Financial Rehabilitation and Insolvency Act ◦ SEC jurisdiction over suspension of

of 2010 (RA 10142) payments, rehabilitation, and

insolvency.
 The law was enacted on August 31, 3. Securities Regulations Code (RA 8799)
2010 ◦ Transferred jurisdiction of the SEC to
 The FRIA governs rehabilitation of the Courts.
covered debtors and insolvency insofar ◦ Supreme Court issued its Interim
as its provisions are not inconsistent with Rules of Procedure on Corporate
the Civil Code. Recovery
◦ Article 2237- Insolvency shall be governed 4. Financial Rehabilitation and Insolvency
by special laws insofar as they are not Act
inconsistent with this Code ◦ Repealed the Insolvency Law and all
 The law primarily deals with the other laws and rules inconsistent with
discharging of debts and rehabilitation of the FRIA
the debtor.
Two Main Proceedings Under the FRIA
Policy of the Law 1. Rehabilitation
1. The FRIA aims to encourage debtors ◦ the restoration of the debtor to a
and their creditors to collectively and condition of successful operation and
realistically resolve and adjust claims solvency, if it is shown that its
and property rights. continuance of operation is
2. To ensure a timely, fair, transparent, economically feasible and its
effective, and efficient rehabilitation or creditors can recover by way of the
liquidation of debtors present value of payments projected
3. To ensure or maintain certainty or in the plan.
predictability in commercial affairs, and 2. Liquidation
preserve and maximize the value of ◦ The proceeding where claims are
assets of these debtors, filed and the assets of the insolvent
4. To recognize creditors rights and respect debtor are disposed of and the
priority of claims, and ensure equitable proceeds are divided among the
treatment of creditors who are similarly creditors.
situated ◦ Taken up usually when rehabilitation
5. When rehabilitation is not feasible, to is not feasible or when rehabilitation
facilitate a speedy and orderly liquidation of the debtor fails.
of these debtor’s assets and the
settlement of their obligations Concept of Insolvency
1. The Balance Sheet Test
History of Insolvency Laws ◦ “Insolvency” is the state of a person
1. Insolvency Law (Act 1956) whose liabilities are more than its
◦ Covered suspension of payments (for assets.
a debtor who was solvent but illiquid) ◦ The relative condition of a man’s
and voluntary or involuntary assets and liabilities that the former, if
insolvency proceedings (for a debor all made immediately available,
who was insolvent) would not be sufficient to cover the
2. SEC Reorganization Act (PD 902-A) latter.
◦ Introduced the concept of ◦ “Insolvency” = “Bankruptcy”
rehabilitation ◦ Illustration:Owner’s Equity=Assets-Liabilities
1. Assets= 100; Liabilities= 50.
 ◦ OE= 50 ◦ Governed by the Insurance Code
◦ Not Insolvent (PD 612)
2. Assets= 100; Liabilities= 200 3. Pre-Need Companies
▪ OE= -100 ◦ Governed by the Pre-Need Code (RA
▪ Insolvent
9829)
2. Equity Test 4. National and local government agencies
◦ The inability of a person to pay his or units
debts as they become due in the 5. Government financial institutions when
ordinary course of business. their specific charter so provides
◦ The debtor may be insolvent
although he may be able to pay his Claims covered by the FRIA
debts at some future time All claims or demands of whatever
◦ “Insolvency” = “Illiquidity” nature or character against the debtor or its
◦ Here, the debtor is illiquid but NOT property, whether:
bankrupt.  Monetary or non-monetary
▪ He is unable to pay his debts, but  Liquidated or unliquidated
his assets are not less than his  Fixed of contingent
liabilities.  Mature or unmatured
 Disputed or undisputed
Insolvency under the FRIA
Covers both Balance Sheet and Equity The rehabilitation court only has
Tests, meaning that “insolvency” under the jurisdiction over claims against the debtor that
FRIA refers to: is under rehabilitation.
◦ The financial condition of a debtor  Claims by the debtor against its own
that is generally unable to pay his debtor or against third parties are not
liabilities as they fall due in the covered.
ordinary course of business; or  These must be filed separately by the
◦ Has liabilities that are greater than insolvent debtor.
his assets.
 In determining the value of a debtor's Steel Corporation vs. Mapre Insurance
assets, reference must be made to its Corporation
fair valuation. Steel Corp. was placed under corporate
rehabilitation. It insured its assets against
Debtors Covered by the FRIA material damage and business interruption.
1. Sole Proprietorship duly registered with Later, a fire broke out in its plant damaging its
the Department of Trade and Industry; mill and other machineries
2. Partnership duly registered with the Steel Corp. filed with the rehabilitation
Securities and Exchange Commission; court a motion to direct Mapre Insurance Corp.
3. Corporation duly organized and existing to pay insurance proceeds. Mapre Insurance
under Philippine laws; and entered a special appearance solely to question
4. Individual debtor who has become the court’s jurisdiction over the insurance claim.
insolvent as defined in the FRIA. Issue: WON the rehabilitation court has
jurisdiction over the insurance claim of Steel
Debtors NOT covered by the FRIA Corp. against Mapre Insurance
1. Banks Held: NO. The rehabilitation court has no
◦ Governed by the New Central Bank jurisdiction over the insurance claim by the
Act (RA 7653) insolvent debtor, Steel Corp.
2. Insurance Companies
  It only has jurisdiction over claims Advantages of Judicial Remedies
against the debtor that is under 1. Retention of management
rehabilitation ◦ The management of the juridical
 Steel Corp. must file a separate action debtor will remain with the existing
against Mapre Insurance to recover management
whatever claim it may have against them 2. Non-withholding of supply
◦ The debtor’s supplier of goods or
Nature of Proceedings services are prohibited from
1. In Rem withholding the supply for as long as
◦ The court acquires jurisdiction over the debtor makes payments for such
all affected person upon publication good or services supplied after the
of the notice of the commencement issuance of the Commencement
of proceedings. Order
2. Summary and non-adversarial 3. Protection from certain actions and
◦ The court may decide on the basis of processes
the pleadings and other documentary ◦ Upon issuance of the
evidence Commencement Order, Stay Order,
◦ It may conduct clarificatory hearings or the Suspension order:
when necessary i. No attempts can be made by
creditors to enforce a claim
Kinds of Remedies Available to an Insolvent against the debtor or to seize his
Debtor property.
1. Judicial remedies ii. No lien may be perfected against
◦ Rehabilitation the debtor’s properties
◦ Suspension of payments iii. Suspend all proceedings for the
2. Extra-judicial remedies enforcement of claims against the
◦ Ex. Bringing in a “white knight” who debtor.
will infuse additional equity iv. Prohibit the debtor from making
◦ Selling core assets or portions of its any payment of its outstanding
business to raise funds liabilities.
◦ Debt-to-equity conversion 4. Exemption from, or waiver of, taxes
◦ Transferring assets as payment of its ◦ From the issuance of the
debt (dacion en pago) Commencement Order up until the
approval of the Rehabilitation Plan or
Remedies under the FRIA its dismissal, the imposition of all
1. Rehabilitation taxes and fees due to the
◦ Voluntary- initiated by the debtor government are considered waived
◦ Involuntary- initiated by the creditor ◦ Amounts of debts reduced or forgiven
◦ Pre-negotiated in connection with the Plan are not
2. Out of court restructuring subject to taxes.
3. Liquidation 5. Compromises binding
◦ Voluntary ◦ Any compromises by the debtor will
◦ Involuntary be binding on creditors regardless of
- The FRIA also provides for suspension of whether or not the Rehabilitation Plan
payments for individual debtors. is successfully implemented
6. Cram-down power
◦ The court has the power to approve
or implement the Rehabilitation Plan
 despite the lack of approval, or  “a new lease on life”
objection from the insolvent debtor,
provided that the terms are Likelihood
necessary to restore the financial The rehabilitation must be viable or
well-being and viability of the likely. In other words, there must be a
insolvent debtor substantial likelihood that the debtor can
7. Binding effect of rehabilitation plan properly rehabilitate itself.
◦ The rehabilitation Plan will be binding Otherwise, the court shall order the
upon the debtor and all persons who speedy and orderly liquidation of debtor’s
may be affected by it, including the assets and the settlement of the obligations.
creditors, whether or not they In determining substantial likelihood, the
participated in the proceedings. court must ensure that the minimum
requirements are met, among others:
REHABILITATION IN GENERAL 1. Sufficient assets to rehabilitate
Concept 2. Sufficient cash flow to maintain
Refers to the restoration of the debtor to operations
a condition of successful operation and 3. Good faith and due diligence
solvency, if it is shown that its continuance is 4. Not a sham filing intended for delay
economically feasible and that the creditors can 5. Likely be able to pursue a viable RP
recover payment more by what is projected in  Receiver’s report declaring the financial
the plan than when it is immediately liquidated. goals stated in the RP are realistic,
The concept of corporate rehabilitation feasible, and reasonable, or there is a
was first introduced in Philippine jurisdiction possibility for the debtor to be
through P.D. No. 902-A (SEC Reorganization successfully rehabilitated
Act)
NOTE: At that time, petitions and matters Court Supervised Rehabilitation
concerning rehabilitation were within the 1. Voluntary
jurisdiction of SEC. It was then transferred to ◦ Insolvent debtor initiates the petition.
the regular courts through R.A. No. 8799. ◦ Filed by the owner, majority of
partners, or the majority vote of the
Types board and the vote of stockholders
1. Court supervised holding at least 2/3 of stock.
◦ Voluntary (Sec. 12) 2. Involuntary
◦ Involuntary (Sec. 13) ◦ Creditor initiates the petition.
2. Pre-negotiated (Sec. 76) ◦ Filed by a creditor or group of
3. Out of court/informal (Sec. 83) creditors with aggregate claims of at
least 1 million PHP or at least 25% of
Purpose subscribed capital or partner’s
Rehabilitation is given as a remedy in an contribution, whichever is higher.
effort to restore and reinstate the corporation to
its former position of successful operation and Venue for Petition
solvency. The petition must be filed in the Regional
 Two pronged purpose Trial Court which has jurisdiction over the
◦ Efficient and equitable distribution of principal office of the debtor alleged insolvent.
insolvent debtor’s assets to its  Where the principal office of the SEC
creditors. registered corporation, partnership, or
◦ Clean slate or providing a fresh start association is in Metro Manila, action
to the debtor
 must be filed on the city or municipality c) serve as the legal basis for rendering
where the head office is located. null and void any set-off after the
 If it involves a group, it gets filed over the commencement date;
principal office of any of them. d) serve as the legal basis for rendering
null and void the perfection of any lien
against the debtor's property; and
e) consolidate the resolution of all legal
ACTION ON THE PETITION AND proceedings by and against the debtor to
COMMENCEMENT PROCEEDINGS the court (FRIA, Sec.17)

I. Action on Petition (3) Effectivity and Duration of Commencement

If the court finds the petition for Order- The Commencement Order is effective
rehabilitation to be sufficient in form and for the duration of the rehabilitation
substance, it within five (5) working days from proceedings, unless (a) earlier lifted by the
the filing of the petition, issue a Court, (b) the rehabilitation plan is seasonably
Commencement Order. confirmed or approved, or (c) the rehabilitation
proceedings are ordered terminated by the
II. Commencement Order court (FRIA, Sec. 20)
(1) Contents of the commencement order- The
Commencement Order will: III. Suspension Order
a) declare that the debtor is under (1) Contents of Suspension Order- The
rehabilitation; Suspension Order will:
b) appoint a rehabilitation receiver; a) suspend all actions or proceedings, in
c) prohibit the debtor’s suppliers of goods court or otherwise, for the enforcement
or services from withholding the supply of claims against the debtor;
of goods and services in the ordinary b) suspend all actions to enforce any
course of business; judgment, attachment or other
d) authorize the payment of administrative provisional remedies against the debtor;
expenses as they become due; c) prohibit the debtor from selling,
e) include Stay or Suspension Order; encumbering, transferring or disposing in
f) set the case for initial hearing (FRIA, any manner any of its properties except
Sec. 16) in the ordinary course of business; and
d) prohibit the debtor from making any
(2) Effects of the Commencement Order- payment of its liabilities outstanding as of
Unless otherwise provided in the FRIA, the the commencement date except as may
court’s issuance of a Commencement Order be provided herein. (FRIA, Sec.16)
will:
a) vest the rehabilitation with all the powers (2) Exceptions to the Stay or Suspension
and functions provided to the approval Order- The Stay or Suspension Order does not
by the court of the performance bond apply:
filed by the rehabilitation receiver; a) to cases already pending appeal in the
b) prohibit or serve as the legal basis Supreme Court as of commencement
rendering null and void the results of any date.
extrajudicial activity after b) subject to the discretion of the court, to
commencement date unless otherwise cases pending or filed at a specialized
allowed in FRIA; court or quasi-judicial agency;
c) to the enforcement of claims against
sureties and other persons solidarily
 liable with the debtor, and third party or a) A citizen of the Philippines or a resident
accommodation mortgagors as well as of the Philippines in the six (6) months
issuers of letters of credit, immediately preceding his nomination;
d) to the actions of a licensed broker or b) Of good moral character and with
dealer to sell pledged securities of a acknowledged integrity, impartiality and
debtor; independence;
e) the clearing and settlement of financial c) Has the requisite knowledge of
transactions through the facilities of a insolvency and other relevant
clearing agency or similar entities duly commercial laws, rules and procedures,
authorized; and as well as the relevant training and/or
f) any criminal action against individual experience that may be necessary to
debtor or owner, partner, director or enable him to properly discharge the
officer of a debtor shall not be affected duties and obligations of a rehabilitation
by any proceeding commenced under receiver; and
FRIA. (FRIA, Sec. 18) d) Has no conflict of interest
e) He is willing and able to file a bond in
(3) Continuance of stay order- The court, on such amount as may be determined by
motion or motu propio, may terminate, modify, the Court.
set conditions for the continuance of  In addition if in case the person is a
suspension of payment, or relieve a claim from juridical person:
the coverage, upon showing that: a) It must submit the name of the person
a) a creditor does not have adequate designated to discharge the
protection over property securing its responsibilities and powers of a
claim; or rehabilitation receiver and the names of
b) the value of the claim secured by a lien the employees and other persons
on property which is not necessary for authorized to assist, together with a
rehabilitation of the debtor exceeds the sworn certification
fair market value of the said property. b) Submit a sworn undertaking binding
itself to be solidarily liable with the
IV. Rehabilitation Receiver persons designated by it to discharge
(1) The Rehabilitation Receiver- is the person, the functions and responsibilities of a
natural or juridical, appointed as such by the receiver;
court pursuant to the FRIA and who is entrusted
with such powers, duties, and responsibilities in (4) Duties and Responsibilities of the
relation to the rehabilitation of the debtor. Rehabilitation Receiver.- The rehabilitation
Where the rehabilitation receiver is a juridical receiver shall be deemed an officer of the court
entity, the term includes the juridical entity’s with the principal duty of preserving and
designated representative. maximizing the value of the assets of the debtor
during the rehabilitation proceedings,
(2) Who may Serve as a Rehabilitation determining the viability of the rehabilitation of
Receiver- Any qualified natural or juridical the debtor, preparing and recommending a
person may serve as a rehabilitation receiver. Rehabilitation Plan to the court, and
implementing the approved Rehabilitation Plan.
(3) Qualifications of a Rehabilitation Receiver-
The rehabilitation receiver must have the (5) Removal of the Rehabilitation Receiver–
following: The rehabilitation receiver may be removed at
by the court motu proprio or upon motion by
any creditor/s holding more than fifty percent
(50%) of the total obligations of the debtor, on Contents of a Rehabilitation Plan
such but are not limited to, the following: The Rehabilitation Plan as a minimum
a) Incompetence, gross negligence, failure shall:
to perform or failure to exercise the a) Specify the financial goals and the
proper degree of care in the procedures proposed
performance of his duties and powers; b) Compare the amounts expected to be
b) Lack of a particular or specialized received by the creditors if they choose
competency required by the specific the Rehabilitation Plan instead of
case; liquidation. It should also contain
c) Illegal acts or conduct in the information sufficient for creditors to
performance of his duties and powers; determine whether supporting the
d) Lack of qualification or presence of any Rehabilitation Plan will benefit them in
disqualification; comparison to choosing liquidation
e) Conflict of interest that arises after his c) Establish classes and subclasses for
appointment; and voting creditors
f) Manifest lack of independence that is d) Indicate how the insolvent debtor will be
detrimental to the general body of the rehabilitated and which of the methods
stakeholders. will be employed to facilitate the
rehabilitation
THE REHABILITATION PLAN e) Specify the treatment of each class or
Rehabilitation subclass
Rehabilitation refers to the restoration of f) Provide for equal treatment of all claims
the debtor to a condition of successful within the same class or subclass,
operation and solvency for the following unless a particular creditor voluntarily
reasons: agrees to less favorable treatment
a) To efficiently and equitably distribute the g) Ensure that the payments made under
assets of the insolvent debtor to its the plan follow the priority established
creditors under the provisions of the Civil Code
b) To provide the debtor with a fresh start. h) Maintain the security interest of secured
Rehabilitation allows the debtor to creditors and preserve the liquidation
reorganize their affairs, while also value of the security unless such has
relieving them of their outstanding debts been waived
However, rehabilitation is only done if it is viable i) Disclose all payments to creditors for
or likely to succeed. pre-commencement debts made during
the proceedings and the justifications
Rehabilitation Plan thereof
The Rehabilitation Plan refers to a plan j) Describe the disputed claims and the
by which the financial well-being and viability of provisioning of funds to account for
an insolvent debtor can be restored using appropriate payments should the claim
various means such as debt forgiveness, debt be ruled valid or its amount adjusted
rescheduling, reorganization or quasi- k) (k) Identify the debtor's role in the
reorganization, dacion en pago, debt-equity implementation of the Plan
conversion and sale of the business (or parts of l) State any rehabilitation covenants of the
it), or setting-up of new business entity as debtor, the breach of which shall be
prescribed in Section 62 hereof, or other similar considered a material breach of the Plan
arrangements as may be approved by the court m) Identify those responsible for the future
or creditors. management of the debtor and the
 supervision and implementation of the Even if the creditors reject the
Plan rehabilitation plan, the court may confirm it if all
n) Address the treatment of claims arising the following circumstances are present:
after the confirmation of the (a) The Rehabilitation Plan complies with
Rehabilitation Plan the requirements in the FRIA
o) Require the debtor and its counter- (b) The rehabilitation receiver
parties to adhere to the terms of all recommends the confirmation of the plan
contracts that the debtor has chosen to (c) The shareholders, owners, or parties
confirm of the juridical debtor lose at least their
p) Arrange for the payment of all controlling interest as a result of the
outstanding administrative expenses as Rehabilitation Plan
a condition to the Plan's approval unless (d) The Rehabilitation Plan would likely
such condition has been waived in provide the objecting creditors with
writing by the creditors concerned compensation greater than which they would
q) Arrange for the payment of all receive if the debtor was under liquidation
outstanding taxes and assessments, or
an adjusted amount pursuant to a The Cram-down Power of the court is
compromise settlement with the BIR or necessary to curb the majority creditors’ natural
other applicable tax authorities tendency to dictate their own terms and
r) Include a certified copy of a certificate of conditions to the rehabilitation, absent due
tax clearance or evidence of a regard to the greater long-term benefit of all
compromise settlement with the BIR stakeholders.
s) Include a valid and binding solution of a Otherwise stated, it forces the creditors
meeting of the debtor's stockholders to to accept the terms and conditions of the
increase the shares by the required rehabilitation plan, preferring long-term viability
amount in cases where the Plan over immediate but incomplete recovery. Its
contemplates an additional issuance of ultimate goal is to ensure that both the creditors
shares by the debtor and the debtor manage to recover.
t) State the compensation and status, if
any, of the rehabilitation receiver after Submission of the Plan to the Court
the approval of the Plan If the Rehabilitation Plan is approved,
u) Contain provisions for conciliation and/or the rehabilitation receiver shall submit the same
mediation as a prerequisite to court to the court for confirmation.
assistance or intervention in the event of Within five (5) days from receipt of the
any disagreement in the interpretation or Rehabilitation Plan, the court shall notify the
implementation of the Rehabilitation Plan creditors that the Rehabilitation Plan has been
submitted for confirmation, that any creditor
Cram-down Power may obtain copies of the Rehabilitation Plan
The power of the court to “cram down” and that any creditor may file an objection
the rehabilitation plan, and the power to thereto.
approve or implement the rehabilitation plan
despite the lack of approval or objection from Filing of Objections to the Plan
the owners, partners, stockholders, or creditors A creditor may file an objection to the
of the insolvent debtor, provided that the terms Rehabilitation Plan within twenty (20) days from
thereof are necessary to restore the financial receipt of notice from the court that the
well-being and viability of the insolvent debtor. Rehabilitation Plan has been submitted for
confirmation. Objections to a Rehabilitation
Plan shall be limited to the following:
 (a) The creditors' support was induced interpreted as continuing to apply to the extent
by fraud that they do not conflict with the provisions of
(b)The documents or data relied upon in the Rehabilitation Plan
the Rehabilitation Plan are materially false or (e) Any compromises on amounts or
misleading; or rescheduling of timing of payments by the
(c)The Rehabilitation Plan is in fact not debtor shall be binding on creditors regardless
supported by the voting creditors. of whether or not the Plan is successfully
Confirmation of the Plan implemented
If no objections are filed within the (f) Claims arising after approval of the
relevant period, or if objections are filed but the Plan that are otherwise not treated by the Plan
court finds them lacking in merit, or determines are not subject to any Suspension Order
that the basis for the objection has been cured,
the court shall issue an order confirming the Management of the Company Under
Rehabilitation Plan. Rehabilitation
 The court may confirm the Rehabilitation As a rule, the management remains with
Plan notwithstanding unresolved the existing management. Usually, the
disputes over claims if the Rehabilitation rehabilitation receiver will not take over the
Plan has made adequate provisions for management and control of the business.
paying such claims. The concept of preserving the
 The court shall have the power to corporation’s business while it is undergoing
approve or implement the Rehabilitation rehabilitation is called debtor-in-possession or
Plan despite the lack of approval, or debtor-in-place. This means that the debtor
objection from the owners, partners or corporation, through its board of directors,
stockholders of the insolvent debtor: remains in control of its business and properties
Provided, That the terms thereof are subject to the monitoring of the appointed
necessary to restore the financial well- rehabilitation receiver.
being and viability of the insolvent The rehabilitation receiver has the power
debtor. to take possession, custody, and control of the
debtor’s property but will generally not do so on
Effect of Confirmation of the Rehabilitation a day-to-day basis.
Plan
The confirmation of the Rehabilitation Restrictions:
Plan by the court shall result in the following: Management of the company remains
(a) The Rehabilitation Plan and its with the existing board of directors and officers
provisions shall be binding upon the debtor and but all disbursements, payments, sales,
all persons who may be affected by it, including disposals, assignment, transfers, or
the creditors, whether or not such persons have encumbrance of property and all acts affecting
participated in the proceedings or opposed the title will be subject to the court’s approval
Rehabilitation Plan or whether or not their
claims have been scheduled Displacement of Existing Management
(b) The debtor shall comply with the The rehabilitation receiver may
provisions of the Rehabilitation Plan and shall recommend the appointment of a management
take all actions necessary to carry out the Plan committee over the debtor, or the court may
(c) Payments shall be made to the appoint the rehabilitation receiver to assume
creditors in accordance with the provisions of the powers of management or appoint the
the Rehabilitation Plan management committee under the following
(d) Contracts and other arrangements circumstances:
between the debtor and its creditors shall be
 (a)Actual or imminent danger of An individual is deemed to have a
dissipation, loss, wastage, or destruction of the conflict of interest if he is situated to be
debtor’s assets materially influenced in the exercise of his
(b)Paralyzation of the business judgment for or against any party to the
operations of the debtor proceedings
(c)Gross mismanagement of the debtor
or fraud or other wrongful conduct on the part of
or gross or wilful violation of the FRIA by A conflict of interests exists in the
existing management of the debtor following circumstances:
(a) He is a creditor, owner, partner or
The Management Committee stockholder of the debtor
Composition: Persons, natural or juridical (b) He is engaged in a line of business
appointed by the court which competes with that of the debtor
1. Nominated by the debtor, if debtor fails (c) He is, or was, within five (5) years
to choose court will choose from the filing of the petition, a director, officer,
2. Nominated by the creditor/s holding owner, partner or employee of the debtor or any
more than 50% of the total obligations of of the creditors, or the auditor or accountant of
the debtor, if they fail court will choose the debtor
3. The third member acts as chairman, they (d) He is, or was, within two (2) years
are nominated by the first and 2nd from the filing of the petition, an underwriter of
members within 10 days from their the outstanding securities of the debtor
appointment. If they disagree, the court (e) He is related by consanguinity or
will choose affinity within the fourth civil degree to any
individual creditor, owners of a sale
Purpose: The management committee will take proprietorship-debtor, partners of a partnership-
the place of the management and the debtor or to any stockholder, director, officer,
governing body of the debtor. They will also employee or underwriter of a corporation-
assume their rights. They have a right to take debtor; or
custody and control of all assets and properties (f) He has any other direct or indirect
owned or possessed by the debtor. material interest in the debtor or any of the
creditors
Employment of Professionals
Upon court approval, and after notice Conflict of interest should be disclosed at
and hearing, the rehabilitation receiver or all times throughout the proceedings to the
management committee may employ court and to the creditors. Same rule applies to
specialized professionals and other experts to persons who assist the rehabilitation receiver or
assist in the performance of their duties. the management committee as professionals.
The professionals and experts will be They must file their disclosure within 10 days
considered either employees or independent from the date they are contracted or employed.
contractors of the rehabilitation receiver or the
management committee. Objections to the Conflict of Interest
Within 10 days from the receipt of
Conflict of Interest disclosure of a conflict of interest, any party
No person may be appointed as adversely affected may file his objection to the
rehabilitation receiver or member of a appointment of the rehabilitation receiver or
management committee if there is a conflict of member of the management committee or
interest employment of the professional / expert
  Court may disregard the conflict of Except as otherwise provided herein, no
interest if it finds that it will not be funds or property of the debtor shall he used or
detrimental to the general interest of the disposed of except in the ordinary course of
stakeholders business of the debtor, or unless necessary to
 If the court decides that the objection finance the administrative expenses of the
has merit, the rehabilitation receiver or rehabilitation proceedings.
management committee will be
dismissed and employ a new one in their However, the following are the
place exceptions to the general rule:
1. Sale or disposition is in the ordinary
Creditor’s Committees course of business
Creditors belonging to a class may 2. Sale or disposition is necessary to
formally organize a committee among finance the administrative expenses of
themselves. In addition, the creditors may, as a rehabilitation proceedings
body, agree to form a creditor’s committee 3. Sale or disposition is made with the
composed of a representative from each class approval of the court and upon
of creditors. The following are the different application of the rehabilitation receiver
classes: 4. The sale, disposition, or encumbrance of
1. Secured creditors unencumbered property is made with the
2. Unsecured creditors authority of the court and after notice
3. Trade creditors and suppliers and hearing
4. Employees of the debtor
Victorio-Aquino vs. Pacific Plans
Election of Representatives for the Respondent Pacific Plans, Inc. (now
Creditor’s Committee “APEC”) was engaged in the business of selling
Creditors from each class are entitled to educational plans, including traditional open-
elect their representative. Once the ended educational plans (PEPTrads).
representatives from each class are elected, PEPTrads are educational plans where the
the representatives will elect a chairman for the respondent guarantees to pay the plan holder,
creditor’s committee. Ties will be resolved by without regard to the actual cost at the time of
drawing lots. enrolment, the full amount of tuition and other
The chairman is responsible for school fees of a designated beneficiary.
convening the creditors committee whenever Victorio-Aquino was a holder of two (2)
necessary to discuss, deliberate, and confer units of respondent’s PEPTrads.
with the rehabilitation receiver on any view or On April 7, 2005, foreseeing the
proposal in preparation or revision of the impossibility of meeting its obligations to the
rehabilitation plan availing plan holders as they fall due, Pacific
The role of the Creditor’s Committee is Plans filed a Petition for Corporate
to assist the rehabilitation receiver in Rehabilitation with the Regional Trial Court,
communicating with the creditors. They are the praying that it be placed under rehabilitation
primary liaison between the rehabilitation and suspension of payments. At the time of
receiver and the creditors. However, they filing of the Petition for Corporate
cannot waive any right or give consent on Rehabilitation, respondent had more or less
behalf of the creditors 34,000 outstanding PEPTrads.
On April 12, 2005, the Rehabilitation
Sale or Disposition of Assets After Court issued a Stay Order, directing the
Commencement Date suspension of payments of the obligations of
respondent and ordering all creditors and
interested parties to file their opposition of the creditors if there is showing
comments/oppositions, respectively, to the that rehabilitation is feasible and the opposition
Petition for Corporate Rehabilitation. The same of the creditors is manifestly unreasonable
Order also appointed respondent Marcelo as
the rehabilitation receiver. Section 64 of the FRIA states that the
court may confirm the Rehabilitation Plan if all
Pacific Plans submitted to the the following circumstances are present: X X X
Rehabilitation Court its proposed rehabilitation In the case at bar, there is a substantial
plan. Pacific Plans proposed the likelihood for the respondent to be successfully
implementation of a “Swap,” which would rehabilitated considering that its business
essentially give the plan holder a means to exit remains viable and is operating on a going-
from the PEPTrads at terms and conditions concern premise.
relative to a termination value that is more
advantageous than those provided under the USE, PRESERVATION AND DISPOSAL OF
educational plan in case of voluntary ASSETS AND TREATMENT OF ASSETS AND
termination. CLAIMS AFTER COMMENCEMENT DATE
For petitioner, she is entitled to receive
an aggregate amount consisting of: (a) the Use or Disposition of Assets
value of her total contributions plus interest at No funds or property of the debtor shall
the rate of seven percent (7%) from the date of he used or disposed of except:
full payment until December 31, 2005 (Net 1. in the ordinary course of business of
Translated Value); and (b) interest on the Net the debtor; and
Translated Value at the annual rate of seven 2. necessary to finance the
percent (7%) from January 1, 2006 until 2010. administrative expenses of the rehabilitation
The ARP also provided for tuition proceedings.
support for each enrolment period until SY Except as otherwise provided
2009-2010 depending on the prevailing market
rate of the NAPOCOR Bonds and Peso-Dollar Sale of Assets
exchange rate. The court, upon application of the
The rehabilitation receiver submitted an rehabilitation receiver, may authorize the sale of
Alternative Rehabilitation Plan and was unencumbered property of the debtor if:
approved by the Court. However due to the fact 1. by its nature; or
that the value of the Philippine Peso 2. because of other circumstance
strengthened and appreciated, the rehabilitation is perishable, costly to maintain,
receiver submitted a Modified Rehabilitation susceptible to devaluation or otherwise in
Plan. jeopardy.
The MRP reduces the original claim of
the petitioner and even the original amount Sale or Disposal of Encumbered Property of
petitioner was to receive under the ARP. the Debtor and Assets of Third Parties Held
Victorio-Aquino did not accept the new terms of by Debtor
the MRP but the court approved it despite The sale, transfer, conveyance or
petitioner’s opposition. disposal of encumbered property may be
Issue: WON the MRP is ultra vires insofar as it authorized by the court.
reduces the original claim and even the original
amount that the petitioner was to receive under Application of the rehabilitation receiver and
the ARP. with the consent of:
Held: NO. Under the Interim Rules, the 1. Affected owners of the property; or
rehabilitation plan may be approved even over 2. Secured creditor/s
and after notice and hearing of the court Unencumbered property or encumbering
property
The court may rescind or declare as null
1. necessary for the continued operation of and void any sale, payment, transfer or
the debtor's business; and conveyance of the debtor's unencumbered
2. the debtor has made arrangements to property or any encumbering thereof by the
provide a substitute lien or ownership debtor or its agents or representatives after the
right that provides an equal level of commencement date which are not in the
security for the counter-party's claim or ordinary course of the business of the debtor.
right. Provided, however, That the
 Provided: Property of others held by the unencumbered property may be sold,
debtor, there is a security interest encumbered or otherwise disposed of upon
pertaining to third parties under a order of the court after notice and hearing:
financial, credit or other similar 1. if such are in the interest of
transactions. administering the debtor and facilitating
 Provided further: That properties held by the preparation and implementation of a
the debtor where the debtor has Rehabilitation Plan;
authority to sell such as trust receipt or 2. in order to provide a substitute lien,
consignment arrangements may be sold mortgage or pledge of property under
or disposed of by the debtor. this Act;
3. for payments made to meet
Assets of Debtor Held by Third Parties administrative expenses as they arise;
Third parties who have in their 4. for payments to victims of quasi delicts
possession or control property of the debtor upon a showing that the claim is valid
shall not transfer, conveyor otherwise dispose and the debtor has insurance to
of the same to persons other than the debtor, reimburse the debtor for the payments
unless there is prior approval of the made;
rehabilitation receiver. 5. for payments made to repurchase
The rehabilitation receiver may also: property of the debtor that is auctioned
1. demand the surrender or the transfer of off in a judicial or extrajudicial sale
the possession or control of such under. This Act; or
property to the rehabilitation receiver or 6. for payments made to reclaim property
any other person, subject to payment of of the debtor held pursuant to a
the claims secured by any possessory possessory lien.
Iien/s thereon;
2. allow said third parties to retain PAYMENT OF LIABILITIES AND CLAIMS
possession or control, if such an OUTSTANDING AS OF COMMENCEMENT
arrangement would more likely preserve DATE
or increase the value of the property in Pre-commencement claim
question or the total value of the assets a claim that is outstanding as of the
of the debtor; or commencement date. It includes:
3. undertake any other disposition of the 1. Claims of separation pay for months
said property as may be beneficial for worked prior to the commencement date;
the rehabilitation of the debtor, after 2. Claims for actual damages, as a result of
notice and hearing, and approval of the the election to terminate a contract.
court.
Payments
 The stay or suspension order generally 5. Any creditor or interested party may
prohibits the debtor from making any payment submit his comments
of its liabilities. 6. Hearing of the objections
7. Approval of the Plan
◦ 10 days from the date of the second
Pre-commencement contracts and publication, unless there is an
obligations objection
Pre-commencement contracts – will still ◦ It will not be implemented until after
continue to enforce, however: the lapse of 20 days from the date of
1. the rehabilitation court may cancel the the second publication
contract at any time after the issuance of the
Commencement Order; Out-of-Court or Informal Restructuring
2. contracts not confirmed by the debtor Agreements or Rehabilitation Plan (OCRA)
will be considered terminated. Agreed upon by the debtor and the
required number of creditors.
Pre-commencement transactions  this is not submitted to the court for
May be rescinded or declared null and approval.
void on the ground that the same was executed
with intent to defraud a creditor/s which Minimum Requirements
constitute undue preference of the creditors. 1. The debtor must agree to the OCRA;
2. It must be approved by creditors
Treatment of secured creditors in the representing at least 67% of the
rehabilitation proceedings secured obligations of the debtor;
The FRIA gives preferential treatment to 3. It must be approved by the creditors
secured creditors, who are creditors whose representing at least 75% of the
claim are secured by a lien such as a pledge or unsecured obligations of the debtor; and
mortgage. Thus: 4. It must be approved by the creditors
1. There shall be no diminution of secured holding at least 85% of the total
creditors rights; and liabilities, secured and unsecured, of the
2. Maintenance of security interest. debtor.

PRE-NEGOTIATED REHABILITATION Publication of the OCRA

Who may file: Insolvent debtor, by itself or It must be published once a week for at
jointly with any of its creditors, for the approval least three (3) consecutive weeks in a
of a pre-negotiated rehabilitation Plan. newspaper of general circulation in the
Philippines and shall take effect upon the lapse
Venue: Regional Trial Court of fifteen (15) days from the date of the last
publication of the notice.
Basic Procedure
1. Filing of the petition Amendment or modification
2. Within 5 working days the court will issue It must be made in accordance with the
the Court Order terms of the OCRA and with due notice of all
3. Publication of order and notification of creditors.
creditors The amendment must be approved by
4. Not later than 8 days from the date of the the debtor and the required number of creditors
second publication, any creditor or and shall take effect upon the lapse of 15 days
interested party may submit to the court from the date of the last publication of the
a verified objection required notice.
 The debtor or creditor may file a petition
to annul the standstill agreement or the OCRA
based on the ground of non-compliance with
the requirements.
Standstill Period Grounds for annulment of OCRA
It refers to the period agreed upon by the 1. Fraud;
debtor and its creditor to enable them to 2. Intimidation; and
negotiate and enter into an OCRA. 3. Violence.
May include provisions identical with or
similar to the legal effects of a Commencement Service of Summons: Upon filing of the petition,
Order the court will immediately issue and cause to be
served the summons to the respondents within
Requirements of Standstill 5 days from receipt of the petition.
1. Approved by creditors representing more  Comment or opposition by the
than 50% of the total liabilities of the respondent (within 5 days from the
debtor; receipt of the summons)
2. Notice is published in a newspaper of  The court will determine the existence of
general circulation in the Philippines a genuine issue of material facts or
once a week for two(2) consecutive whether the petition will be granted. If no
weeks; and comment is filed, a clarificatory hearing
3. It does not exceed 120 days from the may be conducted
date of effectivity.  Upon a determination of genuine issue
of material facts, the court shall conduct
Effectivity a summary hearing not later than 20-
The standstill period will expire upon: days from the filing of the petition
1. Lapse of 120 days from the effectivity;  A judgment shall be rendered not later
2. The effectivity of the OCRA; than 60-days from filing of the petition
3. Terminations of the negotiations for the and shall be final within 10-days from
OCRA as declared by creditors receipt of the decision and is
representing more than 50% of the total immediately executory.
liabilities of the debtor, whichever comes  Judgment of the court may be elevated
first. to the Court of Appeals under Rule 65 of
the Rules of Court
Court Assistance  A final judgement is without prejudice to
The insolvent debtor or a creditor may the parties availing of the other modes of
file an application for court assistance to rehabilitation
execute or implement a standstill agreement or
an OCRA. LIQUIDATION
I. LIQUIDATION IN GENERAL
Venue: Regional Trial Court who has a. Types
jurisdiction over the place in which the insolvent i. Voluntary – Filed by debtor
debtor resides or has its principal place of ii. Involuntary – Filed by Creditor
business. b. Who May File
i. VOLUNTARY
Forms of assistance: issuing a writ of execution 1. Individual Debtor
to enforce its terms. a. Liabilities > Assets
b. Debts exceed PHP 500,000
Petition for annulment of OCRA c. File at:
 i. Court with jurisdiction over the vi. Creditor/ debtor supporting the
province or city where he has resided for 6 rehabilitation plan in bad faith
months prior to the filing of the petition. vii. Debtor initiated
2. Insolvent Juridical Debtor viii. Pending court-supervised
a. FILE AT: rehabilitation (1m/25%)
i. RTC with jurisdiction over its ix. Rehabilitation no longer feasible
principal office
ii. If principal office registered B. Basic Procedure in Liquidation
with SEC is in Metro Manila, it must be filed in i. 17 STEPS
the RTC of the city or municipality where the 1. Filing of the petition
head office is located. 2. Issuance of the court order
ii. INVOLUNTARY 3. Publication of the petition and notification
1. Individual Debtor of parties
a. Any creditor/s with a claim of, or 4. Filing of comments
the aggregate of whose claims is at lease PHP 5. Hearing on the petition or motion
500,000. 6. Issuance of liquidation order
b. File at: court of the province or 7. Publication of liquidation order
city where the debtor resides. 8. Hearing
2. Insolvent Juridical Debtor 9. Appointment of liquidator
a. 3 or more creditors the 10. Registry of claims
aggregate of whose claims is at least either: 1 11. Opposition or challenge to claims
million pesos or 25% of the subscribed capital 12. Submission of disputed claims to court
stock or partner’s contributions of the debtor 13. Submission of liquidation plan
(whichever is higher) 14. Implementation of the liquidation plan
b. File at: 15. Complete implementation of the plan
i. RTC with jurisdiction over its 16. 16. Termination of proceedings
principal office 17. 17. Discharge of liquidator
ii. If principal office registered
with SEC is in Metro Manila, it must be filed in ii. “Filing of the Petition”
the RTC of the city or municipality where the 1. Insolvent debtor
head office is located. a) Schedule of debts and liabilities, list
of creditors and amount of
II. CONVERSION INTO LIQUIDATION addresses, claims, collaterals,
PROCEEDINGS securities if any.
A. 9 instances where rehabilitation b) Inventory of all its assets including
proceedings may be converted into receivables and claims against third
liquidation proceedings: parties
i. Finding of insolvency and no substantial c) Names of at least 3 nominees to the
likelihood for successful rehabilitation position of liquidator
ii. Merit in objection of creditor
iii. Non confirmation of the rehabilitation 2. Involuntary Liquidation of an insolvent
plan juridical debtor
iv. iBreach or failure of the rehabilitation a) No genuine issue of fact or law
plan b) Due and demandable payments have
v. Termination of the rehabilitation not been made for at least 180 days
proceedings due to failure of c) No substantial likelihood that debtor
rehabilitation or dismissal may be rehabilitated
3. Involuntary Liquidation of an insolvent ix. That he has made any
individual debtor assignment, gift, sale,
a) Must state the particulars of at least conveyance or transfer of his
one of 13 the acts of insolvency estate, property, rights or credits
under sec.105 of the fria with intent to hinder or delay the
b) b. “13 acts of insolvency” liquidation or defraud his
i. That such person is about to creditors;
depart or has departed from the x. That he has, in contemplation of
Republic of the Philippines, with insolvency, made any payment,
intent to defraud his creditors; gift, grant, sale, conveyance or
ii. That being absent from the transfer of his estate, property,
Republic of the Philippines, with rights or credits;
intent to defraud his creditors, he xi. That being a merchant or
remains absent; tradesman, he has generally
iii. That he conceals himself to avoid defaulted in the payment of his
the service of legal process for current obligations for a period of
the purpose of hindering or thirty (30) days;
delaying the liquidation or of xii. That for a period of thirty (30)
defrauding his creditors; days, he has failed, after demand,
iv. That he conceals, or is removing, to pay any moneys deposited with
any of his property to avoid its him or received by him in a
being attached or taken on legal fiduciary; and
process; xiii. That an execution having
v. That he has suffered his property been issued against him on final
to remain under attachment or judgment for money, he shall
legal process for three (3) days have been found to be without
for the purpose of hindering or sufficient property subject to
delaying the liquidation or of execution to satisfy the judgment.
defrauding his creditors;
vi. That he has confessed or offered III. THE LIQUIDATION ORDER
to allow judgment in favor of any a. Effects of Liquidation order
creditor or claimant for the i. Juridical debtor deemed dissolved
purpose of hindering or delaying ii. Corporate or juridical existence
the liquidation or of defrauding terminated
any creditors or claimant; iii. Legal title to and control of all assets of
vii. That he has willfully suffered the debtor deemed vested in the
judgment to be taken against him liquidator
by default for the purpose of iv. All contracts of debtor deemed
hindering or delaying the terminated or breached unless liquidator
liquidation or of defrauding his declares otherwise
creditors; v. No separate action for the collection of
viii. That he has suffered or an unsecured claim is allowed.
procured his property to be taken vi. No foreclosure proceeding allowed for
on legal process with intent to 180 days
give a preference to one or more
of his creditors and thereby hinder b. May be reviewed via rule 65 within 15
or delay the liquidation or defraud days from notice of decision or order
any one of his creditors;
c. Rights of secured creditors under the Yngson v. PNB
liquidation order i. Doctrine:
i. Liquidation order will not affect right of a 1. “the secured creditor can foreclose
secured creditor to enforce his lien in during liquidation proceedings”
accordance with the applicable contract ii. FACTS:
or law 1. ARCAM obtained a loan from pnb
ii. ii. At any time prior to the election of the secured by a real estate mortgage
liquidator, must manifest in writing to the and chattel mortgage.
court whether he: 2. ARCAM defaulted.
1. Waive his rights under the security or 3. PNB initiated extra-judicial
lien foreclosure proceedings
2. Prove his claim in the liquidation 4. Before the scheduled public auction,
proceedings ARCAM filed with sec a petition for
3. Share in the distribution of the assets suspension of payments,
of the debtor appointment of rehabilitation receiver,
4. Maintain his rights under his security approval of rehabilitation plan
or lien 5. With application for TRO and
iii. If he fails to manifest, he is deemed to injunction
have opted to maintain his right under 6. Sec issued the TRO and injunction
the security or lien on the foreclosure
iv. If he waives his right, he will be entitled 7. 7 years later, SEC ruled that ARCAM
to participate in the liquidation can no longer be rehabilitated
proceedings as an unsecured creditor 8. SEC decreed ARCAM be dissolved
v. If secured creditor maintains his rights and liquidated
under the security or lien : 9. PNB revived the foreclosure case
1. Value of property may be fixed upon 10. Requested RTC to reschedule public
agreement by creditor and liquidator auction
2. Value of property less than claim it 11. ARCAM contends that foreclosure
secures: during liquidation is improper.
a) Liquidator may convey the 12. Files motion for TRO and injunction.
property to the secured creditor 13. SEC issued a 72 hour TRO which
and the latter will be admitted in lapsed without injunction
the liquidation proceedings as a 14. Extra judicial foreclosure sale
creditor for the balance proceeded and PNB was highest
3. Value of property EXCEEDS THE bidder
claim it secures: 15. ARCAM filed to nullify auction sale.
a) Liquidator may convey the Sec denies it. Ca dismissed petition
property to the secured creditor iii. ISSUE:
and waive the debtor’s right of 1. WON PNB, as a secured creditor,
redemption upon receiving the can foreclose on the mortgaged
excess from the creditor properties of a corporation under
4. The liquidator may sell the property liquidation without the knowledge and
5. Satisfy the creditor’s claim from the prior approval of the liquidator or the
proceeds of the sale SEC?
6. Secured creditor may enforce the lien iv. HELD:
or foreclose on the property pursuant 1. YES.
to applicable laws a) In Consuela metal, Supreme court
upheld the right of the secured
 creditor to foreclose the mortgage g) He has any other direct or
in its favor during the liquidation of indirect material interest in the
a debtor corporation. debtor or any of the creditors
b) b. Under sec. 114 of the fria, if the h) He was the receiver or a
secured creditor maintains his member of the management
rights under the security or lien, committee, when there was
the secured creditor may enforce showing that his lack of
the lien on the property pursuant diligence or foresight resulted
to applicable laws. in the liquidation
v. Entitled to reasonable compensation
IV. THE LIQUIDATOR vi. Needs to take an oath and file a bond
a) Qualifications vii. Keep a record of all moneys received
i. Citizen of the Philippines or a and all disbursements made
resident for 6 months before viii. Subject to removal on grounds
nomination under FLSP rules, rule 3, sec. 13
ii. Good moral character with
acknowledge integrity, impartiality, V. Cross Border Insolvency
and independence a) Adoption of UNCITRAL Model Law on
iii. Have requisite knowledge of Cross-Border Insolvency as part of
insolvency and other relevant FRIA (Sec. 139)
commercial laws, rules and i. UNCITRAL – United Nations Center
procedures for International Trade and
iv. Must have no conflict of interest Development
1. “Conflict of Interest” ii. Mandate is to harmonize and unify
a) He is a creditor, owner, the national laws regarding
partner, or stockholder of the international trade.
debtor iii. “Model Law”
b) He is a creditor, owner, partner 1. Purpose is to provide effective
or stockholder of a creditor of mechanisms for dealing with
the debtor cases of cross-border insolvency
c) He is engaged in a line of so as to promote the objectives
business which competes with of:
that of the debtor a) Cooperation between courts
d) He was, within 5 years from and other competent
filing, a director, officer, owner, authorities of states involved in
partner, employee of the cases of cross-border
debtor or any of the creditors, insolvency
or acted as legal counsel, b) Greater legal certainty for
auditor, accountant trade and investment
e) He was, within 2 years from c) Fair and efficient
filing, an underwriter of the administration of cross-border
outstanding securities of the insolvencies that protects the
debtor interests of all creditors and
f) He is related by consanguinity other interested parties,
or affinity within the 4th civil including the debtor
degree to any of the parties d) Protection and maximization of
the value of the debtor’s
assets
 e) Facilitation of the rescue of in accordance with the manner
financially troubled prescribed in this Act; and
businesses, thereby protecting 5. the extent that the foreign
investment and preserving proceeding has recognized and
employment shown deference to proceedings
b) Initiation of Proceedings: under this Act and previous
i. The court shall set a hearing in legislation. (Sec. 142, FRIA)
connection with an insolvency or
rehabilitation proceeding taking place INSOLVENCY OF INDIVIDUAL DEBTORS
in a foreign jurisdiction, upon the
submission of a petition by the A. Suspension of Payments
representative of the foreign entity  Remedy available to debtor
that is the subject of the foreign  seeks to suspend payments outside of
proceeding. (Sec. 140, FRIA) the necessary or legitimate expenses of
his business
c) Provision of Relief:
i. The court may issue orders: To whom available:
1. Suspending any action to enforce  Individual debtors who possess sufficient
claims against the entity or property to cover all his debts but
otherwise seize or foreclose on foreseeing the impossibility of meeting
property of the foreign entity them when they respectively fall due.
located in the Philippines;  A natural person who is a resident and
2. Requiring the surrender property citizen of the Philippines
of the foreign entity to the foreign
representative; or Basic procedure in suspension of payment
3. Providing other necessary relief. 1. Filing of petition
(Sec. 141, FRIA) ◦ Verified petition
◦ attach to his petition:
d) Factors in Granting Relief 1. a schedule of debts and liabilities;
i. In determining whether to grant relief 2. an inventory of assets
under this subchapter, the court shall 3. a proposed agreement with his
consider; creditors.
1. the protection of creditors in the ◦ 3 nominees to the position of
Philippines and the inconvenience commissioner
in pursuing their claim in a foreign ◦ General Rule: No creditor can sue or
proceeding; institute proceedings to collect his
2. the just treatment of all creditors claim
through resort to a unified ◦ Exceptions: Claims for personal
insolvency or rehabilitation labor, maintenance, expense of last
proceedings; illness and funeral of the wife or
3. whether other jurisdictions have children of the debtor incurred 60
given recognition to the foreign days immediately prior to the filing,
proceeding; and those Secured creditors
4. the extent that the foreign 2. Action on petition
proceeding recognizes the rights ◦ If courts finds petition to be sufficient
of creditors and other interested a) calling a meeting of all the
parties in a manner substantially creditors
 b) directing such creditors to prepare ◦ The creditors and the debtor shall
and present written evidence of discuss the proposed agreement and
their claims any amendment and put it to a vote
c) publication of the said order in a ◦ No creditor who incurred his credit
newspaper of general circulation within 90 days prior to the filing of the
d) directing the clerk of court to send petition shall be allowed to vote
a copy of the Order to all creditors ◦ 2/3 of the creditors voted
e) forbidding the individual debtor ◦ After the results have been
from selling, transferring, announced, all the protests against
encumbering or disposing in any the majority vote shall be drawn up
manner of his property ◦ debtor and all creditors who took part
f) prohibiting the individual debtor in the voting shall sign the affirmed
from making any payment outside propositions
of the necessary or legitimate
expenses Rejection of the proposed agreement
g) appointing a commissioner 1. number of creditors required for holding
a meeting do not attend; or
Actions suspended 2. if the 2 majorities are not in favor
The court may issue an order  terminated without recourse and the
suspending any pending execution against the parties concerned will be at liberty to
individual debtor enforce the rights
Provided: Properties held as security by
secured creditors shall not be the subject of Persons who may refrain from voting
such suspension order. Creditors who are unaffected by the
Suspension Order
3. Notification through publication and  These are secured creditors and
sending of notices creditors having claims for personal
◦ Published in a newspaper of general labor, maintenance, expense of last
circulation illness and funeral of the wife or children
◦ Must be published once a week for of the debtor incurred 60 days
two consecutive weeks immediately prior to the filing of the
◦ First publication must be made within petition
7 days from the time of issuance of ◦ Not bound by any agreement
the order ◦ but if they should join in the voting
◦ Clerk of court will also send a copy to they shall be bound
all creditors named in the schedule of
debts and liabilities 5. Objections to proposal
4. Holding of creditor’s meeting and voting  any creditor who attended the
by creditors meeting and who dissented from and
◦ meet on the date, time, and place protested against the vote of the
designated by the court in the Order majority may file an objection with the
◦ creditors holding claims amounting to court within 10 days
at least 3/5 of the liabilities is  Grounds for objections:
necessary for holding a meeting a) defects in the calling, holding, and
◦ The commissioner shall examine the deliberating
written evidence of the claims. b) fraudulent connivance
c) fraudulent conveyance of claims
6. Hearing and issuance of court order
 ◦ Summary manner industry in which the petitioner is
◦ If annulled by the court, the court engaged
shall declare the proceedings 1. Prohibition against payment:
terminated and the creditors shall be ◦ outside of the necessary or legitimate
at liberty to exercise the rights which expenses of his business or industry
may correspond to them.

Effects of Approval of Proposed Agreement

 order that the agreement be carried out B. Voluntary Liquidation
and all parties bound thereby to comply  Properties are not sufficient to cover his
with its term liabilities, and owing debts exceeding
 binding upon all creditors whose claims Php500,000.00
are included in the schedule of debts  The filing of such petition shall be an act
and liabilities and who were properly of insolvency.
summoned BUT NOT UPON:
◦ creditors having claims for personal Liquidation Order
labor, maintenance, expenses of last If the court finds the petition sufficient in
illness and funeral of the wife or form and substance it shall, within five (5)
children of the debtor working days issue such order
◦ secured creditors who failed to attend
the meeting or refrained from voting C. Involuntary Liquidation
Any creditor or group of creditors with a
Failure of Individual Debtor to Perform claim of, or with claims aggregating at least
Agreement Php500, 000.00
 all the rights which the creditors had  Acts of insolvency:
against the individual debtor before the a) about to depart or has departed
agreement shall revest b) absent from the Republic of the
 individual debtor may be made subject to Philippines
the insolvency proceedings c) conceals himself
d) conceals, or is removing, any of his
Rights of Secured Creditors in suspension property
of payment proceedings e) has suffered his property to remain
 Generally not affect the rights of secured under attachment or legal process for
creditors three (3) days
 Can sue or institute proceedings f) has confessed or offered to allow
 Can also proceed with any pending judgment in favor of any creditor or
execution claimant
 The order confirming the approval of the g) willfully suffered judgment to be taken
proposed agreement is also not binding against him by default
on secured creditors who failed to attend h) suffered or procured his property to be
the meeting or refrained from voting. taken on legal process
i) made any assignment, gift, sale,
Prohibited Transactions conveyance or transfer of his estate,
1. Prohibition against sale or encumbrance property, rights or credits
of assets j) made any payment, gift, grant, sale,
◦ except those used in the ordinary conveyance or transfer
operations of commerce or of k) Merchant defaulted
 l) he has failed, after demand, to pay any 1. citizen of the Philippines or a
moneys deposited with him or received resident for 6 months immediately
by him in a fiduciary preceding his appointment;
m) be without sufficient property 2. of good moral character and with
acknowledged integrity,
Order to Individual Debtor to Show Cause impartiality and independence;
 why he should not be adjudged an 3. has the requisite knowledge of
insolvent insolvency laws, rules and
 If good cause shown, forbid the procedures; and
individual debtor from making payments 4. has no conflict of interest;
of any of his debts, and transferring any ◦ Provided, that such conflict of
property belonging to him interest may be waived,
 However, it shall not affect or impair the expressly or impliedly, by a
rights of a secured creditor to enforce his party who may be prejudiced
lien ◦ deemed to have a conflict of
interest if he is so situated as
Default to be materially influenced in
 Debtor defaults the exercise of his judgment
 in favor of the petitioning creditors
 court shall issue the Liquidation Order Miscellaneous Provisions
 owner, partner, director, officer or other
Absent individual debtor employee of the debtor
 Resides out of the Republic of the  fine of not more than Php 1, 000,000.00
Philippines; or has departed therefrom; and imprisonment for not less than 3
or cannot, after due diligence, be found months nor more than 5 years for each
therein; or conceals offense
 petitioning creditors be entitled to an  hide or conceal, or destroy or cause to
Order of the court directing the sheriff be destroyed or hidden
take into his custody a sufficient amount  make any payment sale, assignment,
of property of the individual debtor transfer or conveyance
 duty of the sheriff to take possession of  having knowledge belief of any person
the property and effects of the individual having proved a false or fictitious claim
debtor, not exempt from execution, against the debtor, fail to disclose
 prepare complete inventory of all the  attempt to account for any of the debtors
property so taken, and to return it to the property by fictitious losses or expense
court  knowingly violate a prohibition or
knowingly fail to undertake an obligation
Sale Under Execution
 interest of the parties to the proceedings Application to Pending Insolvency,
will be subserved by a sale thereof, Suspension of Payments and Rehabilitation
 the court may order such property to be Cases
sold in the same manner as property is  govern all petitions filed after it has taken
sold under execution effect.
 All further proceedings in insolvency,
The Commissioner suspension of payments and
Qualifications: rehabilitation cases then pending
 ◦ except those in the opinion of the impossibility of meeting [their] debts
court their application would not be when they respectively fall due.”
feasible or would work injustice  The rationale in corporate rehabilitation
is to resuscitate businesses in financial
Application to Pending Contracts: distress because “assets . . . are often
 shall apply to all contracts of the debtor more valuable when so maintained than
regardless of the date of perfection they would be when liquidated.”
 Rehabilitation assumes that assets are
still serviceable to meet the purposes of
the business
 The corporation receives assistance
Viva Shipping Lines v. Keppel Philippines from the court and a disinterested
Mining, Inc. rehabilitation receiver to balance the
 filed a Petition for Corporate interest to recover and continue ordinary
Rehabilitation business, all the while attending to the
 RTC: DENIED for failure to comply with interest of its creditors to be paid
Rule 4, Sections 2 and 3 of the Interim equitably
Rules of Procedure on Corporate  When rehabilitation will not result in a
Rehabilitation better present value recovery for the
 In the Amended Petition: own and creditors, the more appropriate remedy
operate 19 maritime vessels and Ocean is liquidation.
Palace Mall, a shopping mall, total  Liquidation is diametrically opposed to
properties’ assessed value at about rehabilitation. Both cannot be
₱45,172,790.00. (contrary to the undertaken at the same time. In
attached documents) rehabilitation, corporations have to
 Property inventory list: 2 maritime maintain their assets to continue
vessels only and fair market value of all business operations. In liquidation, on
Viva Shipping Lines’ assets amounted to the other hand, corporations preserve
₱447,860,000.00 ₱400 million more  their assets in order to sell them.
than what was alleged  The dismissal of the Amended Petition
 ₱147,630,000.00 of real property and its did not emanate from petitioner’s failure
vessels were marked as "free assets." to provide complete details on its assets
 RTC: Viva Shipping Lines’ Amended and liabilities but on the trial court’s
Petition is "sufficient in form and finding that rehabilitation is no longer
substance," and issued a stay order viable for petitioner
 Later on lifted the stay order and  petitioner’s assets are non-performing
dismissed Viva Shipping Lines’ Amended  Petitioner’s rehabilitation plan should
Petition for failure to show the have shown that petitioner has enough
company’s viability and the feasibility of serviceable assets to be able to continue
rehabilitation its business.
 found that Viva Shipping Lines’ assets all  Plans howed that the source of funding
appeared to be non-performing would be to sell petitioner’s old vessels.
ISSUE: WON THE CORPORATE 1. A business primarily engaged as a
REHABILITATION IS PROPER. shipping line cannot operate without its
HELD: NO. ships
 Corporate rehabilitation is a remedy for  plan to purchase new vessels sacrifices
corporations, partnerships, and the corporation’s cash flow
associations “who [foresee] the
 The plan to buy new vessels after selling
the two vessels it currently owns is
neither sound nor workable as a
business plan.