Financial Rehabilitation & Insolvency Act: Overview

❖ What is FRIA? The official title of the law is an act providing for the rehabilitation or liquidation of
financially distressed enterprises and individuals.
o And from this, we can see that the law provides remedies in cases of financially distressed
enterprises and individuals or in short insolvent debtors who may either be natural persons.
▪ Meaning, actual people and sole proprietorships or juridical persons including
partnerships and corporations.
o For FRIA to apply, the debtor must be insolvent meaning the financial condition of the debtor
is such that it is generally unable to pay its liabilities as they fall due you in the ordinary
course of business or it has liabilities that are greater than its assets.
▪ Thus, FRIA applies to cases where debtors may have lost their assets or whose assets
are not enough to pay all their obligations or who may have suffered financial
misfortune for whatever reason including circumstances be under control or errors
in business management decisions.
o However, take note that FRIA does not apply to debtors which are banks, pre-need
companies, insurance companies, or national and local government agencies, why?
▪ Because they are governed by their own special laws, thus, except for those entities
if the debtor is insolvent, then we can apply for the benefits of FRIA.
o Now, aside from the insolvent debtor even the creditors of such insolvent debtor can apply
for the benefits of FRIA, thus depending on the circumstances either the insolvent debtor or
its creditors or both of them together may apply for the remedies provided for under FRIA.
o And this is in line with the policy of FRIA to encourage both the insolvent debtor and its
creditors to realistically resolve and adjust competing claims and property rights.
▪ Specifically, since the financial condition of an insolvent debtor is such that its assets
most likely will not be enough to pay all its obligations in full.
o FRIA provides for the manner by which the assets of that debtor may be preserved and
maximized in order to as far as practicable and possible to best satisfy all the claims of all the
creditors while respecting the priority preference and concurrence of any and all conflicting
claims.
▪ So, instead of the creditors having to fight each other tooth and nail or filing separate
cases to claim their debts from the meager assets of a dying debtor.
▪ FRIA aims to provide a single forum where the creditors can present their respective
claims for payment.
▪ Thus, FRIA helps both the creditor and the debtor by providing orderly procedures
which save time, effort, and resources which otherwise may have been wasted in
fighting over the limited assets of the insolvent debtor.
o The organized processes of FRIA therefore aim to facilitate the settlement of liabilities of the
insolvent debtor in the fairest possible way to all parties concerned and this is shown by the
following principles as contained in the provisions of law:
▪ First, no undue preference is given to any creditor in the settlement of claims against
the insolvent debtor.
• Take note that I emphasized the word “undue” when I said undue preference
because some creditors may hold certain preferences and priorities in their
claims.
• Which may have been acquired prior to the insolvency of the debtor, so,
after following the preference and priority of credit, you observe that first.
 • All the remaining creditors within the same class or sub-class all stand on
equal footing in making their claims unless a creditor voluntarily agrees to a
less favorable treatment because rights can be waived if you remember.
▪ Second, insolvent debtors are prohibited from disposing, destroying, or concealing
their property in fraud of creditors.
• Especially if they know that FRIA proceedings have already been or are
about to be commenced unless such disposition is done in the ordinary
course of business.
• Now, in case of violation of this prohibition, then the person's responsible
shall be liable for double the value of the property disposed of or double the
amount of the transaction whichever is higher.
• Specifically, the person’s responsible who may be held liable for violation of
this prohibition may be the individual debtor himself, the proprietor
partners, directors, or officers.
• With a specific regard to encumbered property of the debtor, meaning
property subject of a lien or security once proceedings under FRIA have
been commenced such property can only be sold if there is a court order.
• After notice and hearing and only under the situations enumerated in
section 52 of FRIA; if the debtor sells or transfers such encumbered property
without a court order, then the court may rescind or declare as void any such
transfer except if it was done in the ordinary course of business.
• Take note that all proceedings under FRIA summary, non-adversarial, and in
rem in nature meaning that these are actions against the thing itself and are
binding on the whole world.
• In other words, the resolution of FRIA cases affects both direct and indirect
interests of other people and it attaches to the subject matter of litigation.
• Being a proceeding in-rem, jurisdiction over all persons affected by the
proceedings is considered as acquired by publication of the notice of
commencement of the proceedings in any newspaper of general circulation
in the Philippines.
❖ So, what are the remedies or proceedings provided for under FRIA? In a nutshell, FRIA provides for
rehabilitation suspension of payments and liquidation:
o Rehabilitation, FRIA defines Rehabilitation as the restoration of the debtor to a condition of
successful operation and solvency if it is shown that its continuance of operation is
economically feasible.
▪ And its creditors can recover by way of the present value of payments projected in
the rehabilitation plan more if the debtor continues as a going concern than if it is
immediately liquidated.
▪ But in Rehabilitation instead of terminating the existence of the debtor and selling its
assets in liquidation to pay its obligations, the debtor is instead given a new lease on
life by allowing its operations to continue.
▪ Because there might be a better chance that its creditors will get paid from the
earnings of continued operations rather than from the sale of assets in liquidation
after its existence is terminated.
▪ The Rehabilitation may either be voluntary if it is initiated by the debtor or by both
the creditor and the debtor jointly or Rehabilitation may also be involuntary.
 • Meaning initiated by the creditors of the debtor in any case Rehabilitation
can only be availed off by a partnership, corporation, or sole proprietorship
and not by an individual debtor meaning a natural or actual person.
▪ Voluntary Rehabilitation, meaning proceedings initiated by the debtor or by both
the debtor and the creditors may be done either in court or out of court.
• If it is done in court, this is known as “court supervised Rehabilitation” which
in turn may be pre-negotiated or not.
o In case of pre-negotiated rehabilitation, the debtor and its creditors
had previously met, and they already successfully negotiated a
rehabilitation plan.
o And then, they file a petition to ask the court to approve or confirm
that pre-negotiated Rehabilitation plan.
• Now, negotiation may also be done out of court as in the case of out-of-court
or informal restructuring agreements or rehabilitation plans or OCRA for
short.
o Which after approval and publication will be binding on all creditors
of the debtor otherwise if there has been no prior negotiation, then
the normal proceedings will be followed.
o Where the debtor will file a petition in case of voluntary Court
supervised Rehabilitation, or the creditors will file the petition in
cases of involuntary rehabilitation, in all the cases a rehabilitation
plan is required.
o Which is what the parties will follow in the restoration of the
financial well-being and viability of the insolvent debtor in order to
ultimately pay off the obligations to the creditors.
o Moving on, we have the remedy of suspension of payments which is simply a petition asking
the court to order the suspension or to delay the payment of the debts of the insolvent
debtor.
▪ This remedy can only be made available by an individual debtor, meaning a natural
person who has sufficient properties to cover all his debts.
▪ But he foresees the impossibility of meeting them or paying them when they will
respectively fall due.
▪ Note that this remedy does not erase, reduce, nor eliminate the debt, the debt is still
there, the amount of the debt remains the same.
▪ But here the debtor is not released, not discharged from its obligation because the
sole purpose of this remedy is just to delay or suspend the payment of the debt.
▪ Here the debtor has to file a petition with a schedule of his liabilities, inventory of
assets, and the proposed agreement with his creditors which proposal will then be
either approved, ordered, or rejected at a creditor's meeting called by the court.
▪ Note that if a creditor only incurred his credit within 90 days prior to the filing of the
petition for suspension of payments then he cannot vote at the creditors meeting.
▪ If the proposal is approved by a vote of 2/3 of the creditors with claims representing
at least 3/5 of the total liabilities of the debtor as mentioned in the petition, then the
same will now be open for objections.
▪ If the are no objections or if the objections are denied by the court, then the court
can now order that the agreement will be carried out and all parties will now be
bound to comply with the terms of such agreement.
 ▪ In case the individual debtor fails to perform his part of the agreement, then all the
rights which the creditors had against the debtor before the approval of the proposal
shall revest or return to the creditors and then they can take any available legal
action that they desire against the debtor.
o Finally, we have Liquidation refers to the proceedings which take place after dissolution of
the business entity, liquidation has been defined as the winding up of affairs of the business
entity by reducing its assets into money.
▪ Settling with creditors and debtors and apportioning the amount of profit and loss
specific to FRIA.
▪ Liquidation refers to the proceedings where claims are filed, and the assets of the
insolvent debtor are disposed, and the proceeds divided amongst the creditors.
▪ Now, the rules on liquidation under FRIA; these apply to individual debtors, sole
proprietorships, partnerships, and corporations.
• Similar to rehabilitation, liquidation may also be voluntary meaning initiated
by the insolvent debtor or by both the debtor and its creditors together or
involuntary as when initiated by the creditors of the debtors.
▪ The prerequisites for filing the different kinds of petitions for liquidation vary and will
not be discuss in here since this is just an overview.
▪ Aside from petitions for liquidation being filed either by the debtor its creditors or
both jointly, liquidation may also have been initiated as a different remedy
specifically petitions which may have been initially filed as rehabilitation proceedings
are allowed to be converted into liquidation proceedings in the following cases:
• First, if the debtor is found to be insolvent and there is no substantial
likelihood for the debtor to be successfully rehabilitated under Section 25.
• Second, in case the debtor acted in bad faith or if it is not feasible to cure the
objectional portions objectionable portions in the rehabilitation plan
according to section 67 in relation to section 66.
• Third, when the court does not confirm the rehabilitation plan within one
year from the filing of the petition to confirm such a plan under Section 72.
• Fourth, in case of breach or failure of the rehabilitation plan under Section
74.
• Fifth, in case of termination of the proceedings due to failure of
Rehabilitation under Section 75.
• Sixth, in case the debtor or creditors acted in bad faith in supporting the
rehabilitation plan under Section 80.
• Or seventh, through the filing of the appropriate motion stating that the
debtor is seeking immediate dissolution and termination of its corporate
existence under sections 90 and 91 for voluntary and involuntary liquidation
respectively.
▪ So, once the court finds the petition sufficient and in form substance, proceedings
will then commence including the issuance of a liquidation order which will declare
the debtor insolvent and dissolved if applicable.
• Because you cannot dissolve an individual person, you just dissolves the
business entities and further order the liquidation of the debtor by directing
payment of claims due to the debtor to the liquidator.
• It will direct the payment paid to the Liquidator named in the petition
elected by the creditors or appointed by the court.
 ▪ On some other orders include the prohibition on the debtor to make payments or
transfers of property and directing all creditors to file their claims with a liquidator
among other orders.
• Thus, the assets of the debtor will be sold either in a public sale mainly
through a public sale though the court may approve a private sale if the
assets are perishable, expensive to maintain, or if it is in the best interest of
both the debtor and creditor.
• In any case the assets and or the proceeds from the sale thereof will be
divided and distributed to the creditors in accordance with the court
approved liquidation plan.
• Ensuring that the rules on concurrence and preference of credit under the
civil code of the Philippines are followed unless of course such rights are
voluntarily waived by a preferred creditor.
• Once the liquidation has been completed, the court will then order the
Securities and Exchange Commission to remove the debtor from the registry
of legal entities.
• And once the court receives confirmation thereof it will then issue an order
terminating the liquidation proceedings.
❖ To review, FRIA provides remedies that will benefit both the predator and the debtor by providing for
orderly procedures where the debtor is assisted in fulfilling its obligations and the creditors are given
the proper forum by which to obtain satisfaction of their credits from the insolvent debtor.
o To reiterate the remedies provided under FRIA:
▪ Rehabilitation, where he debtor is allowed to continue operations because it is
shown that the creditors can recover other credits more if that rather than if the
debtor is liquidated.
▪ We also have Suspension of payments, or the debt of an individual debtor is not
erased but payment of such debt is only suspended or delayed.
▪ And we have liquidation where the assets of an insolvent debtor are disposed of and
distributed to its creditors according to a liquidation plan following the rules on
concurrence and preference of credits.
 Financial Rehabilitation & Insolvency Act: Rehabilitation (Court-Supervised & Informal)

Essential concepts of financial Rehabilitation as governed by the Republic Act No. 10142 or known as the
Financial Rehabilitation and Insolvency Act (FRIA).

FRIA

• restoration of the debtor to a condition of successful operation and solvency if it is shown that its
continuance of operation is economically feasible, and its creditors can recover by way of the present
value of payments projected in the rehabilitation plan more if the debtor continues as a going
concern than if it is immediately liquidated.
• The situation here involves a debtor whose assets may not be enough to pay its debts as they may
fall due so, one option in this situation is to terminate the existence of the debtor so it can sell off its
assets and use the proceeds from that sale to pay its debts however, this option carries major
disadvantages one of which is not the proceeds from the sale of the debtors’ assets may usually not
be enough to pay all of its debts in full and another disadvantage is that once the debtor is dissolved,
and its assets are already liquidated and distributed there will be nothing left to pay the creditors.

But Rehabilitation presents an alternative.

- Instead of dissolving the debtor and liquidating its assets and paying the creditors with the scraps,
the debtors corporate life and activities are permitted to continue so that the creditors may be paid
from the earnings.

This continuance of life and business operations is allowed because it is shown that there is a better chance
that the creditors will get paid if the debtor's business is restored to successful operation rather than if its
existence is terminated and its assets liquidated thus, rehabilitation can only apply if there is a strong
possibility that the debtors’ business operations can still be restored, that it can be rehabilitated.

In case the debtors insolvency appears to be irreversible or where the sole purpose is to the delay or evade
the enforcement of the rights of the creditors then the rehabilitation must be denied.

Rehabilitation therefore seeks to conserve and administer the assets of an insolvent debtor in the hope that
it will eventually return from financial distress to solvency so that, it can ultimately pay off its obligations.

In the long run, rehabilitation seeks to benefit not only the debtor and its employees but its creditors and the
economy in general as well.

In this regard, rehabilitation has two purposes namely:

• Give the insolvent debtor a second chance at life, and

• To allow creditors to be paid their claims from the earnings of the debtors business

To apply for rehabilitation, it is not necessary that the claims of creditors are due already. But it is necessary
if the debtor is unable to pay its debts as they fall due because FRIA does not distinguish between a debtor
which is already in debt and a debtor who foresees the possibility of being unable to pay a debt not yet due.
Thus, whether the debtor is about to be or is already insolvent, a petition for rehabilitation may be filed.

Who can file this petition? It will depend on the type of Rehabilitation which may either be voluntary (at
the initiative or with the cooperation of the debtor) or it may be involuntary (as when it is initiated by the
creditor or creditors of the debtor). In short, either the debtor, the creditor, or both the creditor and the
debtor may file a petition jointly for rehabilitation. However, an individual debtor (a natural person that is
not a solely proprietorship) cannot file a petition for rehabilitation.
Only the following can file a petition for rehabilitation:

• A partnership through the majority of its partners

• A corporation through a majority of directors or trustees with two-thirds of the outstanding capital
stock or members, or
• A sole proprietorship through its proprietor or owner.

Types of Rehabilitation: Voluntary and Involuntary Rehabilitation.

Involuntary Rehabilitation

• initiated by the filing of a verified petition by any creditor or group of creditors with a claim of either
at least 1 million pesos or for at least 25 percent of the subscribed Capital stock or Partners
contributions of the debtor whichever is higher showing either of the following two grounds
o no genuine issue of fact or law on the claims of the petitioners and that either the due and
demandable payments have not been made for at least 60 days or the debtor has failed generally
to meet its liabilities as they fall due, or
o at least one creditor other than the petitioners has initiated foreclosure proceedings against the
debtor which will prevent the debtor from paying its debts as they become due.

Voluntary Rehabilitation

• as the name implies it refers to proceedings that come from the debtor's own initiative
• meaning it is the debtor itself that files the petition or it may be possible that both the debtor and
creditor file the petition jointly
• initiated by the insolvent debtor by himself by filing a verified petition for the court so it's either by
the soil proprietor by majority of the partners or by the directors together with OCS or the trustees
together with the two-thirds of the members
• in any case, proceedings may be done either in or out of court
• It may be formal in nature
o as when it is done with court supervision
• It may it may be more informal
o as when the parties meet negotiate and arrive at a mutually beneficial agreement without the
assistance or supervision of the court, and
o These are known as out of court or informal restructuring agreements or OCR are agreements
or plans entered into and approved by both the debtor and its creditors without court
supervision.
o The parties meet and attempt to settle the debtors liabilities amicably by agreeing upon a plan
for the debtors rehabilitation and the payment of its debts.

While the parties are negotiating and pending the finalization of the OCR, the debtor and its creditors may
agree upon a standstill period which as the name implies it preserves the status quo among the debtor and
its creditors by suspending the claims against the debtor especially since as stated in the FRIA rules of
procedure, the standstill agreement may include provisions having the same legal effects as a
commencement order under court supervised rehabilitation which would include a stay or suspension order
where seizure, sales, set of collection, creation of new liens, or otherwise enforcing claims against the debtor
are suspended or otherwise prohibited.
What is the purpose of the standstill period? to enable the debtor and its creditors to negotiate and
ultimately enter into an OCR and that is why the enforcement of claims is put on hold by the standstill
period, to prevent interruption or interference with the negotiation of the OCR.

It will be effective and enforceable not only against the parties thereto but also against other creditors
provided that the following conditions are met:

✓ The agreement is approved by creditors representing more than 50 percent of the total liabilities of
the debtor
✓ Second notice of the agreement is published in a newspaper of general circulation in the Philippines
once a week for two consecutive weeks to invite creditors to participate in the negotiation of the
OCR and to notify them that the OCR will be binding on all creditors once it is finally approved
✓ The standstill period must not exceed 120 days (about 4 months) from the date of effectivity.

This standstill period will expire under whichever of the following three instances comes first:

✓ Either first upon the laps of the 120 days

✓ Upon the effectivity of the OCR, or
✓ Upon the termination of the negotiations for the OCR as declared by creditors representing more
than 50 percent of the total liabilities of the debtor.

By the expiration of the standstill period, the parties will have completed negotiations on their OCR

To validate, the OCR only needs two things: approval and publication

Approval

• the OCR must be approved by both the debtor and the creditors holding claims of the debtor
in the following percentages
o first, approval of at least 67 percent of creditors holding secured obligations
o second, at least 75 of the unsecured obligations, and
o third, at least 85 percent of the total liabilities secured and unsecured of the debtor

*The approval of the creditors is 67, 75, and 85. That's 67 secured, 75 unsecured, and 85 total

Publication

• After approval, the OCR notice will be published in a newspaper for three weeks. It takes
effect 15 days after the last publication. The OCR and its provisions, such as payment
rescheduling, become binding on the debtor and all affected parties, including creditors who
may have opposed it. This is called the cram down effect.
• If issues occur after OCR takes effect, the parties can ask the court's help for execution or
annulment by filing a petition. They can also seek Court approval for a pre-negotiated
rehabilitation plan, which means the debtor and creditors have already discussed the plan
and need the court's endorsement for implementation.

Pre-negotiated rehabilitation is a form of voluntary court supervised rehabilitation which involves

proceedings where the debtor and its creditors jointly file a verified petition asking the court to approve a
pre-negotiated rehabilitation plan
Important attachments to the petition include:

✓ A schedule of debts and liabilities

✓ Listing all the creditors and their respective claims
✓ An inventory of assets of the debtor including accounts receivables
✓ Claims against third parties summary of disputed claims
✓ Affidavit of General Financial condition
✓ Rehabilitation plan.

To implement the verified petition

✓ It must be endorsed or approved by creditors holding at least 2/3 of the total liabilities of the debtor
✓ Secured creditors holding more than 50 percent of the total secured claims of the debtor
✓ Unsecured creditors holding more than 50 percent of the total unsecured claims

Exception: The court will still have to hear objections to the plan if there are any, they only have a maximum
of 120 days (about 4 months) from the filing of the petition within which to approve or disapprove the pre-
negotiated rehabilitation plan as opposed to the one-year period in other court.

In case of the failure of the court to act within 120-day period, the plan will be deemed approved
nevertheless if the court finds that either party had acted in bad faith or if there is an objection to the plan
that is not curable then, the court may instead convert the rehabilitation proceedings into proceedings for
liquidation.

What if the debtor and its creditors had not previously negotiated? Then, just follow the regular procedure
which may either be voluntary or involuntary.

Two factors to a successful rehabilitation

• A positive change in the business fortunes of the debtor and willingness of the creditors
• Shareholders will enter into a compromise agreement on repayment of burdens extent of the illusion
of credit

Rehabilitation plan must have the following characteristics:

✓ The debtor has assets that can generate more cash if used in its daily operations than if it is sold
✓ Liquidity issues can be addressed by a practicable business plan that will generate enough cash to
sustain daily operations and the debtor has a definite source of financing for the proper and full
implementation of a rehabilitation plan that is anchored on realistic assumptions and goals

What if, after the proceedings start, there are claims that are paid off, offset, enforced, or even liens
created on the debtor's property?

In that case, the commencement order will render them null and void. Why? Because it's not allowed. In fact,
the effects of the commencement order, including the stay order, will go back to the date when the petition
was filed.

The petition for rehabilitation will be dismissed if:

• If the insolvent debtor has the ability to file the petition, it is determined that the debtor is not
insolvent
• If the petition is a fraudulent attempt to postpone the execution of obligations
• Any materially inaccurate or deceptive statements are present in the Rehabilitation plan or its
accompanying documents
• The debtor has engaged in deceptive practices or defrauded creditors.
 Financial Rehabilitation & Insolvency Act: Insolvency of Individual Debtors (Suspension of Payments &
Liquidation)

o Discussion will be about the remedies of an individual debtor who is insolvent, when we say
individual debtor, this refers to a natural person.
o Meaning an actual person as opposed to juridical persons.
o So, the remedies that will be discussed will not apply to business entities such as partnerships and
corps.
o These remedies will only be applicable to individual debtor, and HE MUST BE INSOLVENT.

How to tell if the debtor is insolvent?

o A debtor can be said to be insolvent if its financial condition is such that he is unable to pay his
liabilities/ debts as they fall due in the ordinary course of business. OR;
o If he has a liability greater than his assets.
o Insolvent debtors can try to negotiate with his creditors to restructure, reschedule, etc. But FRIA
PROVIDED 2 REMEDIES THAT AN INSOLVENT DEBTOR CAN AVAIL.
2. Remedies for debtor who is insolvent (only for individual debtors/natural persons/ actual people)
A. Suspension of payments
➢ MAIN PURPOSE IS TO DELAY/SUSPEND THE PAYMENT OF DEBTS.
o A remedy that an insolvent debtor can avail who wants to, but unable to pay off his debts as when
they become due.
o In this case, the debtor HAS a sufficient property to cover all of his debts BUT unfortunately the
debtor FORESEES that it is impossible, or it will become impossible to pay all his debts as they
become due. In this case the DEBTOR IS NOT YET INSOLVENT is that just he foresees that he may not
be able to pay his obligations when that due date arrives.
o Which the debtor availing suspension of payments arises, in which the debtor file a VERIFIED
PETITION to ask the court the suspension/delay the payment of his debts.
o This remedy does not seek to REDUCE, DISCHARGE, OR ERASE THE DEBTS.
A.1. REQUISITES OF SUSPENTION OF PAYMENTS

➢ FRIA does not set any minimum amount of debts or liabilities, no number of claims, certain
numbers of creditors before a petition of suspension of payments may be filed. The only
requirement is:
o Petitioner must be a natural person who has a sufficient assets to cover all his debts but foresees the
impossibility of meeting such debts when it is due.
Procedural rules vs. FRIA on SUSPENTION OF PAYMENTS

o In the procedural rule, rule 3 of administrative matter number 15-4-6-sc section one of rule 3 states
that the party who can file a petition for suspension of payments is an individual debtor who has
assets that EXCEEDS his liabilities.
o While in FRIA only requires that the debtor possess SUFFICIENT PROPERTY to cover all his debts.
o HENCE, IT IS SUBMITTED THAT FRIA OR RA-10142 THAT SHOULD PREVAIL.WHY? because it is the
substantive law. Rules of procedure cannot supplant/ prevail over substantive law.

A.2. REQUISITES OF A PETITION

 o It must establish the jurisdictional requirement - which the debtor possess sufficient assets to cove
the debts and he foresees the impossibility of meeting such debts when they fall due. And relief
prayed for must be to ask the court to suspend/ delay the payments of such debts.
o Petition must name at least 3 nominees for commissioner of the creditors meeting.
o The petition must be filed in the court having jurisdiction over the province or city where the
debtor has resided(tumira) for six months prior to the date of filing.
A.3. ESSENTIAL ATTACHMENTS TO THE PETITION

o schedule of debts and liabilities with a list of creditors and their claims
o Inventory of the debtors assets receivables claims
o schedule of income and expenditures
o Propose agreement with the creditors
A.4. SUSPENTION OF PAYMENTS ORDER.

➢ If the court find the petition sufficient then it will now issue a SUSPENTION OF PAYMENTS ORDER.
Which will call a meeting of all the creditors that are named in the schedule of debts and liabilities at
a time NOT LESS THAN 15 NOR MORE THAN 40 DAYS from the date of the order. This order will also
appoint a commissioner to preside over that creditors meeting.
➢ This order preserves the status quo by prohibiting debtor from making payments other than
necessary or legitimate expenses for his business and also prohibiting the debtor from transferring or
disposing his property EXCEPT in the ordinary course of business.
➢ This order prohibits creditor from suing or instituting proceedings for a collection against the debtor
EXCEPT secured creditors or in case of claims for personal labor, illness, funeral of the wife or child
of the debtor which have been incurred within 60 days prior to filing of the petition.
A.5 EXEMPTIONS IN SPO (SECURED CREDITOR, LABOR, ILLNESS, ETC.)

o They may choose not to attend the creditors meeting since they will not be bound in the agreement
arrived in that meeting and they are protected anyway.
o In the case they attend, they will be waiving their right already because their voluntary choosing of
attending, participating and voting at the creditors, THEN THEY WILL BE BOUND BY THE
AGREEMENTS ARRIVED AT THE CREDITORS MEETING.
A.6 CREDITORS MEETING

o If a creditor only incurred his credit within 90 days prior to the filing of the petition for suspension of
payments, HE CANNOT ATTEND OR VOTE AT THE CREDITORS MEETING.
o There must be a QUOROM. Its creditor holding at least 3/5 of the liabilities of the debtor these
creditors MUST be present either in person or through a representative who is authorize in writing.
o During the meeting, creditors shall present their claims, then the commissioner will examine the
evidence and then the parties will discuss the proposed agreement, they can make amendments, if
necessary, then finally they vote either approval or disapproval.
A.7 DISAPPROVAL OF THE COURT ON THE PETITON

➢ If within 90 days from the last publication of the suspension of payments order either:
o The creditor is not able to make a vote on the proposal. OR,
o No meeting with the required quorum is actually held.
o If the creditor actually vote to deny the proposed agreement.
A.8 APPROVAL OF THE COURT ON THE PETITION

o Must have a vote of 2/3 of the creditors with claims representing at least 3/5 of the total liabilities of
the debtor MENTION IN THE PETITION.
 o The proposal can now be opened for objections from any creditor who attended the meeting against
the approval of the proposal on the grounds of defects in the call, holding, deliberations of the
meeting, fraudulent in voting, or fraudulent conveyance of claims to obtain a majority vote. (double
majority)
o In the case, the court grants the objections and annul the debtor proposal then the PETITION IS
DISMISSED.
o If the proposal is approved the parties are now bound to comply with the terms of the approved
agreement.
A.9. RESIDUAL POWER OF THE COURT

o Court may issue any order necessary to enforce the agreement.

o In the case the debtor fails in whole or in part to fulfill his obligation or to comply with order of the
court, then the court UPON MOTION OF THE CREDITOR will now declare the agreement
TERMINATED.
o Then all the creditor rights will now return upon the approval of the agreement, they can now take
any legal action available against the debtor.
o In the case the individual debtor assets cannot cover his debts, HE CANNOT AVAIL THE REMEDY OF
SUSPENTION OF PAYMENTS.
B.LIQUIDATION

CONTENT AND EFFECTS

Liquidation is important because of its contents and effects. It declares the debtor insolvent, it sets the case
for hearing for the elections and appointment of the liquidator, it order the liquidation of the debtor by
investigating legal title and control over the assets, it directs the payment of claims due to the debtor to the
liquidator and directs creditors to file their claims with the liquidator and prohibits the debtor from making
payments or transfers of his property.

o Liquidation cannot affect the right of the secured creditor to enforce his lien unless he waives his
right in writing before the election of the liquidator.
o where claims are filed in assets of the insolvent debtor are disposed of and the proceeds thereof are
now divided among creditors.
o In liquidation the debtor can be discharge from his debts through sale, transfer, or other disposition
of his encumbered assets to convert it into money which will use to pay the creditors in accordance
with a liquidation plan approved by the court.
o specific unincumbered property may also be conveyed to a creditor in satisfaction of his claim in
whole or in part.
o It may be voluntary or involuntary.
B.1 VOLUNTARY LIQUIDATION – initiated by the debtor of his own free will. By availing of VL the debtor is
applying to be discharge from his obligation

o Initiated by the debtor by filling of a VERIFIED PETITION with the court of the province or city in
which he has resided in 6 months prior tohis filling.
o filing a petition for liquidation shall considered as an act of insolvency on the part of the debtor.
B.2. ESSENTIAL ATTACHMENTS IN THE PETITION IN THE VOLUNTARY LIQUIDATION

o The debtor must name at least three nominees to the position of liquidator.
 o Attached schedule debts and liability with the list of creditors and their claims.
o Inventory of assets including receivables and claims against third party.
o Schedule of income and among other requirements.
B.3. LIQUIDATION ORDER IN VL

o If the court finds the petition sufficient in form and substance then the court will now issue a
liquidation order within maximum period of 10 working days prior to the filling of petition
o In the case the debtor refuses to act, the law allows Any/group creditor which the debtor owes 500,
000 pesos to file a verified petition in the correct of the province or city in which the individual
debtor resides alleging any of the acts of insolvency off the debtor.

Examples of acts of insolvency which must be ALLEDGE.

o Debtor leave the Philippines with the intent to defraud his creditors.
o The debtor concealed himself or his property to evade payment or legal process for collection.
o Did that door transferred or disposed his property with the intent to delay/evade/defraud payment.

o Petition must be filed with a bond condition that if the petition is dismissed or or if the debtor be
declared as not insolvent then the PETITIONERS (in this case creditors ang petitioners) will pay all
expenses and damages and attorneys fees caused by the proceedings.
o After the petition is filed, the court will now issue summons requiring the individual debtor to show
cause of why he should not be declared insolvent.
o Any creditor may also file aa motion asking the court to prohibit the debtor from making payments
of any debts or transferring any office property to the prejudice of the creditors.
o And the court issues a liquidation order or dismisses the petition whichever comes first.
o Whichever is granted, secured creditors will still be allowed to enforce their respective liens against
the debtor.
B.4. DEBTOR IS NOT PRESENT AT THE PHILIPPINES

o In the case the debtor is hiding to defraud his creditors, the petition will still continue and the
creditors can simply file a motion asking the court to direct the sheriff to take and hold the property
of the debtor to satisfy their claims and cost of the proceedings.
o The properties will be held by the sheriff/court for the benefit of all the creditors. Whick they will
prove their claims before the court in the proceedings.
o This motion MUST be accompanied by AFFIDAVITS showing that the absence of the creditor is to
defraud his creditors as well as a bond in double the amount of the aggregate sum of their claims. I=
o In the case that the debtor is IN THE PHILIPPINES, then the proceeding will continue as usual, and
the court will assign/decide the liquidation.
B.5. WHAT HAPPENS AFTER THE ISSUANCE OF LIQUIDATION ORDER

o Creditors will now file their claims with the liquidator who will now submit a liquidation plan to the
court for approval.
o A liquidation plan enumerates assets of the debtor that are not exempt from execution, list of
creditors with their proven claims and schedule of liquidation of assets and payment of claims.
 o After the liquidation plan is approved then the liquidation plan will now be implemented, ensuring
that the rules on concurrence and preference of credit under Philippine law are observed. UNLESS a
preferred creditor voluntarily waives his preferred right.
o Then the liquidator may not sell, transfer or otherwise dispose of the unincumbered asset of the
debtor to convert it to money.
o GENERAL RULE : the sale must be at a public auction however, the court may approve a private sale
if the goods are perishable, disproportionately expensive to maintain or if is for the best interest of
the both that door and his creditors
o The court may also allow specific and unencumbered property to convey to a creditor in payment of
whole or in part.
o After the sale, the proceeds will be distributed to the creditors in accordance with the liquidation
plan.
o Then the liquidator shall file his final report and accounting to the court. If the court is satisfied with
the final report he may now discharge the liquidator and issue an order approving the final report
and discharging the debtor from the liabilities listed in the liquidation plan and terminate the
proceeding

OVERVIEW OF THE PROCEEDINGS

o Filing of the petition

o issuance of the liquidation order
o Submission of claims of the creditors
o Determination of claims
o the creation, submission, and approval of the liquidation plan
o implementation
o distribution of proceeds
o termination of the proceedings
 Financial Rehabilitation & Insolvency Act: Liquidation of Insolvent Juridical Debtors

Concept of liquidation of insolvent juridical debtors as provided under Republic act number 10142. Known
as the financial Rehabilitation and insolvency act or FRIA.

Liquidation:
❖ it will focus on insolvent juridical debtors, meaning Partnerships and corporations and we will also
include sole proprietorships as well.
❖ Thus, natural or actual persons, these are not covered by today's discussion especially since I have
already discussed the remedies of insolvent individual debtors in the previous episode on suspension
of payments and liquidation of individual debtors.

Focus will remain on the discussion of substantive aspects of the law on liquidation of juridical debtors.
❖ Overview of some procedural rules:
The liquidation of juridical debtors or juridical persons.
❖ When we say juridical persons, the law defines them as beings with legal existence susceptible or
capable of having rights and obligations or of being the subject of juridical relations.
❖ Specifically, juridical persons are not natural or actual people but rather they are artificial beings
treated by law as having a separate individual personality from other people or entities.
❖ Most common examples are partnerships and corporations.
❖ which are treated as separate persons or entities from the directors, officers, stockholders, employees,
or partners that may compose the partnership or Corporation.

ILLUSTRATION
XYZ firm, which is a partnership made up of Partners X Y and Z, the partnership itself is treated as a separate
person from the partners which compose it. So, the partnership in itself has its own rights and obligations
separate from the rights and obligations of each of its individual Partners. Same as with corporations let's say
McDonald's Corporation or the Coca-Cola Company these are separate entities from their respective
presidents' directors or stockholders.
Meaning that in the case of a partnership or a corporation as the case may be as juridical persons, they have
the right to exist to own, sell property and other rights subject of course to the limitations set by law. And they
also have obligations such as duty to pay law to observe labor laws and other similar responsibilities.
Liquidation
❖ will also be including a sole proprietorship even though strictly speaking a sole proprietorship is not a
juridical person.
Why? Because the law does not grant sole proprietorships a separate personality from the sole proprietor or
owner and therefore a sole proprietorship enjoys less protection than the law grants to Partnerships or
corporations.

NOTE: Sole proprietorships will be included in today's discussion because they are expressly included under
the coverage of FRIA.
❖ Juridical persons or juridical debtors in today's discussion this will include Partnerships, corporations
and sole proprietorships.
Like natural persons, juridical persons also go through the stages of birth and death. They are created and they
also die, and it is the latter which is relevant to today's discussion that the end of the life of a juridical person
is made up of two phases namely:
❖ dissolution
❖ liquidation.
Simply the extinguishment of the life of the juridical person done either voluntarily or involuntarily in which
its existence Juridical personality and business affairs are terminated.

Except for acts necessary to perform the second phase which is the winding up or liquidation of Affairs.
(dissolution here are not discuss because that's not the topic and you can just watch my discussion on the
solution of Partnerships or corporations)

Liquidation.
❖ It has been defined to be the winding up of Affairs of the business entity by reducing its assets into
money settling with creditors and debtors and apportioning the money the amount of profit and loss.
It is the process by which all the assets of the corporation are converted into liquid assets or cash and
in order to facilitate the payment of obligations to creditors.
❖ And the remaining balance if any is to be distributed to the stockholders. It may therefore consist of
adjusting the debts and claims by collecting oil that is due to the juridical person, the settlement and
adjustment of claims against it and the payment of its just debts.

The normal procedure for liquidation is already contained within the respective laws for Partnerships and
corporations meaning the civil code for Partnerships and the revised Corporation code for corporations.

So why does FRIA still provide us with rules on liquidation for juridical persons if they already have their
own rules for liquidation under their own respective laws?
❖ That is because FRIA is a special law providing for the rules of liquidation for insolvent juridical debtors
so if a juridical person is not necessarily insolvent and either voluntarily or involuntarily proceeds to
dissolve and liquidate its Affairs then you can just follow the rules provided in their respective laws
such as civil code for the partnership or Corporation code revised Corporation code for uh corporations
as the case maybe.

If the juridical person is insolvent - We follow FRIA

How do we know if the juridical debtor is insolvent under FRIA?
❖ A debtor is insolvent if its financial condition is such that it is either generally unable to pay its liabilities
as they fold you in the ordinary course of business or if it has liabilities that are greater than its assets.

Since we are talking about juridical persons, it is important to remember that FRIA does not apply to:
❖ debtors that are banks pre-need companies
❖ insurance companies or national and local government agencies. Because the proceedings for
liquidation are governed by their own respective special laws so we don't apply FRIA here.
Liquidation refers to the proceedings where claims are filed and the assets of the insolvent debtor are disposed
of and the proceeds divided among the creditors, and if any are remaining then to the stockholders, proprietor,
or the partners.

And how is this done?

❖ Liquidation of Juridical debtors may either be voluntary meaning at the initiative of the insolvent
debtor,
❖ It may be involuntary as when initiated by the creditors of the debtor or liquidation may come about
as a result of conversion it may be converted from a previously filed petition for rehabilitation.

Voluntary liquidation
❖ The name implies the proceedings initiated by the debtor.
❖ And this may be done in two ways.
1. If there are ongoing Rehabilitation proceedings
❖ The debtor can just file a verified motion to convert the rehabilitation proceedings into liquidation
proceedings. He just asked the court to convert the proceedings, but if there are no ongoing
Rehabilitation proceedings then the debtor can just apply for liquidation by filing a verified petition in
the regional Trial Court having jurisdiction over the principal office of the debtor. This petition must
establish the insolvency of the debtor and must attach several things.
➢ Important ones:
✓ certificates attesting to the fact that the meeting of the directors was held and approved the filing of
the petition,
✓ another certificate attesting to the holding of a meeting by the stockholder two-thirds of the
stockholders or of the members as the case may be approving the filing of the petition,
✓ Also, a schedule of debts and liabilities, a list of creditors and their respective claims inventory of
assets receivables and claims against third parties.
✓ And also, important names of at least three nominees to the possession of Liquidator

Now if the court finds the petition or motion as the case may be sufficient in forming substance then the court
will issue a liquidation order and the proceedings for liquidation can now commence.
As for involuntary liquidation proceedings may be initiated by three or more creditors, three or more creditors
of the debtor with an aggregate claim of either at least one million pesos or at least 25% of the subscribed
Capital stock or Partners contributions of the debtor whichever is higher.

Similar to voluntary liquidation the creditors may either file a verified motion for conversion of ongoing
Rehabilitation proceedings into liquidation proceedings or if there are no Rehabilitation proceedings the
petitioning creditors may simply file a verified petition praying for immediate liquidation of the debtor and in
support.
Thereof showing that first there is no genuine issue of fact or law on the claims of the petitioner and that the
due and demandable payments thereon have not been made for at least 180 days or that the debtor has
generally failed to meet its liabilities as they fooled you and there is no substantial likelihood that the debtor
may be rehabilitated so as you can see that's one of the main distinctions within liquidation and Rehabilitation.
Remember:
❖ In Rehabilitation there must be a showing of the substantial likelihood that the debtor can be
rehabilitated
❖ In liquidation the debtor will be liquidated because there is no substantial likelihood that it can be
saved or rehabilitated.

This petition filed by the creditors must be accompanied by a bond in an amount equal to at least equal to the
aggregate of their claims conditioned on paying the debtor oil expenses and damages which it may suffer by
the filing of the petition in case it is dismissed or withdrawn.
The petitioning creditors must also allege to the best of their knowledge at least the assets, liabilities receivable
and audited financial statements of the debtor.
❖ If the court finds the petition or motion as the case may be sufficient in form in substance. Then the
court will direct publication of the petition or motion in a newspaper of General circulation once a
week for two consecutive weeks and it asks if the court will have to give an opportunity to be heard
by directing the debtor and all creditors who are not petitioners to file their comment. That's the
opportunity to be heard by writing it in the comment.
❖ which must be filed within 15 days from the date of the last publication
❖ and after resolving the comments or if there are no comments then the court can now issue the
liquidation order and the liquidation proceedings may now commence.
❖ So, it's clear that not only can petitions for liquidation be filed either by the debtor or its creditors,
liquidation may also be initiated as a result of conversion from previously filed Rehabilitation
proceedings.

The following are the cases under FRIA where Rehabilitation proceedings may be converted into liquidation
proceedings
❖ First we have section 25 under which within 10 days from receipt of the report of The Rehabilitation
receiver the court May convert Rehabilitation proceedings into liquidation if there is a finding that the
debtor is insolvent and there is no substantial likelihood for the debtor to be successfully rehabilitated
❖ Second, the court may also order conversion of Rehabilitation to Liquidation in case of objections to
the rehabilitation plan which are not curable or in case the debtor acted in bad faith, and this is under
Section 67 in relation to section 66 of FRIA.
❖ Third Rehabilitation may also be converted to liquidation proceedings either upon motion or at the
Court's own initiative motu proprio if the court does not confirm the rehabilitation plan within the
period of one year from the filing of a petition to confirm the rehabilitation plan as provided under
Section 72 of FRIA.
❖ Fourth in case of failure or Rehabilitation or dismissal of the petition under Section 75 in relation to
section 74 the proceedings may also be converted into liquidation so aside from this missile of the
petition other examples of failure of Rehabilitation include failure of the debtor to submit a
rehabilitation plan or the rehabilitation plan shows that there is no substantial likelihood that the
debtor can be rehabilitated within a reasonable period or fraud in securing the approval of the for the
rehabilitation plan or its amendments and other analogous circumstances.
❖ The fifth situation of conversion is in case the debtor or the creditors have acted in bad faith in
supporting the rehabilitation plan as provided under Section 80 of FRIA.
❖ And last is what I have already mentioned earlier through the filing of the appropriate motion by either
the debtor or the Creditor as the case may be under sections 90 and 91 respectively of FRIA.
Now as I mentioned earlier I won't be going into detail about procedural matters such as the full list of contents
and effects of the liquidation order or the electron removal qualifications powers and duties of the Liquidator
and the rest of the proceedings after the issuance of the liquidation order okay these things you can either
read on your own if you're a student or if in case you are the juridical insolvent the insolvent juridical debtor it
is best to leave it up to your lawyer instead.

A brief overview of the proceedings after issuance of the liquidation order starting with some important
matters about the liquidation order.
❖ liquidation order is important because it declares the debtor insolvent it sets the case for hearing for
the election on end appointment of the Liquidator and orders the liquidation of the debtor by investing
legal title and control over the assets of the debtor into the Liquidator and directing the payment of
claims due to the debtor to the Liquidator directing creditors to file their claims with a liquidator and
prohibiting the debtor from making payments or transfer its property among others.

NOTE: however, that this liquidation order will not affect the right of a secured creditor to enforce his lien
unless he waives his right in writing prior to the election of the liquidator.

For a brief overview of the proceedings

❖ They are roughly the same as those for liquidation of individual debtors which I discussed in the
previous episode but with minor changes especially in the stage of termination of proceedings.
After the issuance of the liquidation order the creditors
❖ will now file their claims with the Liquidator who will then submit a liquidation plan to the court for
approval.
❖ The liquidation plan will enumerate the assets of the debtor and it will also that are not exempt from
execution and also a list of all the creditors and their proven claims as well as a proposed mode in
schedule of liquidation of assets and payment of claims.
❖ After the court approves the liquidation plan it will now be implemented ensuring of course that the
rules and concurrence and preference of credit under Philippine laws are observed.
❖ Unless of course a preferred creditor voluntarily waives his preferred right, with the approval of the
Court the Liquidator may sell, transfer or otherwise dispose of the unencumbered assets of the debtor
to convert them into money.
❖ And as a general rule, the sale must be at a public auction although the court may approve a private
sale if the goods are perishable if it is disproportionately expensive to maintain or if it is for the best
interest of the debtor and its creditors.
The court may also allow specific property of the debtor to be conveyed to a creditor in payment of the whole
or part of the creditors claim.
After the sale the proceeds will now be distributed to the creditors in accordance with the liquidation plan
thereafter the Liquidator will submit his final report in accounting to the court which if satisfied can now
discharge the Liquidator and the court can now issue an order approving the final report and directing removal
of the name of the juridical debtor from the register of legal entities of the SEC and other government agencies
as may be applicable.

Once the court has received evidence from the SEC that it has removed the juridical debtor from the registry
of legal entities then the court can now issue an order terminating the proceedings.
 Take note this is only a general overview of how the proceedings may go so there are definitely some
omissions which you can either live up to your lawyer if you are the debtor or for you to study if you are a
student.

To Review:

❖ liquidation of Partnerships corporations or sole proprietorships may be initiated voluntarily by the

debtor itself or involuntarily by the debtors' creditors or converted from previously initiated
Rehabilitation proceedings.
Ultimate aim of liquidation proceedings would be
❖ to settle the Affairs of the debt or by accounting for all its property before disposing of or transferring
the same to satisfy the claims of its creditors and if any Still Remains for distribution to the
stockholders' members Partners or proprietor as the case may be.