FINANCIAL REHABILITATION AND
INSOLVENCY ACT
FRIA’s Declared Policies
• Expresses the policy of the
State to encourage debtors, both
juridical and natural persons,
and their creditors to
collectively and realistically
resolve and adjust competing
claims and property rights.
• The State ensures a timely, fair
and transparent, effective, and
efficient rehabilitation or
liquidation of debtors.
• Main Factors: (a) ensure or
maintain certainty and
predictability in commercial
affairs; (b) preserve and
maximize the value of the assets
of these debtors; (c) recognize
creditor rights; (d) respect
priority claims; and (e) ensure
equitable treatment of creditors
who are similarly situated
• When rehabilitation is not
feasible, it is in the interest
of the State to facilitate a
speedy and orderly liquidation
of the debtor’s assets and the
settlement of their obligations.
KEY DEFINITIONS
DEBTOR
a. sole proprietorship duly
registered with the DTI;
b. partnership duly registered by
the SEC
c. corporation duly organized and
existing under Philippine Laws
d. individual debtor who has
become insolvent
INDIVIDUAL DEBTOR
A natural person who is a resident
and citizen of the Philippines that
shall become insolvent.
GROUP OF DEBTORS
a. Corporations that are
financially related to one
another as parent
corporations, subsidiaries and
affiliates;
b. Partnerships that are owned
more than fifty percent (50%)
by the same person; and
c. Single proprietorships that
are owned by the same person
INSOLVENT
Debtor is generally unable to pay
its or his liabilities as they
fall due in the ordinary course of
business; OR his liabilities are
greater than his assets.
LIABILITIES
Monetary claims against a debtor,
including stockholder’s advances
that have been recorded in the
debtor’s audited financial
statements as advances for future
subscriptions
ORDINARY COURSE OF BUSINESS
Transactions in the pursuit of the
individual debtor’s or debtor’s
business operations prior to
rehabilitation OR insolvency
proceedings and on ordinary
business terms.
CREDITOR
A natural or juridical person which
has a claim against the debtor that
rose on or before the commencement
date.
COMMENCEMENT DATE
Date on which the court issues the
Commencement Order, which shall be
retroactive to the date of the
filing of the petition for
voluntary or involuntary
proceedings.
COMMENCEMENT ORDER
• Appoints the rehabilitation
receiver, and includes a stay
 order. The rationale of the stay
order is to enable the
rehabilitation receiver to focus
on the rehabilitation of the
debtor unhampered by court
suits.
SECURED CREDITOR
Refers to a creditor with a secured
claim.
 Secured Claim – claim that is
secured by a lien.
 Lien – refers to a statutory
or contractual claim or
judicial charge on real or
personal property that legally
entitles a creditor to resort
to said property for payment
of the claim or debt secured
by such lien.
GENERAL UNSECURED CREDITOR
Refers to a creditor whose claim or
a portion thereof is neither
secured, preferred nor subordinated
under the FRIA.
WHEN A GROUP OF CREDITORS MAY FILE:
 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 member
of the group and/or
participation of the other
members of the group
essential under the terms and
conditions of the proposed
Rehabilitation Plan.
EXCLUDED DEBTORS
1. Banks
2. Pre-Need Companies
3. Insurance Companies
4. National and Local Government
Agencies or Units
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 creditor can recover by way
of the present value of payments
projected in the plan.
Rehabilitation of SOLE
PROPRIETORSHIP, PARTNERSHIP and
CORPORATION – thru a petition
 Voluntary Rehabilitation Must
establish the insolvency of
the debtor and the viability
of its rehabilitation
 Involuntary Rehabilitation
When:
a. NO GENUINE ISSUE OF FACT
or law on the claim/s of
the petitioner/s and that
the due and demandable
payments have not been
made for at least 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
is
REHABILITATION PLAN
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 setting up
of a new business entity or other
similar arrangements as may be
approved by the court or creditors.

CRAM DOWN RULE
The Rehabilitation Plan confirmed
by the court shall be binding upon
the debtor and all persons who may
be affected by it, including
creditors, whether or not such
persons have participated in the
proceedings, opposed the Plan or
whether or not their claims have
been scheduled.
STAY ORDER
 suspends all actions and
proceedings, including the
enforcement of claims against
the debtor;
 suspends the enforcement of
any judgement and other
remedies against the debtor;
 prohibit the selling,
encumbering, transferring or
disposing any of its
properties;
 Prohibit the debtor from
making any payment of its
liabilities outstanding “as
of the commencement date”
SUSPENDED CLAIMS
 All claims of the government
(national or local)
 Claims against directors and
officers of the debtor arising
from acts done in the
discharge of their functions
falling within the scope of
their authority
WHO WILL MANAGE:
General Rule: The existing BOARD
and/or MANAGEMENT of the debtor
shall continue.
Exception: Management can be
replaced. Upon Motion, the court
may appoint either “Rehabilitation
Receiver” or a “Management
Committee” to undertake the
management of the debtor in the
following cases:
 Actual or imminent danger of
dissipation, loss, ow wastage
of debtor’s assets or
properties
 Paralyzation of the business
operations of the debtor
 Gross mismanagement by the
debtor, or fraud or other
wrongful conduct or violation
of the FRIA Law and Court
Orders
COURT ACTION ON PETITION FOR
REHABILITATION
The Court may either:
a. Give due course to the
petition
b. Dismiss the petition
c. Convert the proceedings to
liquidation proceedings
• SUSPENSION OF PAYMENTS
• Only an individual debtor may
file a petition for suspension
of payment.
• The debtor has sufficient
properties to cover all his
debts but forsees the
impossibility of meeting his
debts when they respectively
fall due
• The purpose is to suspend or
delay the payment of debts
• The amount of indebtedness is
not affected (not reduced or
discharged)
• The number of creditors is
immaterial
• DISTINCTIONS:
Suspension of Payment v.
Liquidation
• DISTINCTIONS:
Suspension of Payment v.
Rehabilitation
• SUSPENSION ORDER
• Upon motion filed by the
individual debtor, the Court may
issue an order suspending any
pending execution against the
individual debtor.
• Properties held as security
be secured creditors shall
not be the subject of the
suspension order
• The suspension order shall
lapse when 3 months shall
have passed WITHOUT the
proposed agreement being
accepted by the creditors or
as soon as such agreement is
denied
• Creditors cannot sue or
institute proceedings to
collect his claim from from
the debtor from the time of
the filing of the petition
for suspension of payments
and as long as the
proceedings remain pending.
• EXCEPTIONS:
1) Creditors having claim for
personal labor, maintenance,
expense of last illness and funeral
of the wife or children of the
debtor incurred in the 6o days
immediately prior to the filing of
the petition
2) Secured Creditors
• Instances when rehabilitation
proceedings may be converted
into liquidation proceedings:
• The debtor is insolvent
• No substantial likelihood for
the debtor to be successfully
rehabilitated;
• It no rehabilitation plain is
confirmed within 1 year from
the date of the filing of the
petition for rehabilitation
• If the termination of the
rehabilitation proceedings
was due to failure of the
rehabilitation or dismissal
of the petition for reasons
other than technical grounds
• Instances when rehabilitation
proceedings may be converted
into liquidation proceedings:
5. If the court determines that the
debtor or creditor supporting the
Rehabilitation Plan acted in bad
faith, or that the objection is not
curable
6. AT any time pending the court-
supervised or pre-negotiated
rehabilitation proceedings, the
debtor may file a motion in the
same court where the rehabilitation
proceedings are pending to covert
the proceedings into one for
liquidation
7. Upon recommendation by the
rehabilitation receiver
• Liquidation of INDIVIDUAL
DEBTORS may be (1) Voluntary OR;
(2) Involuntary
• Involuntary Liquidation of
Individual Debtors vs.
Involuntary Liquidation Business
Organizations
• LIQUIDATION PROCESS
• This is the proceeding where
claims are filed and the assets
of the insolvent debtor are
disposed and the proceeds are
divided among the creditors.
• The rules applies to individual
debtors, sole proprietorship,
partnership, corporation.
• Applies as well to both original
liquidation proceedings and
proceedings that are originally
rehabilitation proceedings but
converted into liquidation
proceedings.
• LIQUIDATION ORDER contains:
• Declaring that the debtor is
insolvent
• Ordering the liquidation of
the debtor
• In case of juridical person,
declaring it as dissolved
• Prohibiting payments and/or
transfer of property bybthe
debtor; and
• Directing all claims to be
filed with the liquidator
• RIGHTS OF SECURED CREDITORS:
• The Liquidation Order shall not
affect the right of a secured
creditor to enforce his lien in
accordance with the applicable
 contract or law. The 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
• Maintain his right under the
security or lien
• DISTRIBUTION OF ASSETS
• The assets of the insolvent
debtor shall be divided among
the creditors in accordance with
the Liquidation Plan submitted
by the Liquidator and approved
by the Court.
• The rules on Concurrence and
Preference of Credit under the
New Civil Code shall be observed
in the Liquidation Plan.
• CONCURRENCE AND PREFERENCE OF
CREDIT
• CONCURRENCE OF CREDITS
-Implies the possession by two
or more creditors of equal
rights or privileges over the
same property or all the
property of a debtor
• PREFERENCE OF CREDIT
-Right held by a creditor to be
preferred in the payment of his
claim above others out of the
debtor’s assets
• NATURE AND EFFECT OF PREFERENCE
1. A preference is an
exception to the general
rule. For this reason, the law
as to preferences is strictly
construed.
2. Preference doesn’t create
an interest in property. it
creates simply a right of one
creditor to be paid first the
proceeds of the sale of property
as against another creditor.
3. The law doesn’t give the
creditor who has a preference a
right to take the property or sell
it as against another creditor. It
is not a question who takes or
sells, it is one of the application
of the proceeds after the sale—of
payment of the debt
• Continuation. .
4. The right of preference is
one which can be made only by
being asserted and
maintained. If the right
claimed is not asserted or
maintained, it is lost.
5. Where a creditor released
his levy, leaving the property
in possession of the debtor,
thereby indicating that he
didn’t intend to press his
claim further as to that
specific property, after that act,
his claim to preference, if one had
been asserted y him, could not
exist because he had ceased to
contest.
•
WHEN RULE OF PREFERENCE
APPLICABLE
• Apply only where two or more
creditors have separate and
distinct claims against the
same debtor who has an
insufficient property
• Is applicable when the
debtor is insolvent—having
more liabilities than his assets
• It is a matter of
necessity and log that the
question of preference should
arise only when the debtor’s
assets are insufficient to pay
his debts in full
•
GENERAL PROVISIONS
Art. 2236.
The debtor is liable with all his
property, present and future, for
the fulfillment of his
obligations, subject to the
exemptions provided by law. (1911a)

• only given to #1 and the
GENERAL CATEGORIES OF CREDIT
1. Special preferred credits
listed in Articles 2241 and 2242
2. Ordinary preferred credits
listed in Article 2244
3. Common credits under Article
2245
• or malfeasance by public officials
NATURE OF CLAIMS OR CREDITS
IN
ARTICLES 2241 AND 2242
• Articles 2241 and 2242
apply only when there is a
concurrence of credits when the
same specific property of the
debtor is subjected to the
claims of several creditors
and the value of such property
is insufficient to pay in full
all the creditors
• In such situation, the
question of preference will
arise, there will be a need
to determine which of the
creditors will be paid ahead of
the others
• determined proportionally;
PREFERRED CREDITS WITH
RESPECT TO
SPECIFIC MOVABLE PROPERTY
• Articles 2241 and 2242 don’t
give the order of preference or
priority of payment
• They merely enumerate the
credits which enjoy preference
with respect to specific
movables or immovables
• With respect to the same
specific movable or immovable,
creditors with the exception of
the State, merely concur
• REMEMBER that preference is
rest shall be treated equally
• Art. 2241. With reference to
specific movable property of the
debtor, the following claims or
liens shall be preferred:
(1) Duties, taxes and fees due
thereon to the State or any
subdivision thereof;
(2) Claims arising from
misappropriation, breach of trust,
committed in the performance of
their duties, on the movables,
money or securities obtained by
them;
(3) Claims for the unpaid price of
movables sold, on said movables, so
long as they are in the possession
of the debtor, up to the value of
the same; and if the movable has
been resold by the debtor and the
price is still unpaid, the lien may
be enforced on the price; this
right is not lost by the
immobilization of the thing by
destination, provided it has not
lost its form, substance and
identity; neither is the right lost
by the sale of the thing together
with other property for a lump sum,
when the price thereof can be
(4) Credits guaranteed with a
pledge so long as the things
pledged are in the hands of the
creditor, or those guaranteed by a
chattel mortgage, upon the things
pledged or mortgaged, up to the
value thereof;
(5) Credits for the making, repair,
safekeeping or preservation of
personal property, on the movable
thus made, repaired, kept or
possessed;
• Continuation. .
(6) Claims for laborers' wages, on
the goods manufactured or the work
done;
(7) For expenses of salvage, upon architects, engineers and
the goods salvaged; contractors, engaged in the
(8) Credits between the landlord construction, reconstruction or
and the tenant, arising from the repair of buildings, canals
contract of tenancy on shares, on or other works, upon said
the share of each in the fruits or buildings, canals or other works;
harvest; (4) Claims of
(9) Credits for transportation, furnishers of materials
upon the goods carried, for the used in the construction,
price of the contract and reconstruction, or repair of
incidental expenses, until their buildings, canals or other works,
delivery and for thirty days upon said buildings, canals or
thereafter; other works;
(10) Credits for lodging and (5) Mortgage credits
supplies usually furnished to recorded in the Registry of
travellers by hotel keepers, on the Property, upon the real estate
movables belonging to the guest as mortgaged;
long as such movables are in the (6) Expenses for the
hotel, but not for money loaned to preservation or improvement of
the guests; real property when the law
(11) Credits for seeds and expenses authorizes reimbursement, upon the
for cultivation and harvest immovable preserved or improved;
advanced to the debtor, upon the (7) Credits annotated in
fruits harvested; the Registry of Property, in
(12) Credits for rent for one year, virtue of a judicial order,
upon the personal property of the by attachments or executions,
lessee existing on the immovable upon the property affected, and
leased and on the fruits of the only as to later credits;
same, but not on money or (8) Claims of co-heirs for
instruments of credit; warranty in the partition of an
(13) Claims in favor of the immovable among them, upon
depositor if the depositary has the real property thus
wrongfully sold the thing divided;
deposited, upon the price of the (9) Claims of donors or
sale. real property for pecuniary
• Art. 2242. With reference charges or other conditions imposed
to specific immovable upon the donee, upon the immovable
property and real rights donated;
of the debtor, the (10) Credits of insurers,
following claims, mortgages upon the property insured, for the
and liens shall be preferred, insurance premium for two years.
and shall constitute an (1923a)
encumbrance on the immovable or
real right:
(1) Taxes due upon the land
or building;
(2) For the unpaid price of
real property sold, upon the
immovable sold;
(3) Claims of laborers,
masons, mechanics and other
workmen, as well as of