CONCURRENCE AND PREFERENCE OF CREDIT

 No other way but memorize the order of preference (1:22:15)

 Preference does not attach to the property. In contrast, a lien attaches to the property.
Therefore, the preference given to employee-worker/ laborer of a building does not apply first
when the building is subject to a mortgage. Why? Because again a lien attaches to the property.
It has to be satisfied first before applying the rule on preference of credit.

 WHAT PROPERTIES ARE EXEMPTED ROM THE PAYMENT OF THE INSOLVENT DEBTOR’S
OBLIGATION?

1. So long as the conjugal partnership or ACP 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 (fruits of obligation) have
redounded to the benefit of the family.
2. If there is property, other than that mentioned in the preceding article, owned by
two or more persons (co-owned property), 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 obligation
3. Property held by the insolvent debtor as a trustee of an express or implied trust,
shall be excluded from the insolvency proceeding.

 WHAT ARE THE CLASSIFICATION OF CREDITS? (Essentially, it is either common or preferred,

like shares of stocks)

1. Special preferred credits (2241-2242)

 Art 2241. This refers to specific movable properties. Again, no other way but
memorize the order. In the foregoing cases, if the movables to which the lien or
preference attaches have been wrongfully taken, the creditor may demand from any
possessor, within 30 days from the unlawful seizure.
 Art 2242. Specific immovable properties. As you can see, the government is always
preferred, particularly on taxes. Wait, I thought that mortgage lien always comes
first before the laborers claim? Then why is mortgage is 5 th in order while laborers’
claim is 3rd in preference, what happened? It is because here, the laborer refers to
the very laborer in the land. In the above scenario, they are employee’s claim.
Example, the business owner becomes insolvent. He has his family home being sold
to satisfy his credits. Claiming parties are the mortgagee of the house, mason,
construction men for the house and the business owner’s employees in his business.
Who will get paid first, of course it is the laborer, considering that we are talking
about specific immovable property. He is preferred than the mortgagee. Who comes
next, of course it is the mortgage. This is what is referred to in the abovemost
scenario between the mortgagee lien and the claims of employee.
- 2241-42 are considered as liens on the specific properties (Special = Specific)
 2. Ordinary preferred credits (2244)
 Art 2244. Affects All other property, without regard whether real or personal,
movable or immovable

3. Common Credits (2245). Any other credit enjoys no preference. Therefore, the rule priority
in time, priority in right is without any effect here.

AFTER DETERMINING CLASSIFICATION OF CREDITS, WHAT IS NOW THE ORDER OF PREFERENCE?

1. Those credits which enjoy preference with respect to specific movables, exclude all others to the
extent of the value o the personal property to which the preference refers [Specific movables]
2. 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 feed due the State or any
subdivision thereof. [Specific movables with concurring special preferred]
3. Those credits which enjoy preference in relation to the 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 (Specific immovables]
4. 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
5. Any excess after satisfying 1-4, will be added to the free property which the debtor may have,
for the payment of the other credits. (This refers to ordinary preferred)
6. 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:
a. As stated in Art 2244.
b. Common credits referred to in Art 2245 shall be paid pro rata regardless of dates.
(because again, these credits enjoy no preference)

- Remember, when we talk of specific property, taxes over them are always
first.
 FINANCIAL REHABILITATION AND INSOLVENCY ACT
 Purpose of REHABILITIATION. The purpose is restoration – to bring back to or put back into a
former or original state. (in a state of solvency)

 Define INSOLVENCY. A financial condition of a debtor that is:

a. Generally unable to pay its liabilities as they fall due in the ordinary course of business,
or
b. Has liabilities that are greater than its or his assets

 What is ILLIQUIDITY? A person has more assets than liabilities, however those assets are non-
cash. Therefore you are not in a state of liquidity.
o What is the purpose of defining illiquidity? For purposes of SUSPENSION OF
PAYMENTS. Suspension of payments occur when an individual debtor who, possessing
sufficient property to cover all his debts but foreseeing the impossibility of meeting
them when they respectively fall due, files a v. petition that he be declared in the state
of suspension of payments by the court of the province or city in which he resided for 6
months prior to the filing of his petition, attaching a schedule of debts and liabilities,
inventory of assets, and proposed agreement with his creditors

o Again, the issue in this remedy of suspension of payments is liquidity problems, not
solvency problems.

o PURPOSE OF SUSPENSION OF PAYMENTS? Deferment of payment of debts until such

time as the debtor is able to convert his sufficient assets into cash or otherwise acquires
the cash necessary to pay its debts. This is in contrast with the purpose of insolvency
proceedings which is to (terminate the debtor!) effect an equitable distribution of the
bankrupt’s properties among his creditors and to benefit the debtor by discharging him
from his liabilities and enabling him to start afresh with the property set apart for him as
exempt.

 REHABILITATION
- RESTORATION to successful operation and solvency, if it is shown that economic
recovery is 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.
- If suspension of payment is to illiquidity, rehabilitation is to insolvency

- CORPORATE REHABILITATION CASE. This is a special proceeding in rem wherein

the petition seeks to establish the status of a party or a particular fact (the
inability of the corporate debtor to pay its debts when they fall due). Its end
 goal is to secure the approval of a rehabilitation plan to facilitate the successful
recovery of the corporate debtor.

- WHO MAY ASK/PETITION FOR REHABILITATION? An insolvent debtor, whether

natural or juridical, can ask for rehabilitation. Banks and insurance company and
pre-need companies are not covered because they are covered by PDIC,
Insurance commission; but GOCCs are covered unless their charter otherwise
provides.
-
- The fact that a corporation was placed under rehabilitation and a receiver was
appointed to carry out the plan does not ipso facto deprive the corporation and
its officers the power to recover unlawfully detained property. THEY REMAIN IN
CONTROL OF ITS BUSINESS AND PROPERTIES, subject only to the monitoring of
the appointed receiver. (Debtor-in-possession or debtor-in-place)
-

WHAT ARE THE DIFFERENT FORMS OF DEBT RELIEF AVAILABLE TO A DEBTOR IN FINANCIAL DISTRESS

A. CORPORATE DEBTOR (BASICALLY, rehab or liquidate)

1. COURT SUPERVISED REHABILITATION

a. Voluntary proceedings (debtor-initiated)
i. By the owner
ii. By the majority vote of the BOD + 2/3 SH
iii. By group of debtors 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 of the proposed rehab plan.

** The debtor may ask the conversion of he rehabilitation

proceedings into liquidation proceedings.

b. Involuntary proceedings (creditor-initiated)

i. By any creditor or group of creditors with an aggregate claim of at
least P1M or at least 25% of the subscribed capital stock or
partners’ contribution, whichever is higher if:
(a) there is no genuine issue of fact or law on the claim/s of the
petitioner/s, and that the due and demandable payments were
 not made for at least 60days or that the debtor has failed
generally to meet its liabilities as they fall due; or
(b) 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.

** The creditor may also ask the conversion of the rehabilitation

into liquidation proceedings.

2. PRE-NEGOTIATED REHABILITATION.
The parties have talked out of court. Then a verified petition is filed
before the court for the approval of the pre-negotiated rehabilitation plan,
which must be:
1. Approved by creditors holding at least 2/3 of the total liabilities of the
debtor, including secured creditors holding more than 50% of the total
secured claims of the debtor and unsecured creditors holding more
than 50% of the total unsecured claims of the debtor.

** What is the difference then between pre-negotiated rehab and

court-supervised rehab? In the former, there is already an approved (by
parties) rehabilitation plan which will only be submitted to the court for
recognition/approval, while in the court supervise rehab, it is only
during the proceedings where a rehab plan will be formulated.

3. OUT OF COURT RESTRUCTURING AGREEMENTS (OCRA)

Requirements:
1. Debtor must agree to the OCRA
2. OCRA must be approved by creditors holding at least:
 67% of secured obligation of the debtor
 75% of the unsecured obligations
 85& of the total liabilities of debtor, secured and
unsecured

4. LIQUIDATION (Magic number is P500,000)

1. Voluntary proceedings(Sec90) – through closing business and
filing a petition
2. Involuntary proceedings(Sec.91)– a petition filed by a creditor/
group of creditors
a. The petitioners must be 3 or more creditors, whose
aggregate claim is:
i. At least P1M or
 ii. At least 25% of the subs. Capital stock,
WHICHEVER IS HIGHER.
b. There must be no genuine issue of fact/law on the claims of the petitioners.
c. There is non-payment of due debts for at least 180 days; or that the debtor
has failed generally to meet its liabilities as they fall due.
d. There is no substantial likelihood that the debtor may be rehabilitated.

B. INDIVIDUAL DEBTOR
1. SUSPENSION OF PAYMENTS

2. LIQUIDATION (Magic number is P500,000)

a. Voluntary proceedings
An individual debtor whose properties are not sufficient to cover his
liabilities, and owing debts exceeding P500,000.

b. Involuntary proceedings
Any creditor or group of creditors with a claim of, or with claims
aggregating, at least P500,000 may initiate this.
 COURT ACTION ON THE PETITION FOR REHAB
a. Issue commencement order within 5 working days from filing a petition (sufficient in
form and substance)

OR

b. Issue a corrective order for the parties to rectify the petition

OR
c. DISMISS THE PETITION

COMMENCEMENT ORDER (WITH STAY OR SUSPENSION ORDER)

 Commences the rehabilitation proceedings upon its issuance ex parte upon mere
examination of petition and its annexes, without need for a hearing by the Court.

 WHEN EFFECTIVE?
Shall retroact to the date that the petition was filed (commencement date) even if its
issuance is on a much later date, and renders void:
- any attempt to collect on or enforce a claim against the debtor or
- to set off any debt by the debtor’s creditors, after the commencement date.
STAY OR SUSPENSION ORDER
 A Commencement order contains a STAY/SUSPENSION ORDER, which:
1. Suspends ALL ACTIONS OR CLAIMS (whether they are debt or pre-need plans/proceeds)
against the debtor (in liquidation, for unsecured creditors lang)
2. Suspends all actions for execution of judgement against the debtor corp
3. Prohibits sale or encumbrance of any property save from those in the ordinary course of
business
4. Prohibits payment of liabilities outstanding as of the commencement date, except as may be
provided herein.

 EXCEPTIONS TO THE STAY ORDER

a. Cases already pending appeal in the Supreme Court as of the commencement date.
Provided, that any final and executory judgement arising from such appeal shall be
referred to the court for appropriate action

b. Subject to the discretion of the court, to 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 court. Provided that any final and
executory judgement of such court or agency shall be referred to the court and shall be
treated as a non-disputed claim

c. Enforcement of claims against sureties and other persons solidarily liable with the
debtor, and third party or accommodation mortgagors as well as issuers 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 of the
rehab receiver.

d. 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.

e. Actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant

to a securities pledge or margin agreement for the settlement of securities transactions
in accordance with the provisions of the SRC.

f. Clearing and settlement of financial transactions through the facilities of a clearing

agency or similar entities duly authorized, registered and/or recognized by the
appropriate regulatory agency like BSP and SEC as well as any form of actions of such
agencies to reimburse themselves for any transactions settled for the debtor; and

g. any criminal action against the individual debtor or owner, partner, director or
officer of a debtor shall not be affected by any proceeding under this Act.
 -administrative expenses are the only costs that may be paid during the subsistence of
commencement order

-none of the creditors shall be paid; no property shall be alienated nor mortgaged.

 EFFECTS OF ISSUANCE OF COMMENCEMENT ORDER:

(a) vest the rehab receiver the powers and functions pertaining to the rehab corp

(b) serves as basis for rendering null and void the results of any EJ activity or process to seize
property, sell encumbered property, or otherwise attempt to collect or enforce a claim against the
debtor after the commencement date. (ETO UNG KAY DEAN NANI NA SUSPENDED LAHAT NG CLAIMS
AGAINST THE DEBTOR-CORP REHAB)

(c) 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 debtor’s creditors

(d) serve as the legal basis for rendering null and void the perfection of any lien against the
debtor’s property after the commencement date; and

(e) consolidate the resolution of all legal proceedings by and against the debtor to the court. But
the court may allow the continuation in cases in other courts initiated by the debtor.

REHABILITATION PLAN.
- Specifies the underlying assumptions, the financial goals and the procedures proposed
to accomplish the corporate rehabilitation. It must also contain material financial
commitments to support the plan.

DOCTRINE OF EQUALITY IS EQUITY

- Means that when a corporation threatened with bankruptcy is taken over by a receiver,
all the creditors should stand on equal footing. Not any one of them should be given any
preference by paying one or some of them ahead of the others.
-
- Considering this principle, will the issuance of the commencement order and the
suspension order diminish or impair the security or lien of a secured creditor, or the
value of his lien or security? NO. it will only suspend his right to enforce said security or
lien during the term of the Stay Order.
CRAM DOWN DOCTRINE (Compel Acceptance)
- Means that the court may approve a rehabilitation plan over the objection of the
creditors if, in its judgement, the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly unreasonable. It forces the creditors to accept
the terms and conditions of the rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery.

** If rehabilitation is infeasible, proceed to liquidation

WHEN CAN REHABILITATION PROCEEDINGS BE CONVERTED INTO LIQUIDATION

PROCEEDINGS?
1. Section 25(c)
a. When the debtor is insolvent; and
b. There is no substantial likelihood for the debtor to be successfully
rehabilitated
2. Section 72 – failure to confirm the Rehab Plan within the 1 year period of
confirmation of the rehab plan.
3. Section 75 – termination of the rehab proceedings due to failure of rehabilitation or
dismissal of petition for reasons other than technical grounds
4. Section 90 – At any time during the pendency of court supervised or pre-negotiated
rehab proceedings, the debtor may also initiate liquidation by filing a motion in the
rehab court to convert the proceeding into liquidation proceeding
5. At any other time upon the recommendation of the rehab receiver that the rehab of
the debtor is not feasible.
 =====NOTES IN FIRST LECTURE IN FRIA====

FRIA
Remedy/options of a “distressed corporation”:

1. Out-of-Court Rehab or Informal Restructuring Agreement or Rehab Plan (OCRA)

-Meet with creditors to

 ask for time to find a “white knight” investor

 to convince them to restructure or modify existing loan agreements
 Invite creditors to become part owners (convert loan to equity)

-when a Restructuring Agreement/Rehab Plan was reached (regardless of non-unanimity among

creditors), it will be binding among ALL of them even to the dissenting creditors, when the
following are present:

 Approval of: (This refers to the initiation of starting efforts to reach an OCRA Plan)
o Debtor/distressed entity
o Creditors representing at least 67% (2/3) of the secured obligations of the
debtor (amount owed, not the number of creditors)
o Creditors representing at least ¾ of the unsecured/ordinary obligations of the
debtor
o And when you combine the secured and unsecured obligations, it must be at
least 85% (at least 85% of the total outstanding obligations)
o In short, 2/3 secured + ¾ unsecured ; 85% total to initiate the process

 Publication of the notice of OCRA

- Standstill period during OCRA (Status quo)

 Is like a mutual, conventional injunction reached by parties pending negotiation and
finalization of the OCRA, which is enforceable even against non-participating
creditors, as long as the following elements are present:
o Approved by creditors representing more than 50% of total liab of debtor;
o Notice thereof is published in a newspaper of gencirc once a week for 2
consecutive weeks; and
o Its effectivity is at a maximum of 120 days.

 Serves also as a notice, invitation for all creditors to participate in this extrajudicial
procedure.
 - The very OCRA Plan must be approved/endorsed by creditors holding at least 2/3 of the
total liab of the debtor (at least 51%-51% secured-unsecured creditors) to make it
enforceable to all.
 In short, 51% secured + 51% unsecured; 2/3 total to make the OCRA Plan
enforceable

2. Court-Supervised Rehabilitation
- All about deciding who to pay, in what order, and how much to pay in an efficient and
equitable manner.
- Proceedings under FRIA are in rem, summary, and non-adversarial in nature. It affects the
civil status of the distressed entity (insolvent status). Jurisdiction over all persons affected by
the proceedings is acquired upon publication of notice of the commencement of the
proceedings in any newspaper of general circulation. Being in rem, it is binding against the
whole world.
- But for creditors holding at least 10% of the total liab against the debtor is entitled to
separate summons or notice.
- Excluded from coverage of FRIA are: banks (jurisdiction is with BSP), Insurance companies
(Insurance commission), Pre-need Companies (IC), National or LGU. Government Financial
Institutions (GFI) and GOCC may be placed under FRIA, unless otherwise excluded by their
special charter.
- Unlike the concept of “claim of credit” in Civil law where it should be demandable, the
concept of claim under FRIA proceedings is broader, including in its scope “contingent and
potential claims”
b. Voluntary petition (by debtor)
a.
c. Involuntary petition
a. The petitioners must be 3 or more creditors (more likely unsecured), whose
aggregate claim is: (same in liquidation)
i. At least P1M or
ii. At least 25% of the subs. Capital stock, WHICHEVER IS HIGHER.
b. There must be no genuine issue of fact/law on the claims of the petitioners.
c. There is non-payment of due debts for at least 60 days; or that the debtor has failed
generally to meet its liabilities as they fall due. (In Liquidation, it is 180 days)
d. A creditor, other than petitioner, has initiated foreclosure proceedings (meaning a
secured creditor) against the debtor that will prevent the debtor from paying its
debts as they become due or will render it insolvent.

d. Liquidation

5. 2 kinds of corporate insolvency under FRIA.

 1. Actual insolvency
2. Technical insolvency – state of suspension of payments. Debtor suffers
cash-flow/liquidity problems to meet its liabilities upon maturity, despite sufficiency of
assets.

I. JUDICIAL LIQUIDATION
6. Liquidate asset of debtor to pay its creditors and terminate commercial activities
7. A corporation may choose either:
b. Voluntary Liquidation (Sec90) – through closing business and filing a petition
c. Involuntary Liquidation (Sec.91)– a petition filed by a creditor/ group of creditors
a. The petitioners must be 3 or more creditors, whose aggregate claim is:
i. At least P1M or
ii. At least 25% of the subs. Capital stock, WHICHEVER IS HIGHER.
b. There must be no genuine issue of fact/law on the claims of the petitioners.
c. There is non-payment of due debts for at least 180 days; or that the debtor
has failed generally to meet its liabilities as they fall due.
d. There is no substantial likelihood that the debtor may be rehabilitated.

II. CORPORATE REHABILITATION

8. Corporation with a reasonable prospect of survival should be given opportunity if it can be
demonstrated that: a) there is greater value and greater benefit for creditors in the long
term; and b) keeping essential business and other component parts of a corporation
together is more efficient than liquidation.
9. Rehab is available to a corp who while illiquid, has assets that can generate more cash if
used in its daily operations than sold; it shall be denied to corp whose insolvency appears to
be irreversible.
1. Voluntary petition for Corporate Rehab

Involuntary petition of Corporate Rehab