PROBLEM EXERCISES ON FINANCIAL REHABILITATION

AND INSOLVENCY ACT (RA 11042)

Prepared by: Dr. Jeannie P. Lim

Doctrinal Synopsis:

 Petition for Rehabilitation is filed with the RTC Special Commercial Court and not with the SEC.

 An essential function of corporate rehabilitation is the mechanism of suspension of all actions and
claims against the distressed corporation upon the due appointment of a management committee
or rehabilitation receiver. (Veterans Phil. Scout Security Agency, Inc. vs. First Dominion Prime
Holdings, Inc., 679 SCRA 168, 2012)

 “TRADEGY of the Commons” - Sudden closure of the business results to bigger losses to
stake holders.

 The inherent purpose of rehabilitation is to fund ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period by providing the best possible framework for
the corporation to gradually regain or achieve a sustainable operating form.

 Rehabilitation proceedings are summary and non-adversarial in nature and do not contemplate
adjudication of claims that must be threshed out in ordinary court proceedings.

 The financial rehabilitation (FR) shall be liberally construed to promote a timely, fair, transparent,
effective and efficient rehabilitation of DEBTORS.

 The jurisdiction of the rehabilitation court is over claims against the debtor that is under
rehabilitation, NOT over claims by the debtor against its own debtors or against third parties. The
corporation under rehabilitation must file a separate action against its debtors/insurers to recover
whatever claim it may have against them. ( Steel Corp. vs. Mapfre Insular Insurance Corp. GR No.
201199, )ct. 16, 2013)

 A successful rehabilitation usually depends on two factors: (a) the willingness of the creditors and
shareholders to arrive at a compromise agreement on repayment burdens, extent of dilution, etc.

 An indispensable requirement in the rehabilitation of a distressed corporation is the rehabilitation

plan (RP).

 The “RP” shall include (a) the business targets or goals, its terms and conditions with due regard
to the interest of the secured creditors, (c) duration and coverage of the rehabilitation, (d) the
material financial commitments to support the RP, (e) manner or means for the execution and
implementation which may include - the conversion of the debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest, (f) a
liquidation analysis that estimates the proportion of the claims that the creditors and shareholders
would receive if the debtor’s properties were liquidated, and (g) such other information on the
feasibility of the RP.

 Once the rehabilitation plan is approved by the court, it is binding upon the debtor and all persons
who may be affected by it, including the creditors, whether such persons have or have not
participated in the proceedings or have opposed the plan or whether their claims have or have not
been scheduled.

 The “RP” once approved by the court is binding upon: (a) the debtor, (b) all persons who
may be affected by it, (c) all creditor, (secured, unsecured) whether of not they have
participated in the proceedings, (d) opposing creditors, and (e) creditors iun possession of
with schedule payments of their claims.

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  The RP is deemed approved if more than 50% of all classes of creditors (secured and
unsecured) give the consent thereto.

 The rehabilitation court has a CRAM-DOWN POWER in rehabilitation proceedings - It can

approve the rehabilitation plan (RP) even over the opposition or objection of creditors holding
majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is
feasible, and the opposition of the creditors are manifestly unreasonable.

 The opposition of a distressed corporation’s majority creditor is manifestly unreasonable if it

counter proposes unrealistic payment terms and conditions which would, more likely than not,
impede rather than aid its rehabilitation. (BPT vs. Sarabia Manor Hotel Corp., 702 SCRA 432,
2013)

 The creditors must ventilate their claims before the rehabilitation court and any attempt to seek
legal or other resource against the distressed corporation shall be sufficient to support a finding of
indirect contempt of court.

 Creditors’ opposition which push for high interests rates are generally frowned upon in
rehabilitation proceedings given that the inherent purpose of a rehabilitation is to find ways and
means to minimize the expenses of the distressed corporation during the rehabilitation period.

 If the court finds that the petition for rehabilitation is sufficient in form and substance, it shall
issue a commencement order (with STAY ORDER) and order its publication (2X) in a newspaper
of general circulation where the debtor resides.

 The Interim Rule does not require the holding of hearing before the issuance of a stay order
neither does it prohibit the holding of one. The trial court has ample discretion to call a hearing
when it is not confident that the allegations in the petition are sufficient in form and substance,
such hearing is held within five (5) days from the filing of the petition.

 A receiver may be appointed whenever (1) it is necessary in order to preserve the rights of the
party-litigants; and/or (2) protect the interest of the investing public and creditors.

 The receiver or the management committee has the power to rescind or declare NULL and VOID
per-commencement transactions that were executed with intent to defraud creditors or those
which constitute undue preference of creditors.

 All claims against the debtor must be filed before the receiver of the management committee.

 The receiver or management committee does not take over the management and control of the
corporation or debtor’s business but simply oversees and monitors closely its operations during the
pendency of the proceedings.

 The Stay Order shall be effective from the (a) date of its issuance until the dismissal of the petition
or (b) the termination of the rehabilitation proceedings.

 The stay order and appointment of a rehabilitation receiver is an “extraordinary, preliminary, ex-
parte remedy”. Its effectivity period is only from the date of its issuance until dismissal of the
petition or termination of the rehabilitation proceedings. It is not a final disposition of the case.
The Order is an interlocutory order that does not finally dispose of the case and does not end the
Court’s task of adjudicating the parties’ contentions and determining their rights and liabilities as
regards each other, but obviously indicates that other things remains to be done by the Court.

 The suspension of all actions and/or claims against a corporation under rehabilitation does not
only cover cases which are pending in court. The AUTOMATIC SUSPENSION of an action for
claims embraces ALL PHASES of the suit, i.e., the ENTIRE PROCEEDINGS of an action or suit and
not just the payment of the claims.

 This suspension under the Stay Order includes damage suits founded on breach of contracts of
carriage, labor cases, collection suits or any claims of a pecuniary nature. A claim arising from
illegal dismissal is a claim covered by the suspension order issued by the SEC/RTC as it is one for
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 pecuniary consideration. The Stay Order is effective on all creditors of the corporation without
distinction, whether secured or unsecured. (Veterans Phil. Scout Security Agency, Inc., vs. First
Dominion Prime Holdings, Inc. GR No. 1909078, August 23, 2012)

 The Stay Order cannot suspend foreclosure proceedings already commenced over properties
belonging to third party mortgagors. The Order can only cover those claims directed against
the petitioner corporation or their properties, against petitioners’ guarantors, or against
petitioners’ sureties who are not solidarily liable with them.

 The suspension applies even when the corporation is under management or receivership, without
distinction, except only those expenses incurred in the ordinary course of business. ( Molina vs.
Pacific Plans, Inc., GR No. 165476, August 15 , 2011)

 The justification for the suspension of actions or claims, without distinction, pending rehabilitation
proceedings is to enable the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder
or prevent the “rescue” of the debtor company.

 During rehabilitation receivership, the assets are held in trust for the equal benefit of all creditors
to preclude one from obtaining an advantage or preference over another by the expediency of an
attachment, execution or otherwise. All creditors should stand on equal footing.

 During rehabilitation, the only payments sanctioned by the Rules are those made to creditors in
accordance with the provisions of the plan.

 Upon the appointment of a management committee or rehabilitation receiver, board or body, all
actions for claims against the corporation, partnership or under management or receivership
pending before any court, tribunal, board or body shall be suspended accordingly in whatever
stage they may be.

 A secured creditor may file a motion with the Rehabilitation Court for the modification or
termination of the stay order.

 The SC has already settled and upholds the right of the secured creditor to foreclose the
mortgages in its favor during the liquidation of a debtor corporation.

 A creditor can demand payment from the surety not solidarily liable with the domestic corporation
seeking rehabilitation. (BDO-EPCI, Inc., vs. JAPRL Dev’t. Corp. 551 SCRA 342, 2008)

 FRIA shall apply to ALL contracts of the debtor regardless of the date of perfection. (Sec. 147)

Problem Exercises:
1) Declaration of policy under RA 10142:

a) The Sate encourages debtors (juridical and natural) and their creditors to collectively and realistically
resolve and adjust competing claims and property rights.

b) The State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of
debtors.

2) Coverage of FRIA:

a) Insolvent individual debtor

b) Juridical entities duly organized and existing under Philippine Laws, their affiliates and subsidiaries.
c) Sole proprietorship duly registered with the Department of Trade and Industry.
d) Partnership duly registered with SEC
e) Government financial institutions other than banks
f) GOCCs unless their specific charter provides otherwise.

NOTE: FRIA does not apply to banks, insurance companies, pre-need companies, national
and local government agencies and units, non-resident citizens, aliens or foreigners as it
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 covers only an “individual debtor or a natural person who is a resident and citizen of the
Philippines who becomes insolvent. (Sec. 40)

3) Kinds of debtors covered by FRIA:

a) Sole proprietorship registered with DTI

b) Partnership registered with SEC
c) Domestic Corporations duly registered with SEC
d) Individual debtor who is a natural person that is a resident citizen that has become insolvent.

4) Classifications of creditors under the FRIA:

a) Secured creditors
b) Unsecured creditors
c) Trade creditors and suppliers, and
d) Employees of the debtor
e) The rehabilitation plan may establish other classes of voting creditors [Sec. 62(d) FRIA]

5) Cross-border Insolvency – The local court may (a) issue orders, in connection with an insolvency or
rehabilitation proceedings taking place in a foreign jurisdiction (Sec. 140). (b) Suspending any action to
enforce claims against the foreign entity located in the Philippines. (1) by requiring the surrender of property of
the foreign entity to the foreign representative, or (2) providing any other necessary relief. (Sec. 141)

6) May our local court entertain or recognize foreign insolvency proceedings?

Yes. The local court may issue orders in connection with an insolvency or rehabilitation proceedings
taking place in a foreign jurisdiction by (a) suspending any action to enforce claims against foreign entity
located in the Philippines, (b) requiring the surrender of property against a foreign entity to the foreign
representative or (c) providing other necessary relief. (Sec. 140-141)

7) What is a Creditors’ Committee?

This is a group composed of majority of the debtor’s creditors purposely created to facilitate dealings
with the creditors. Each class of the creditors may formally organize among themselves and each class may
elect a representative to the creditor’s committee.

After its creation, it shall be the primary liaison between the receiver and the creditors. Notice shall be
sent to the creditor’s committee instead of the individual creditors. The committee may perform such other
functions that the court may deem necessary to facilitate the rehabilitation process.

Limitations: the creditors’ committee CANNOT exercise or waive any right or give any consent on behalf
of any creditor unless specifically authorized in writing by such creditor.

8) Briefly explain (a) Insolvency (b) Technical Insolvency and (c) Supervening Insolvency.

Insolvency – Is 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/his assets.

Technical insolvency - This exists if the debtor is experiencing the inability to pay its obligations, although
temporarily, for a period longer than one (1) year from the filing of the petition for rehabilitation before the
RTC Special Commercial Court.

Supervening Insolvency – If at any time during the pendency of the proceedings, the petitioner-debtor has
become, or is shown (a) to be insolvent, whether actual or technical, or (b) that it has violated any of the
conditions of the suspension order, or (c) has failed to make payments on its obligations in accordance with
the approved Repayment Schedule, the RTC shall terminate the proceedings and dismiss the petition.
However, the RTC may upon motion, treat the proceeding as one for rehabilitation of the debtor.

9) Rehabilitation Plan (RP) – It refers 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 the business or part
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.

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10) What are the contents of a rehabilitation plan?

a. The desired business targets or goals and the duration and coverage of the rehabilitation
b. The terms and conditions of the of such rehabilitation which shall include the manner of its
implementation, giving due regard to the interest of secured creditors;
c. The material financial commitments to support the rehabilitation plan;
d. The means for the execution of the rehabilitation plan, which may include conversion of debts or any
portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the
controlling interest;
e. A liquidation analysis that estimates the proportion of the claims that the creditors and shareholders
would receive if the debtor’s properties were liquidated; and
f. Such other relevant information to enable a reasonable investor to make an informed decision on the
feasibility of the rehabilitation plan.

11) REMEDIES under the FRIA: (same as: What are the three (3) kinds of rehabilitation under
FRIA?)

(1) Court Supervised Rehabilitation (2) Pre-Negotiated (3) Out-of-Court

(CSR) Rehabilitation (PNR) Rehabilitation or Informal
Restructuring
Agreements (OCR)
Voluntary Involuntary This involves a pre-negotiated The “compromise agreement” must
Initiated by the Initiated by creditors Rehabilitation Plan (RP) be consented to by the debtor and
debtor who may with an aggregate between the debtor and the approved by creditors holding 67%
be - claim of at least Php creditor(s). (2/3) of the secured claims and
Sole 1.0M or at least 25% It commences as an extrajudicial 75% of the unsecured claims with
Proprietorship – of the subscribed - proceedings but terminates as is 85% of the total obligation of the
approved by the capital stock or a judicial proceeding. debtor.
owner partners’ contribution, The debtor, by itself or jointly
Stock Corp. – whichever is higher. with any of its creditors file the There shall be a standstill period
approved by verified petition inclusive of the (not exceeding 120 days) pending
majority of the pre-negotiated RP for approval the negotiation and finalization of
BOD and of the court. the OCRP.
authorized by 2/3 The RP must be approved by The stand still period shall be
of the OCS in a creditors holding at least 2/3 of approved by creditors holding 50%
meeting called for the total liabilities of the debtor. of the total liabilities of the debtor.
that purpose Including –
Non-stock corp. - (a) Secured creditors
approved by 2/3 holding more than 50% of the
of the members in total secured claims, and (b)
a meeting called unsecured creditors holding
for that purpose. more than 50% of the total
unsecured claims.

What are the requirements for voluntary rehabilitation of a corporation under the FRIA 2010?

A petition for corporate rehabilitation of a domestic corporation or individual debtor must be filed before
the RTC. The petition must be approved by a majority of the Board of Directors and by 2/3 votes of the
outstanding capital stockholders.

A) Court Supervise rehabilitation (CSR) – may be initiated by the (1) insolvent debtor himself, or (2) by
his creditor because debtor is insolvent.

Requirements for voluntary rehabilitation of a corporation:

 If initiated by the insolvent debtor himself – he files a petition for voluntary rehabilitation.

 STAND-ALONE REHABILITATION PLAN whereby the debtor undertakes recovery on its own and
that it possesses enough resources to weather the financial storm, if any.

 Debtor must submit NOTICE OF CLAIMS (schedule of debts and liabilities due to all creditors
including principal, interests or penalties, the nature of the claim and any pledge, lien or other
security given to creditors)

 If filed by creditor or group of creditors who has a claim of at least Php 1.0 million credits or a claim
of at least 25% of the subscribed capital stock or partners’ contribution of the debtor whichever is
higher, the petition is for involuntary rehabilitation.

 Creditors can file their claims with court at least 5 days before initial hearing.

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 Requisites under an INVOLUNTARY Rehabilitation (Court supervised):

a) That there is no genuine issue of fact or law on the claims of the creditors
b) That debtor was not able to pay for at least sixty (60) days on due or from demandable periods
c) That debtor has failed generally to meet its liabilities because of his illiquidity, or
d) At least 1 creditor, other than the petitioner(s) has initiated foreclosure proceedings against the
debtor that will prevent said debtor from paying its debts as they become due or will render it
insolvent.

B) Pre-negotiated Rehabilitation (PNR) – The RP is jointly prepared by the debtor together with his/its
creditors out-of–court and then submits the plan for the approval of the court. (Sec. 76)

 The approving creditors must hold 2/3 of the total liabilities of the debtor, including those holding
50% each of the secured and unsecured claims.

 The court must rule on the RP within 120 days, an inaction after 120 days is deemed an
APPROVAL OF THE RP.

 If there is/are objection the RP, a hearing will be conducted.

C) Out-of-Court or Informal Restructuring Agreement (IRA) – “compromise agreement between debtor

and his creditors” (Sec, 84)

 The informal restructuring agreement (plan) must be consented to by the debtor and approved by
creditors holding 67% of the secured claims and 75% of the unsecured claims which is 85% of the
total obligation.

 The OCRA need not be approved by the court for its effectivity, as long as the number of votes in its
favor has been obtained.

 The OCRA must be published (3X). 15 days after its last publication, it shall take effect and it shall
have the same effect has a confirmed RP.

 A standstill period of 120 days is allotted to other creditors of the existence of the OCRA and to
participate in its negotiation.

 Court intervention will take place only if an interested party institutes an action for assistance or
annulment of the OCRA.

 An injunctive writ against its implementation can be issued only by the CA.

12) Distinguish liquidation from rehabilitation.

Liquidation - is the winding up of a corporation so that assets are distributed to those entitled to receive
them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

Rehabilitation – It contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. This is available
only if it is shown that (a) its continuance of operation is economically feasible, and (b) its creditors can
recover more, by way of the present value of payments projected in the plan, if the debtor continues as
a going concern than if it is immediately liquidated.

 Rehabilitation proceedings are in REM. Jurisdiction over all persons affected is considered as
acquired upon publication of the notice of proceedings. It is instituted against the thing and not against
the person nor that it is a personal action. (Advent Capital & Finance Corp., vs. Alcantara, 665 SCRA
224, January 2012)

 A motion for new trial or reconsideration is a prohibited pleading in the proceedings. (BPI Family
Savings Bank, Inc., vs. Pryce Gases, Inc. 653 SCRA 42, June 29, 2011)

13) What is the purpose of rehabilitation of corporation under the FRIA?

This is an attempt to conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency. It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of successful operation
and liquidity. This process enables the company to gain a new lease on life and thereby allow creditors to be
paid their claims from its earnings.

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 It also provides debtors with a “fresh start” by relieving them/it of the weight of their outstanding debts
and permitting them to reorganized their affairs.

14) Rule on corporate rehabilitation:

The reason for suspending actions for claims against the corporation should not be difficult to discover.
It is not really to enable the management committee or the rehabilitation receiver to substitute the defendant
in any pending action against it before any court, tribunal, board or body. Obviously, the real justification is
to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free
from any judicial or extra-judicial interference that might duly hinder or prevent the “rescue” of the debtor
corporation. (B. F. Homes, Inc. vs CA cited in PAL vs. Spouses Sadic)

15) How does the court acquire jurisdiction over the person affected by the rehabilitation
proceeding?

The Court shall acquire jurisdiction over the person affected upon PUBLICATION of the Notice of
Commencement of Proceeding and Commencement Order issued by the rehabilitation court in one (1)
newspaper of general circulation for two (2) consecutive weeks.

16) Distinguish (a) a rehabilitation receiver from an interim receiver. (b) Management committee
and rehabilitation receiver.
A.
Rehabilitation Receiver (RR)
Appointed by the court. May also be
recommended by the debtor with the approval of
the creditors
Appointed by the court to preserve the rights of
the parties-litigants or
Appointed also to protect the interest of the
investing public and creditors.
Interim Receiver (IR)
No appointment by court is required and he is
automatically attending to the concerns of the
rehabilitation from the time the petition is filed in
court.
If no court appointed RR yet, he is necessary to
protect the interests of both creditors and
shareholders.

Management Committee Rehabilitation Receiver (RR)

Its appointment is an extraordinary and drastic Appointed by the court. May also be recommended
remedy to be exercise with care and caution. by the debtor with the approval of the creditors
Usually done when there is inadequacy,
ineffectual or exhaustion of legal or other
remedies.
Its appointment is for the benefit of minority Appointed by the court to preserve the rights of the
stockholders parties-litigants or
Usually applied for when there is imminent danger Appointed also to protect the interest of the
of dissipation, loss, wastage or destruction of investing public and creditors.
assets or other properties and there is danger of
paralyzation of its business operations.

17) When is a debtor considered insolvent?

a) A person (natural or juridical) who is unable to pay his/its liabilities as they fall due in the ordinary course
of business (ILLIQUID), or

b) A person who has liabilities greater than his/its assets (BALANCE SHEET INSOLVENT).

 The word debtor may also apply to GROUPS OF DEBTORS, such as:

a) Corporations financially related to one another as parent corporations, subsidiaries or affiliates,

b) Partnerships owned more than 50% by the same person; and
c) Single proprietorship owned by the same person.

18) What is a Commencement Order? And when may the court issue it?

This is issued by the rehabilitation court within five (5) days from the filing of the petition should it find
the petition for rehabilitation sufficient in form and substance. This order incorporates a STAY ORDER that
specifically pertains to claims that are stayed during the pendency of the rehabilitation proceedings.

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19) Contents of a Commencement Order:

a) Direct the publication of the Notice of Commencement Order and the Commencement Order in a
newspaper of general circulation,

b) Direct the personal service of the petition to each creditor holding at least 10% of the total liabilities of
the debtor (if debtor initiated) or to the debtor (if creditor initiated) and to the BIR and other
appropriate regulatory agency;

c) Direct the petitioner to ensure the service of the Commencement Order to foreign creditors with NO
known addresses in the Philippines at their foreign addresses;

d) Appoint a rehabilitation receiver;

e) Direct creditors, the BIR and all interested parties to file their respective comments on or opposition to
the petition;

f) Direct the creditors to file their verified notice of claims, and

g) Set the case for initial hearing.

20) What are the effects of a Commencement Order issued by the rehabilitation court?

a) It vests the rehabilitation receiver all the powers and function under the FRIA,

b) It serves as the legal basis to render NULL and VOID any extrajudicial activity or process to enforce a
claim against the debtor after the commencement date;

c) It serves as legal basis to render NULL and VOID any set-off (compromise) after the commencement date
of any debt owned to the debtor by any of the debtor’s creditors;

d) It consolidates all legal proceedings by and against the debtor to the court, and

e) It exempts the debtor for all liability for taxes, fees and penalties, interests, charges thereon due to the
national or local government.

21) When is the effectivity of the Commencement Order?

Its effects shall retroact to the date of the filing of the petition. (NOT from its issuance) and will last for
the duration of the rehabilitation proceedings.

22) When the Commencement Order is no longer effective?

a) When the Order the lifted by the court as a result of the dismissal of the petition,

b) When the Rehabilitation Plan (RP) is seasonably confirmed or approved by the court; or

c) When the rehabilitation proceedings are ordered terminated by the court. (NOTE – the Commencement
Order shall continue to be effective during the interim period when the rehabilitation proceedings are
converted to liquidation.)

23) Purpose of the Stay Order – To avoid a possibility of favorable judgment and execution thereof against the
assets of the distressed corporation which might prejudice the other creditors and depositors. (Barrameda vs.
Rural Bank of Canaman, Inc. GR 176260, November 24, 2010)

This is an attempt to conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency. It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of successful operation
and liquidity. This process enables the company to gain a new lease on life and thereby allow creditors to be
paid their claims from its earnings.

 Criminal actions against the distressed corporation or its officers are not included in the Stay Order not
being pecuniary in nature.

 The suspension embraces all phases of a suit involving claims or debts or demands of pecuniary in
nature, be it before the trial court or any tribunal including the rendition of judgment during the state of
suspension. Labor cases are included but the criminal aspect of BP 22 is not suspended only the civil
aspect thereof.

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  BP Blg. 22 is not included in the suspension because this is a suit for the issuance of unfunded checks.

24) The STAY ORDER is an essential component of the Commencement Order and it has the
following effects:

a) It shall suspend ALL actions or proceedings in court or otherwise, for the enforcement of all claims
against the debtor,

b) Suspends all actions to enforce any judgment, attachment or other provisional remedies against the
debtor;

c) Prohibits the debtor from selling, encumbering, transferring or disposing in any manner any of its
properties except in the ordinary course of business; and

d) Prohibits the debtor from making any payment of its liabilities outstanding as of the commencement date
except when allowed by law.

25) What kinds of action are suspended against a distressed corporation placed under
rehabilitation of the court?

Upon issuance by the RTC of a Stay Order all actions and/or monetary claims against a corporation
under rehabilitation shall be automatically suspended. It shall include damage suits founded on a breach of
contract of carriage, labor cases, collection suits or any other claims of a pecuniary nature. The new rules
on corporate rehabilitation, its interim rules provide an all-encompassing definition of the term and thus,
include all claims or demands of whatever nature or character against a debtor-corporation or its property.
The suspension does not only cover cases pending in court, but embraces all phases of the suit (for
execution) and monetary claims against the corporation yet to be filed.

Note: A criminal case for violation of BP Blg. 22 shall not be suspended because this is not a case enforcing
collection or pecuniary in nature, but a case penalizing the issuance of worthless check.

26) The court issued a Stay Order against X, a distressed corporation. Will the suspension order
extend to criminal action against the corporation or its directors and officers?

The suspension of claims in corporate rehabilitation does not extend to criminal actions against the
distressed corporation or its directors and officers. It would be absurd for one who has engaged in criminal
conduct to escape punishment simply because the corporation of which he is a director or officer filed a
petition for rehabilitation. The prosecution of the directors or officers of the corporation has no bearing on
the pending rehabilitation of the corporation. (Panlilio vs. RTC, Branch 51, City of Manila, February 2, 2011)

27) Distinguish stay order in corporate rehabilitation from Declaration in a state of suspension of
payments:

Stay Order in Corporate Rehabilitation Declaration in s State of Suspension of

Suspensive effect commences from the issuance by
the court of the stay order or upon the appointment
of a rehabilitation receiver or management
committee
The suspensive effect has no time limit and would
prevail for as long as the corporate debtor is under a
management committee or rehabilitation receiver
and there is no directive to have its assets
liquidated.
The suspensive effect covers all corporate creditors,
both secured and unsecured.
Payments
Suspensive effect commences from the filing of the
petition.
In the absence of agreement among the corporate
creditors, the suspensive effect would expire after
three (3) months.
The suspensive effect covers unsecured creditors
only.

28) Distinguish insolvency from suspension of payments.

Insolvency Suspension of payments

The liabilities of the debtor are more than his assets
The assets of the debtor are to be converted into
cash for distribution among its creditors
The assets of the debtor are more than his
liabilities
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.

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 Insolvency
The insolvency petition may be filed either by the
debtor (voluntary insolvency) or at least 3 creditors
whose aggregate credit is not less than Php 1M
(involuntary insolvency)
Discharge of the debtor from his liabilities is
possible
Suspension of payments
The petition is filed by the debtor. His proposal can
be sustained if approved by at least 2/3 of his
creditors representing at least 3/5 of the total
liabilities of the debtor.
There is no discharge of debtor from his
obligations.

NOTE: Suspension of payment is covered by the law on financial rehabilitation.

When is the remedy of declaration in a state of suspension of payments available to a

corporation?

The remedy is available to the corporate debtor in two instances:

1. Where the corporate debtor possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due, or

2. Where the corporate debtor as no sufficient assets to cover its liabilities but is under management of
a Rehabilitation Receiver or Management Committee.

29) What is Suspension of Payments?

This is a remedy where an individual debtor who, possessing sufficient property to cover all his
debts but foreseeing the impossibility of meeting them when they respectively fall due.

 This is a judicial insolvency proceeding by which an individual debtor submits or files a verified petition in
court where he has resided for more than six (6) months prior to the filing of the petition praying that he be
declared in a State of Suspension of Payments.

 His petition must contain (a) schedule of debts and liabilities, (b) an inventory of assets and liabilities and
(c) a proposed agreement with his creditors containing propositions delaying or extending the time of
payment of his debts.

 This petition does not reduce the debtor’s liabilities but merely allows a grace period to its payment.

 If the court finds the petition sufficient in form and substance, it may issue suspension of payments Order
within five (5) days from determination of sufficiency.

 Once the order is issued, the individual debtor is prohibited from; (a) disposing his properties except those
used in his ordinary business operation, and (b) making any payments outside of the necessary or
legitimate expenses of his business.

 The ORDER shall be binding upon all creditors, whose claims are included in the schedule of debts and
liabilities submitted by the individual debtor, and who were properly summoned.

 Once a majority vote is reached in the creditors meeting, the court shall issue an ORDER that the
agreement be carried out and all parties bound thereby with its terms.

 The order remains effective from the time of filing the petition until the termination of the proceedings.

30) Instances when the Stay Order of a Suspension Order does not apply: (same as: relief from,
modification or termination of the Stay Order)

a) Cases pending appeal before the Supreme Court as of commencement date: provided any final and
executory judgment arising from such appeal shall be referred to the rehabilitation court for appropriate
action.

b) Subject to the discretion of the rehabilitation court, to cases pending or filed with a specialized court or
quasi-judicial agency which is capable of resolving the claim quickly, fairly and efficiently than the
rehabilitation court; Provided that any final and executory judgment of the specialized court or agency
shall be referred and shall be treated as a non-disputed claim;

c) To the enforcement of claims against sureties and other persons solidarily liable with the debtor, and
third party or accommodation mortgagors as well as issuers of letters of credit.

d) To any criminal action against individual debtor or owner, partner, director or officer of a debtor. The
enforcement of the civil liability arising from the offense charged, deemed instituted with the criminal
action shall be covered by the Stay Order.
10
 e) To any form of action of clients of a security market participant to recover or otherwise claim moneys
and securities entrusted to the latter (broker) in the ordinary course of the broker’s business as well as
any action of such security market participant or the appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities.

f) To the actions 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 Securities Regulation Code (SRC) and its implementing rules and regulations, and

g) To the clearing and settlement of financial transactions through the facilities of a clearing house/agency
or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency
like the BSP and the SEC as well as any form of actions of such agencies or entities to reimburse
themselves for any transactions settled for the debtor.

h) When creditor does not have adequate protection over property securing its claim.

i) When the value of a claim secured by a lien on property which is not necessary for rehabilitation of the
debtor exceeds the FMV of the property.

31) What is a Notice of claim?

This is a document that is included in the petition for rehabilitation of the debtor that lists down a
Schedule of Debts and Liabilities due to all his creditors, the amounts due them including principal, interest
or penalties, the nature of the claim and any pledge, lien or other security given to creditors.

32) C is a creditor of X, a petitioner for rehabilitation. C’s claim was not included in the Notice of
claim filed by X in court. What will happen to C’s claim?

Since C’s claim was not included in the Schedule of Debts and Liabilities of X, C must file his verified
notice or claim not later then five (5) days before the initial hearing date fixed in the Commencement Order.
If he fails to file his notice of claim on time, he shall not be entitled to participate in the proceedings, but shall
be entitled to receive distributions arising from the proceedings if recommended and approved by the
rehabilitation receiver, and approved by the court.

33) Is there a pre-trial proceeding in financial rehabilitation case filed in court?

The “pre-trial proceeding” had been removed in the FR Rules, since FRIA itself does not require it.

34) What will transpire during the initial hearing of the petition?

The Court shall:

a) Determine the creditors who have made timely and proper filing of their notice of claims and issue an
order that the creditors not named therein shall NOT be entitled to participate in the proceedings but
shall be entitled to receive distributions arising from the proceedings.

b) Hear and determine any objections to the qualification and appointment of the rehabilitation receiver
and, if necessary, appoint a new one;

c) Direct the creditors to discuss their comments on the petition and the Rehabilitation Plan (RP) that has
been submitted;

d) Direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and
submit to the court a report; and

e) Determine the reasonableness of the rehabilitation receiver’s fees stated in the “RP”, which shall be
presumed reasonable unless the creditors object to it.

The court may hold additional hearings to discuss the above matter, but these hearings must be
concluded not later than ninety (90) days from the first hearing date.

35) Who may be named a receiver in the petition of the debtor for rehabilitation?

The FRIA allows the appointment of a (1) natural person or (2) juridical persons as receivers. The
juridical receiver must be authorized to do business in the Philippines for at least six (6) years prior to its
appointment and must name a representative who shall be authorized to act for it. The designated
representative must be a director, officer, a stockholder, or a partner of the juridical receiver. The
juridical receiver is SOLIDARILY liable with the designated representative for any wrongful act
committed in the discharge of their functions and responsibilities.
11
36) Duties of the receiver after the initial hearing on the petition:

a) To submit a report to the court stating his preliminary findings and recommendations,

b) To report whether or not the debtor is insolvent and the possible causes of such insolvency;

c) To report the financial goals of the rehabilitation plan and the procedures to accomplish these goals;
and

d) To report the substantial likelihood that the debtor can be rehabilitated.

e) He may also recommend the dismissal of the petition, or the dissolution and/or liquidation of the debtor.

f) The receiver is required to disclose, upon appointment, if he has any conflict of interest. This is a
continuing obligation to make disclosure of any fact coming to his knowledge that may deemed to be in
conflict of interest.

g) The rehabilitation receiver MAY NOT interfere with or take over the management of the debtor’s affairs,
but may only oversee and monitor the operations of these affairs during the pendency of the
proceedings.

h) The rehabilitation receiver and persons he may employ are entitled to compensation. The salaries shall
be for the account of the debtor and are considered administrative expenses. The amount of the
compensation shall be based on terms approved by the court after notice of hearing.

37) What are he possible course of action of the court after receiving the receiver’s report?

a) Give due course to the petition upon a finding that:

1. The debtor is insolvent, or

2. There is a substantial likelihood that the debtor could be successfully rehabilitated.

b) Dismiss the petition upon a finding that:

1. The debtor is NOT insolvent

2. The petition is a sham filing intended to delay the enforcement of the rights of the creditor(s) or
any group of creditors;
3. The petition, the rehabilitation plan and the attachments thereto contain may materially false or
misleading statements, or
4. The debtor has committed acts of misrepresentation or fraud to its creditor(s) or group of
creditors;

c) Convert the proceedings into one for the liquidation of the debtor upon a finding that:

1. The debtor is insolvent and there is no substantial likelihood for the debtor to be successfully
rehabilitated as determined, and
2. There is failure of rehabilitation.

38) Is the court authorized to appoint a management committee to assume the powers of
management of the debtor’s affairs?

Yes. Upon motion of any interested party, the court is empowered to appoint a management
committee. The requisites are:

a) There is actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets
and other properties, or

b) There is paralyzation of the business operations of the debtor which may be prejudicial to the interest of
the parties-litigants, or the general public, or

c) There is gross mismanagement of the debtor, or fraud or other wrongful conduct on the part of, or gross
or willful violation of the Act by the existing management of the debtor or the owner, partner, director,
officer or representative(s) in management of the debtor.

39) What is the effect(s) of the creation of a management committee?

It will result in the suspension of all actions (pecuniary in nature including labor cases) regardless of the
phase of the suit, be it before the court or any tribunal against the corporation to enable such management
committee or rehabilitation receiver to effectively exercise its powers free from any judicial or extra-judicial
12
 interference that might unduly hinder or prevent the rescue of the distressed company. (Tyson’s Super
Concrete, Inc. vs. CA, June 23, 2005)

The management committee shall take custody and control of all the assets of the debtor and shall take
the place of the management and governing body of the debtor and assume powers, rights and
responsibilities. It has the power to overrule or revoke the actions of the precious management or governing
body of the debtor.

40) If the petitioner is a juridical entity (corporation) is stockholders’ approval needed to

commence a rehabilitation proceeding? Are shareholders entitled to vote on a rehabilitation
plan?

Yes, shareholders’ approval (2/3 of OCS entitled to vote) is required to commence voluntary rehabilitation
proceedings. However, they are not entitled to vote on the rehabilitation plan.

41) When can the minority stockholders file a petition for the appointment of an interim
management committee?

They must do more than merely make a prima facie showing of a denial of their right to share in the
concerns of the corporation. They must show that corporate property is in danger of being wasted or
destroyed, that the business of the corporation is being diverted from the purpose for which it has been
organized; and that there is a serious paralyzation of operations all to their detriment. It is only in a strong
case where there is a showing that the majority are clearly violating the chartered interest of the minority
and putting their interests in imminent danger that a management committee may be created.

42) May the receiver or the management committee sell, encumber or dispose debtor’s property
during the rehabilitation proceedings to meet administrative expenses?

Yes, for that purpose. In certain cases, the court may authorize, upon motion, the sale,
encumbrance or disposition of the debtor’s property if there is a showing that it is necessary for the
continued operation of the debtor’s business.
How are the secured creditors protective if there is disposition of debtor’s property?

The secured creditors must consent to the sale, encumbrance, or disposition of debtor’s property
and they must be given a substitute lien.

43) X has a claim against the debtor petitioner in a rehabilitation proceeding. If X will wait until the
rehabilitation proceeding is terminated, his right to commence an action against X might
have prescribed. Can X file a case in court against X while the rehabilitation proceeding is
on-going to preserve his claim against X?

The FR Rules declares that the issuance of the stay order does not affect the right to commence actions
or proceedings insofar as it is necessary to preserve a claim against the debtor because the Stay Order
does not toll the running of the period of prescription. The plaintiff has to pay Php 100,000 or 1/10 of the
prescribed filing fee whichever is lower in court and the balance of the filing fees shall be a jurisdictional
requirement for the reinstatement or revival of the case.

44) RTC finds that the petition for rehabilitation of Z Corporation is sufficient in form and
substance. Hence, the court issued a “Stay Order” and appointed a rehabilitation receiver to
stay the enforcement of all claims against Z. What is the rationale of the Stay Order of the
court?

The stay order of the court places all creditors of Z in equal footing under the Doctrine of Equality in
Equity”. The stay order will enable the rehabilitation receiver or management committee to effectively
exercise his/its powers free fro, judicial or extrajudicial interference that might unduly prevent rehabilitation
of Z. The receiver should not be unduly hindered from rescuing the distressed corporation, rather than
waste his/its time, efforts and resources in defending claims against Z, the receiver can concentrate on the
possible rehabilitation of Z. which at the end of the day benefits all creditors of Z. [Rubberworld (Phils), Inc.
vs. NLRC, 305 SCRA 721 (2000]

45) XYZ Corporation filed a petition for rehabilitation claiming serious financial distress brought
about by long labor disputes. The petition was given due course. Employees of XYZ were not
allowed to report for work. A labor case for illegal dismissal was filed by employees against
XYZ. The Labor Arbiter decided the case in favor of the employees and awarded then
reinstatement with back wages. Can employees enforce the payment of their back wages
while corporation is under rehabilitation? (PAL, Inc. vs. Reynaldo Paz, G. R. No. 192924,
November 26, 2014)
13
 All kinds of money or pecuniary claims against a corporation under rehabilitation shall be suspended
including employees claim for their accrued unpaid salaries.

46) X Corporation filed for corporate rehabilitation before the RTC. While the action was ongoing,
X ceased operation. X’s employees were terminated. Y, for himself and his co-employees
filed a case before the Labor Commission for illegal dismissal. The LA decided the case in
favor of Y and group. Can Y move for the execution of the judgment in their favor while X is
under rehabilitation?

All pecuniary claims including unpaid wages and court decisions against a corporation under
rehabilitation shall be suspended until the process or the rehabilitation of subject distress corporation has
been completed. (PAL, Inc. vs. Reynaldo Paz, GR No. 192924, November 26, 2014).

47) X Corporation is under rehabilitation. How will X enforce its claim against its own debtors?

Since the jurisdiction of the rehabilitation court is over claims against the debtor corporation under
rehabilitation, all claims by the debtor corporation against its own debtors or against third parties must be
filed in a separate action. (Steel Corporation vs. Mapfre Insular Insurance Corporation, October 16, 2013)

48) Explain the Principle of “Equality of Equity” in corporate rehabilitation.

When the corporation is threatened by bankruptcy and it is taken over by a receiver, all creditors
(secured and unsecured) shall stand on equal footing. Not anyone of them should be given any preference
by paying one or some of them ahead of the others.

49) Briefly explain the “pari passu principle” in corporate rehabilitation.

When the petition for rehabilitation of a corporation is approved by the RTC, all its assets shall be held
in trust by the rehabilitation receiver for the equal benefit of all creditors, precluding one from obtaining an
advantage of preference over another by the expediency of attachment, execution or otherwise. Hence, all
creditors stand on equal footing and no one may be paid ahead of the others.

50) X, a secured creditor questions the constitutionality of pari passu treatment (placing secured
creditors and unsecured creditors in equal footing and treatment during rehabilitation of the
corporation) and claims that the same offends the Non-impairment Clause of the
Constitution? Decide.

Rehabilitation of corporation is not a proper subject of the Non-impairment Clause of the Constitution.
This process is designed to benefit both debtor and creditors alike. It gives the corporation a chance to
continue its business operation without claims yet being enforced so that it can return and regain from
financial stress to solvency. At the end of the day, creditors are satisfied in their full claims rather than
recover at a lesser amount if corporate properties are immediately sold.

51) May secured creditors enforce their preference in payment during the rehabilitation by virtue
of a contractual agreement?

Secured creditors retain their preference over unsecured creditors but enforcement of such preference
is equally suspended upon the appointment of a management committee, rehabilitation receiver, board or
body.

In the event that the assets of the corporation, partnership or association are finally liquidated, however,
secured and preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured credits.

52) C Corporation mortgaged to the X Bank three (3) parcels of land under a valid real estate
Mortgage. Due to very poor business activities, C defaulted in its loan payment to X Bank.
Subsequently C became insolvent. Insolvency or liquidation proceedings are undertaken to
settle C’s liabilities. Can X Bank proceed to foreclose C’s property at this stage?

While the case of insolvency or liquidation proceedings is ongoing, the right to foreclosed real estate
mortgage is merely suspended upon the appointment of a management committee or a rehabilitation
receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may
exercise his/its right to foreclose the mortgage upon the termination of the rehabilitation proceedings or
upon lifting of the stay order. (Yngson, Jr. vs. PNB, GR 171132, August 12, 2012)

14
53) X Corporation filed a petition before the RTC for corporate rehabilitation. Subsequently, the
court issued a stay order and appointed a rehabilitation receiver. Prior to the petition and
particularly during the initial stage of X’s operation Y Corporation accommodated X by
allowing the later to mortgage Y’s properties in support of X’s loan application. Having notice
of X’s petition in court, the creditors of Y moved for the foreclosure of the accommodation
mortgages. Are the properties of Y (third party mortgagors) included in the stay order? (Situs
Dev’t. Corp. et. al., vs. Asia Trust Bank, et. al. G. R. No. 180036, January 13, 2013)

The issuance of a stay order empowers the court to suspend claims against the debtor, its guarantors
and sureties not solidarily liable with the debtor. Hence, it cannot suspend the foreclosure of
accommodation whether or not the properties subject to the third-party mortgage are used by the debtor-
corporation (X) or are necessary for its operation is of no moment, as the Interim Rules do not make a
distinction. It is beyond the rehabilitation court’s jurisdiction to suspend foreclosure proceedings against
properties of third-party mortgagors.

54) RST Corporation was granted a commercial loan of Php 25M by Merchant Bank. Three (3)
parcels of land were mortgaged in support of the loan. On due date RST defaulted in making
good its obligation. The Bank sought the extra-judicial foreclosure of the mortgages. On
March 7, 2009 it filed a petition for sale of the subject real properties. On May 28, 2009, the
mortgaged properties were sold at public auction and the Bank won the bid being the
highest bidder thereof. On the same day, the Sheriff executed a Certificate of Sale in favor of
the Bank.

On July 15, 2009, RST filed a Petition for Rehabilitation. Pursuant thereto a Stay Oder
was issued by the RTC on August 22, 2009.

Meanwhile on September 3, 2009 the Merchant Bank caused the registration of the
Certificate of Sale with the Register of Deeds of the City where the properties are located. It
executed an Affidavit of Consolidation of Ownership and had the same annotated on the title
of RST Corporation. Thereafter, the Reg. of Deeds cancelled RST’s titles and issued new
titles in the name of the Bank on October 1, 2009. On January 4, 2010, the Bank also filed an
ex-parte petition for issuance of Writ of Possession before the RTC of the City. After hearing,
the court March 3, 2010 issued an order directing the issuance of the Writ of Possession.

RST claims that all subsequent actions pertaining to the mortgaged properties should
have been held in abeyance after the Stay Oder was issued by the rehabilitation court. Is the
contention of RST correct?

No, the contention of RST Corporation is not correct. The foreclosure of mortgages and the issuance
of the Certificate of Sale were done prior to the appointment of a Rehabilitation Receiver and the Stay
Order. The actions of the Bank with respect to the foreclosure were not affected by the Stay order which
was issued after the foreclosure and public sale of the mortgaged properties. Hence, after the redemption
period expired without RST exercising its right of Equity of Redemption, the Bank becomes the absolute
owner of the real properties and it was within its right to ask for the consolidation of title and the issuance
of new titles in its name as the new owner thereof. It is entitled to the possession of the property.
(Equitable PCI Bank, Inc. vs. DNG Realty & Development Corporation, G. R. 168672, August 2, 1010)

55) X, a judgment creditor filed an extra-judicial foreclosure against C Corporation for failure to
pay its debts. A Certificate of Sale was issued in favor of X-mortgagee. But, before the
transfer of the foreclosed properties was effected, a Stay Order was duly issued by the
Court. Can X move for the issuance of new title in its favor after the Stay Order?

Yes. Since the foreclosure of the mortgage and the issuance of the Certificate of Sale in favor of X-
mortgagee were done prior to the appointment of a Rehabilitation Receiver and the Stay Order, all actions
taken by X are not affected by the Stay Order. Thus, after the redemption period expired without C-
mortgagor redeeming the foreclosed property, X becomes the absolute owner thereof and it is within its right
to ask for the consolidation of title and the issuance of new title in its favor. The writ of possession procured
by X despite the subsequent issuance of a stay order in the rehabilitation proceedings instituted is VALID.

56) X Corporation borrowed money from B Bank. Y, the brother of X’s president allowed to
corporation to use his (Y’s) property as additional collateral to that loan application X applied
for. Subsequently, X was placed under corporate rehabilitation. A stay order was issued by
the trial court. Can B bank proceed to foreclose Y’s property?

15
 Yes. Nowhere in the Interim Rules of the old and the New Corporate Rehabilitation Law is the
rehabilitation court authorized to suspend foreclosure proceedings against properties of third-party
mortgagors.

The Stay Order cannot suspend foreclosure proceedings already commenced over properties belonging
to third party mortgagors. The Stay Order can only cover those claims directed (a) against petitioner
corporation or their properties, (b) against petitioners’ guarantors or (c) against petitioners’ sureties who are
NOT solidarily liable with them. (Situs Dev’t. Corporation, et.al., vs. Asia Trust Bank et al., GR. 180036, July
25, 2012)

57) Are the properties of third party mortgagors included in the stay over of the rehabilitation
court?

The properties of guarantors and sureties NOT solidarily liable with the debtor are excluded from the
suspension order or stay order of the court. Hence, the court is not authorized to suspend foreclosure
proceedings against properties of third-party mortgagors. (Situs Development vs. Asia Trust Bank, January
16, 2013)

58) ABC Corporation secured loans from banks and financial intermediaries. Among the banks
that granted loans to ABC were RR Bank, an unsecured creditor and loans from XY Finance
& Investment Corporation a secured creditor. After several years, ABC filed a petition for
rehabilitation, to which XY filed an opposition contending that the rehabilitation plan unduly
benefits unsecured creditors. The regular commercial court granted the petition. (Robinson’s
Bank Corp. vs. Trade & investment Dev’t. Corp. et. al., G. R. No. 195289, Sept. 24, 2014)

XY appealed the ruling of RTC before the CA. RR then filed a Motion for Intervention with
the CA to participate in the proceedings. CA denied RR’s Motion for violation of the Rules of
Procedure on Corporate Rehabilitation. “Motion for Intervention” is a prohibited Motion.
[Rule 3, Sec. 1 par 2(g)]

Is RR allowed to participate in the proceedings in question?

The nature of XY’s petition mandates the participation of RR , an unsecured creditor because the
latter has an interest in the main issued at hand., RR is already a party to the case and it does not need to
file a motion for intervention to participate in the proceedings. XY cannot refuse or object to the participation
of RR in the case.

59) X Corporation filed a petition for rehabilitation before the RTC. The petition was dismissed for
lack of substance. Can X thereafter file a petition for insolvency?

Yes, the dismissal of a petition for rehabilitation means that the corporation can no longer be restored
to solvency. Hence, the further recourse of X is to file a petition for insolvency.

60) P, the president of C Corporation is duly authorized by its BOD to file suit for and on behalf of
the corporation. C Corporation has been placed under corporate rehabilitation. May P file a
case to recover an unlawfully detained corporate property despite the fact that C is under
rehabilitation?

Yes, notwithstanding the appointment of a rehabilitation receiver, P can file the case since there is no
allegation that the SEC (now RTC) gave the rehabilitation receiver the exclusive right to sue. (Umale vs.
ASB Realty Corporation, GR 181126, June 15, 2011)

61) Debtor Corporation “D” and its principal stockholders filed with the RTC (Special Commercial
Court) a petition for rehabilitation and declaration of a state of suspension of payments
under RA 8799. The purpose was for the court to appoint a receiver to take control of the
corporation and all its assets and liabilities, earnings and operations, and to determine the
feasibility of continuing operations and rehabilitating the company for the benefit of
investors and creditors.

After hearing, the court directed and appointed a receiver and ordered the suspension of
all actions and claims against “D” as well as against the principal stockholders. Discuss the
validity of the order.

Generally, the unsecured creditors had manifested willingness to cooperate with Debtor
Corporation. The secured creditors, however, expressed serious objections and
reservations.
16
 First Bank had already initiated judicial foreclosure proceedings on the mortgage
constituted on the factory of the Debtor Corporation.

Second Bank had already initiated foreclosure proceeding on a third-party mortgage

constituted on certain assets of the principal stockholders.

Third Bank had already filed a suit against the principal stockholders who have held
themselvesjointly and severally liable for the loans of debtor Corporation with said bank.

a) Discuss the validity of the RTC order of suspension.

b) Discuss the effect of the RTC order of suspension on the judicial foreclosure
proceeding initiated by the First Bank.
c) Would the order of suspension have any effect on the foreclosure proceeding initiated
by the Second Bank? Explain.
d) Would the order of suspension have any effect on the suit filed by the Third Bank?
Explain.
e) What are the legal consequences of a rehabilitation receivership?
f) What measures may the receiver take to preserve the assets of Debtor Corporation?

Answer. (a) The RTC order of suspension of payment is valid with respect to the debtor corporation but not
with respect to the principal stockholders. The RTC has jurisdiction to declare suspension of payments with
respect to corporations, partnership or associations, but not with respect to individuals.

(b) The RTC order of suspension of payment suspended the judicial proceedings initiated by First Bank.
According to the Supreme Court in a line of cases, the suspension order applies to secured creditors
and to the action to enforce the security against the corporation regardless of the stage thereof.

(c) The order of suspension of payments suspended the foreclosure proceedings initiated by Second
Bank. While the foreclosure is against the property of a third party, it is in reality an action to collect
the principal obligation owed by the corporation. During the time that the payment of the principal
obligation is suspended, the debtor corporation is considered to be not in default and, therefore, even
the right to enforce the security, whether owned by the debtor corporation or of a third party, has not
yet risen.

(d) For the same reason as in (c), the order of suspension of payments suspended the suit filed by Third
Bank against the principal stockholders.

(e) Under PD 902-A, the appointment of a rehabilitation receiver will suspend all actions for claims
against the corporation and the corporation will be placed under rehabilitation in accordance with a
rehabilitation plan approved by the Commission.

(f) To preserve the assets of the Debtor Corporation, the receiver may take custody of , and control, all
the existing assets and property of the corporation; evaluate existing assets and liabilities, earnings
and operations of the corporation and determine the best way to salvage and protect the interest of
the investors and creditors.

62) X Corporation applied for its rehabilitation and submitted a rehabilitation plan which called for
the entry by it into a joint venture agreement with Y Corporation. Under the agreement, Y
Corporation was to lend to X Corporation its credit facilities with certain banks to obtain
funds not only to operate X Corporation but also for a part thereof in the amount of P1
million as initial deposit in a sinking fund to be augmented annually in amounts equivalent to
10% of its operation of the business of X Corporation. From this fund, the creditors of X
Corporation were to be paid annually, starting from the second year of operations, with the
entire indebtedness to be liquidated in 15 years.

The creditors of X Corporation objected to the plan because Y Corporation would be

taking over the business and assets of X Corporation.

1. Could the court approve the plan despite the objection of the creditors of X
Corporation and could the creditors be compelled to follow the plan?

2. Could Y Corporation, in managing the business of X Corporation in the meantime, be

deemed to have taken over X Corporation itself?

1. Yes, it could. The interim Rules of Procedure on Corporate Rehabilitation (2000) expressly provides for
17
 the “cram-down” power of the court, particularly the RTC, having jurisdiction over the petition for
rehabilitation.

This “cram-down” power of the RTC enables it to approve the rehabilitation plan even over the
opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable.

2. No. it could not. In the rehabilitation plan, Y Corporation is envisaged merely as a rehabilitation receiver.
A rehabilitation receiver implements the rehabilitation plan after its approval by the court. Its primary
task is to study the best way to rehabilitate the debtor and to ensure that the value of the debtor’s
property is reasonably maintained pending the determination of whether or not the debtor should be
rehabilitated. It does not take over the management and control of the corporate debtor but simply
oversees and monitors closely the operations of the latter during the pendency of the proceedings.

63) What is the “serious situation test”?

This test is used in appointing a receiver to the corporation. The court should consider whether the
company’s financial situation is serious and whether there is a clear and imminent danger that it will lose its
corporate assets if a receiver is not appointed.

64) ABC Corporation filed a petition for corporate rehabilitation with the RTC-Special Commercial
Court. It submitted a proposed rehabilitation plan. The creditors opposed the plan
contending that it is of doubtful nature and impossible to accomplish. Notwithstanding the
objection, the RTC approved the plan and granted the petition. Is the approval of the court
valid on the score that the creditors were able to prove that the financial commitments of
ABC under the rehabilitation plan are unrealistic and cannot be achieved? (PBCom vs. Basic
Polyprinters & Packaging Corp., G. R. No. 187581, October 20, 2014)

A material financial commitment is an indispensable requirement of a financial rehabilitation plan. If the

financial commitments under the rehabilitation plan are of doubtful nature and impossible to achieve or
realized the plan should not be approved and the petition should not be given due course. Hence, the
approval of the RTC is improper.

65) C Corporation applied for rehabilitation, it submitted the rehabilitation plan with the required
financial commitments. Upon scrutiny of the rehabilitation plan and the financial
commitment of C, it was found out that it is not feasible. The additional working capital it
stated to infuse from an insurance claim has already been written off as bad debt by C’s
affiliate. Whereas, its proposal to enter into the dacion en pago to create a fresh source of
capital is also doubtful because the object thereof would come from Y Corporation another
affiliate. Nonetheless, the RTC approved the rehabilitation plan. P, one of C’s creditors
opposed the plan. The CA sustained the approval of the RTC. P went to the SC to question
the assailed decision. Decide.

Sec. 5, Rule 4 of the Interim Rules provides that the material financial commitment is an indispensable
requirement of a financial rehabilitation plan and a liquidation analysis setting out for each creditor that the
present value of payments it would received under the plan is more than that which it would receive if the
assets of the distress corporation were sold by a liquidator within six (6) months period from the filing of the
petition. If the plan is doubtful and impossible to achieve the approval is irregular and not valid. The plan
must be doable. (PBCom vs. Basic Polyprinters and Packaging Corp., GR No. 187581, October 20, 2014,
BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc. GR No. 205469, March 25, 2015)

66) Debtor Corporation “D” and its principal stockholders filed with the RTC (Special Commercial
Court) a petition for rehabilitation and declaration of a state of suspension of payments
under RA 8799. The purpose was for the court to appoint a receiver to take control of the
corporation and all its assets and liabilities, earnings and operations, and to determine the
feasibility of continuing operations and rehabilitating the company for the benefit of
investors and creditors.

After hearing, the court directed and appointed a receiver and ordered the suspension
of all actions and claims against “D” as well as against the principal stockholders. Discuss
the validity of the order.

The suspension of payment is valid with respect to D but not with respect to the principal stockholders.
The court has jurisdiction to declare suspension of payments with respect to corporations, partnership or
associations, but not with respect to individuals.

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67) The jurisdiction of the SEC DOES NOT extend to the liquidation of a corporation – while it has
jurisdiction to order the dissolution of a corporation, jurisdiction over the liquidation of a corporation belongs to
the RTC (Special Commercial Court) because liquidation requires the settlement of claims for and against the
corporation, which clearly falls under the jurisdiction of the regular court, It is in a better position to convene all
the creditors of the corporation to ascertain their claims and determine their preferences. (BPI vs. Eduardo
Hong, February 15, 2012)

Cases on FRIA:
Heirs of Santiago Divinagracia vs. Ruiz, GR 172023, July 7, 2010 - The awards for moral
damages, exemplary damages and attorney’s fees in intra-corporate controversies are not
immediately executory.

Panlilio vs. RTC, Br. 51, City of Manila, GR 173846, February 2, 2011 – The suspension of claims
in corporate rehabilitation does not extend to criminal actions against the distressed corporations
or its directors and officers. It would be absurd for one who has engaged in criminal conduct to
escape punishment simply because the corporation of which he is a director or officer filed a
petition for rehabilitation. The prosecution of the officers of the corporation has no bearing on the
pending rehabilitation of the corporation.

Equitable PCI Bank, Inc. vs. DNG Realty & Dev’t. Corp, 627 SCRA 125-2011, Town & Country
Enterprises vs. Hon. Quisumbing, GR No. 173610, October 1, 2012 – When the foreclosure of
the mortgage and the issuance of the Certificate of Sale in favor of the mortgagee were done
PRIOR to the appointment of a Rehabilitation Receiver and the issuance of the Stay Order, all
actions taken with respect to the foreclosed mortgage property which are subsequent to the
issuance of the Stay Order will not be affected by said Order. Hence, if the redemption period
expired without the mortgagor redeeming the foreclosed property, the mortgagee becomes the
absolute owner of the property and it is within its right to ask for the consolidation of title and the
issuance of new title in its favor. The writ of possession procured by the mortgagee despite the
subsequent issuance of a stay order in the rehabilitation proceedings instituted is also VALID.

Yngson, Jr. vs. PNB, GR No. 171132, August 15, 2012 – The creditor-mortgagee has the right to
foreclose the mortgage over a specific real property WON the debtor-mortgagor is under
insolvency or liquidation proceedings. The right to foreclose such mortgage is merely suspended
upon the appointment of a management committee or rehabilitation receiver or upon the issuance
of a stay order by the trial court. However, the creditor-mortgagee may exercise his right to
foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of
the stay order.

Metropolitan Bank & Trust Co., vs. Liberty Corrugated Manufacturing Corporation, 815 SCRA
458 (2017):

 A corporation that may seek corporate rehabilitation is characterized not by its debt but by
its capacity to pay this debt.

 The opportunity to rehabilitate the affairs of an economic entity, regardless of the status of its
debts, redounds to the benefit of its creditors, owners and to the economy in general.

 Rule 4, Section 1 of the Interim Rules does not specify what kind of debto9r may seek
rehabilitation. The provision allows creditors holding 25% of the debtor corporation’s total
liabilities to petition for the corporation’s rehabilitation.

 The Interim Rules does not specify that courts must make a written declaration that a creditor’s
opposition is manifestly unreasonable.

 A debtor corporation may file for rehabilitation despite having defaulted on its obligations to its
creditors.

Lim vs. Moldex Land, Inc., 815 ACRA 619 (2017):

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  Pursuant to A. M. No. 04-9-07-SC, all decisions and final orders in cases falling under the
Interim Rules of Corporate Rehabilitation and the Interim Rules of Procedure Governing Intra-
Corporate Controversies shall be appealable to the Court of Appeals (CA) through a petition
for review under Rule 43 of the Rules of Court. Such petition shall be taken within 15 days
from notice of the decision or final order of the RTC.

BIR vs. Lepanto Ceramics, Inc. 824 SCRA 125:

 Case law has defined corporate rehabilitation as an attempt to conserve and administer the
assets of an insolvent corporation in the hope of its eventual return from financial stress to
solvency.

 The inherent purpose of rehabilitation is to find ways and means to minimize the expenses of
the distressed corporation during the rehabilitation period by providing the best possible
framework for the corporation to gradually regain or achieve a sustainable operating form.

 The creditors must ventilate their claims before the rehabilitation court and any attempt to seek
legal or other resource against the distressed corporation shall be sufficient to support a
finding of indirect contempt of court.

Good Luck and GOD Bless

JPLim, April 2023. ALL RIGHTS RESERVED.

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