Commercial Laws 1: Financial Rehabilitation and Insolvency Act of 2010
Financial Rehabilitation and Insolvency Act of 2010
Ordinary rules on collection of debts cannot cope with the special situations where there are numerous creditors and the debtor's assets are not sufficient to answer for all obligations.
The misfortune of debtors, who lost their assets either through circumstances they cannot control or just erroneous management decisions, will be further aggravated.
These debtors would then lose a second chance to pursue their means of livelihood.
On the other hand, the creditors might not be in a better position because each creditor must spend increasing time and resources to beat other creditors to the insolvent debtor's assets.
This Chapter discusses the special statutory rules that aim to address these concerns.
1. Applicable Law.
Insolvency, rehabilitation, and liquidation are now governed by Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act of 2010 (FRIA for short).
FRIA lapsed into law on July 18, 2010.
The FRIA expressly repealed the Insolvency Law or Act No. 1956 that was passed way back in 1909.
However, FRIA did not repeal and even adopted the rules on concurrence and preference of credits under the New Civil Code.
Supreme Court A.M. No. 12-12-11-SC entitled “Financial Rehabilitation Rules of Procedure (2013)”
implements the provisions of FRIA on rehabilitation.
Supreme Court A.M. No. 15-04-06-SC entitled “Financial Liquidation and Suspension of Payment Rules of Procedure for Insolvent Debtors (2015).”
implements the statutory rules on liquidation and suspension of payment.
1.02 Proceedings.
The proceedings under FRIA are as follows: RP-VI-VI
Rehabilitation proceedings that include: VIP
Voluntary rehabilitation;
Involuntary rehabilitation;
Petition for Approval of Pre-Negotiated Rehabilitation;
Petition for Suspension of Payment of Individual Debtor;
Voluntary Liquidation of Sole Proprietorship, Partnership or Corporation;
Involuntary Liquidation of Sole Proprietorship, Partnership or Corporation;
Voluntary Liquidation of Individual Debtor;
Involuntary Liquidation of Individual Debtor (due to acts of insolvency).
1.03 Nature of Proceedings.
Section 3 provides that the proceedings under FRIA are judicial in nature and are classified as proceedings in rem.
Section 3 of FRIA provides:
Section 3. Nature of Proceedings.
The proceedings under this Act shall be in rem.
Jurisdiction over all persons affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines in the manner prescribed by the rules of procedure to be promulgated by the Supreme Court.
The proceedings shall be conducted in a summary and non-adversarial manner consistent with the declared policies of this Act and In accordance with the rules of procedure that the Supreme Court may promulgate.
Allied Banking Corp. v. Equitable PCI Banlc, Inc., G.R. No. 191939, March 14, 2018:
Rehabilitation proceedings are considered in rem.
In rem actions:
are against the thing itself and
they are binding upon the whole world;
unlike in personam actions, which:
are against a person on the basis of his personal liability.
“Against the thing”
means that the resolution of the case affects the direct or indirect interests of others and assumes that those interests attach to the thing which is the subject matter of the litigation.
The Court has consistently held that in actions in personam, jurisdiction over the parties is required since they seek to impose personal liability.
On the other hand, courts need not acquire jurisdiction over the person of the defendant in actions in rem because they are not directed against a specific person. The court need only acquire jurisdiction over the res.
Nonetheless, some form of notice to all affected parties is required to satisfy the requirements of due process.
Under both the Rehabilitation Rules and the Interim Rules, publication of the notice of the commencement of rehabilitation proceedings is the operative act which vests the court with jurisdiction over all affected parties.
As discussed earlier, once jurisdiction is acquired, the court can subject all those affected to orders consistent with the rehabilitation of the insolvent debtor, including the reversal of any transfer, payment, or sale made after the filing of the petition.
1. Rationale and State Policies.
Generally, both insolvency and liquidation proceedings have only one aim - to conserve all the remaining assets of the insolvent/liquidated person/ corporation for distribution to the creditors.
However, such aim should be taken in the larger context of economic stability, growth and development.
The Explanatory Notes to the House Bill that was later enacted into FRIA include the following discussion:
The absence of effective and orderly insolvency procedures can aggravate economic and financial crises. Without effective procedures that are applied in a consistent manner, creditors may be unable to collect on their claims, which will adversely affect the future availability of credit.
Without orderly procedures, the rights of the debtors may not be adequately protected and different creditors may not be treated equitably. On the other hand, the consistent application of orderly and effective insolvency procedures plays a critical role in fostering growth and competitiveness and may also assist in the prevention and resolution of financial crises.
The legislative framework of our insolvency proceedings is sorely outdated. Likewise, it is inadequate and unresponsive to the modern business trends and it is generally unable to provide quick resolution of financial dilemmas. This inadequacy and unresponsiveness of the insolvency proceedings were deeply felt during the economic crisis of 1997 and 1998 when long-drawn out proceedings following corporate failures caused immense waste of resources. In some cases, the proceedings drag on to the extent of seriously threatening the survival of the subject companies.
FRIA expresses the following State Policies:
Section 2. Declaration of Policy.
It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations.
Accordingly, to attain its stated purposes and policies, FRIA seeks:
To establish a more systematic framework for insolvency proceedings;
To provide equitable treatment to all parties involved in a financial restructuring or rehabilitation;
To maximize the chances for the survival of the company concerned by providing an ailing enterprise four different remedies, to wit:
fast-track rehabilitation;
court-supervised rehabilitation;
negotiated rehabilitation; and
Dissolution-liquidation.
3. Persons Involved.
The indispensable persons that are involved in rehabilitation and insolvency proceedings are: DC
the debtors and
the creditors.
After all, it is necessary to initiate these proceedings only if there is a debtor who is incapable or is presently in no position to settle its obligations to creditors.
3.01. Debtor.
Debtor shall refer to: SPCI
a sole proprietorship duly registered with the Department of Trade and Industry (DTI);
a partnership duly registered with the Securities and Exchange Commission (SEC);
a corporation duly organized and existing under Philippine laws, or
an individual debtor
who has become insolvent.
Understandably, FRIA does not cover the government because of the basic rule that the State is always solvent.
Individual debtor
shall refer to a natural person who is a resident and citizen of the Philippines that has become insolvent.
Group of debtors
shall refer to and can cover only: CPS
corporations that are financially related to one another as parent corporations, subsidiaries or affiliates;
partnerships that are owned more than 50% by the same person; and
single proprietorships that are owned by the same person.
When the petition covers a group of debtors, all reference under these rules to debtor shall include and apply to the group of debtors.
A group of debtors may jointly file a petition for voluntary rehabilitation under the FRIA when one or more of its members foresee: IF
the impossibility of meeting debts when they respectively fall due, and
the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group and/or the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan.
Excluded Debtors.
Excluded from the operation of the FRIA are debtors which are: BPIN
banks,
pre-need companies,
insurance companies, and
national and local government agencies or units.
Rehabilitation of banks, pre-need companies, and insurance companies is still governed by their respective governing special laws.
FRIA does not cover the government because of the basic rule that the State is always solvent.
Juridical Entities and Related Enterprises.
Each juridical entity shall be considered as a separate entity in the proceedings under FRIA. Section 7 of FRIA provides:
Section 7. Substantive and Procedural Consolidation.
Each juridical entity shall be considered as a separate entity under the proceedings in this Act. Under these proceedings, the assets and liabilities of a debtor may not be commingled or aggregated with those of another, unless the latter is a related enterprise that is owned or controlled directly or indirectly by the same interests:
Provided, however, That the commingling or aggregation of assets and liabilities of the debtor with those of a related enterprise may only be allowed where: CC-VB
There was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of the proceedings;
The debtor and the related enterprise have common creditors and it will be more convenient to treat them together rather than separately;
The related enterprise voluntarily accedes to join the debtor as party petitioner and to commingle its assets and liabilities with the debtor's; and
The consolidation of assets and liabilities of the debtor and the related enterprise is beneficial to all concerned and promotes the objectives of rehabilitation.
Provided, finally, That nothing in this section shall prevent the court from joining other entities affiliated with the debtor as parties pursuant to the rules of procedure as may be promulgated by the Supreme Court.
3.02. Insolvent Debtor.
Insolvent shall refer to the:
financial condition of a debtor that is
generally unable to pay its or his liabilities as they fall due in the ordinary course of business or
has liabilities that are greater than its or his assets.
Liabilities
shall refer to monetary claims against the debtor, including stockholder's advances that have been recorded in the debtor's audited financial statements as advances for future subscriptions.
Ordinary course of business
shall refer to transactions in the pursuit of the individual debtor's or debtors' business operations prior to rehabilitation or insolvency proceedings and on ordinary business terms.
Insolvency
shall refer to the financial incapacity of the debtors to pay their liabilities as they fall due in the ordinary course of business or whenever their liabilities are greater than their assets.
3.03. Creditor.
Creditor
shall refer to a natural or juridical person which has a claim against the debtor that arose on or before the commencement date.
Commencement Date
refers to the date on which the court issues the Commencement Order, which shall be retroactive to the date of filing of the petition for voluntary or involuntary proceedings.
General unsecured creditor
shall refer to a creditor whose claim or a portion thereof is neither secured, preferred nor subordinated under the FRIA.
Secured creditor
shall refer to a creditor with a secured claim.
Secured Claim
shall refer to a claim that is secured by a lien.
Lien
shall refer to a statutory or contractual claim or judicial charge on real or personal property that legally entitles a creditor to resort to said property for payment of the claim or debt secured by such lien.
4. Liability for Unlawful Disposition of Assets.
No undue preference should be given to any creditor during the proceedings or even before the filing of the appropriate petition.
Related to this is the obligation to disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof under Section 62 of FRIA.
Section 10 prohibits disposition of assets under the circumstances stated therein:
Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a Partnership, or Directors and Officers.
Individual debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher to be recovered for benefit of the debtor and the creditors, if they, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts: DA-CEM
Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or
Conceal or authorize or approve the concealment, from the creditors, or embezzles or misappropriates, any property of the debtor.
The court shall determine the extent of the liability of an owner, partner, director or officer under this section. In this connection, in case of partnerships and corporations, the court shall consider the amount of the shareholding or partnership or equity interest of such partner, director or officer, the degree of control of such partner, director or officer over the debtor, and the extent of the involvement of such partner, director or debtor in the actual management of the operations of the debtor.
Section 52 of FRIA authorizes rescission of any transfer or conveyance after the commencement date.
Section 52. Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets.
The court may rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor's unencumbered property or any encumbering thereof by the debtor or its agents or representatives after the commencement date which are not in the ordinary course of the business of the debtor: Provided, however, That the unencumbered property may be sold, encumbered or otherwise disposed of upon order of the court after notice and hearing: IS-AV-RR
if such are in the interest of administering the debtor and facilitating the preparation and implementation of a Rehabilitation Plan;
in order to provide a substitute lien, mortgage or pledge of property under this Act;
for payments made to meet administrative expenses as they arise;
for payments to victims of quasi delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the debtor for the payments made;
for payments made to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale under this Act; or
for payments made to reclaim property of the debtor held pursuant to a possessory lien.
Properties Held by Third Persons.
Section 51 provides for the rules that apply to possessory pledges, mechanic's liens or similar claims, third parties who have in their possession or control property of the debtor:
Section 51. Assets of Debtor Held by Third Parties.
In the case of possessory pledges, mechanic's liens or similar claims, third parties who have in their possession or control property of the debtor shall not transfer, convey or otherwise dispose of the same to persons other than the debtor, unless upon prior approval of the rehabilitation receiver.
The rehabilitation receiver may also: SRD
demand the surrender or the transfer of the possession or control of such property to the rehabilitation receiver or any other person, subject to payment of the claims secured by any possessory Iien/s thereon;
allow said third parties to retain possession or control, if such an arrangement would more likely preserve or increase the value of the property in question or the total value of the assets of the debtor; or
undertake any other disposition of the said property as may be beneficial for the rehabilitation of the debtor, after notice and hearing, and approval of the court.
5. Rehabilitation.
If a sole proprietorship, partnership, or corporation is in financial distress but the proprietor, partners or directors and shareholders believe that it can still continue the business organization may consider rehabilitation rather than outright dissolution.
5.01. Concept of Rehabilitation.
Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its: EC
continuance of operation is economically feasible and
its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.
Bank of Philippine Islands v. Sarabia Manor Hotel Corporation, G.R. No. 175844, July 29, 2013:
Recognizing the volatile nature of every business, the rules on corporate rehabilitation have been crafted in order to give companies sufficient leeway to deal with debilitating financial predicaments in the hope of restoring or reaching a sustainable operating form if only to best accommodate the various interests of all its stakeholders, may it be the corporation’s stockholders, its creditors and even the general public. In this light, case law has defined corporate rehabilitation as an attempt to conserve and administer the assets of an insolvent corporation in the hope of its eventual return from financial stress to solvency.
It contemplates the continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and liquidity.
Verily, the purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.
Thus, rehabilitation shall be undertaken when it is shown that the continued operation of the corporation is economically more feasible and its creditors can recover, by way of the present value of payments projected in the plan, more, if the corporation continues as a going concern than if it is immediately liquidated.
Applicable if the Debts are Already Due and Debtor is Insolvent.
In rehabilitation proceedings, the Court need not distinguish whether the claim has already matured or not.
What is essential in case of rehabilitation is the inability of the debtor corporation to pay its dues as they fall due.
It was further explained that FRIA does not make any distinction between a corporation which is already in debt and a corporation which foresees the possibility of debt, or which would eventually yet surely fall into the same, but may at present be free from any financial liability.
Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation, 745 Phil. 651 (2014):
The Supreme Court ruled that despite the insolvency of a corporation, it cannot be hindered to file a petition for corporate rehabilitation.
To conclude otherwise will defeat its purpose of restoring a corporation to its former position of successful operation and solvency.
The Court need not distinguish whether the claim has already matured or not.
What is essential in case of rehabilitation is the inability of the debtor corporation to pay its dues as they fall due.
5.02. Kinds of Rehabilitation.
Rehabilitation may either be: CO
court supervised or
one that is agreed upon out of court.
Supervised rehabilitation may either be: VI
voluntary or
involuntary.
Voluntary Rehabilitation.
Voluntary Rehabilitation can be: CP-R
Court supervised rehabilitation without pre-negotiation
the following must be alleged and established in a verified Petition filed by the Debtor corporation:
the insolvency of the debtor, and
the viability of its rehabilitation; or
Pre-negotiated rehabilitation
a Petition is filed by the debtor alone or jointly with creditors; or
Out of Court or Informal Restructuring Agreements or Rehabilitation Plans.
Involuntary Rehabilitation.
A creditor or group of creditors may initiate involuntary proceedings against the debtor by filing a verified petition for rehabilitation with the court if: D-F-C
there is no genuine issue of fact or law on the claim/s of the petitioner/s (the creditor/s), and that the due and demandable payments on their claim/s have not been made for at least 60 days or
that the debtor has failed generally to meet its liabilities as they fall due; or
a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.
5.04. Rehabilitation Plan.
One of the required attachments to a Petition for Rehabilitation is a Rehabilitation Plan.
The Rehabilitation Plan in the form prescribed by law and rules is an indispensable requirement in corporate rehabilitation proceedings.
“Rehabilitation Plan”
refers to a plan by which the financial well being and viability of an insolvent debtor can be restored using various means including, but not limited to: DDR-DDNS
debt forgiveness,
debt rescheduling,
reorganization or quasi-reorganization,
dacion en pago,
debt-equity conversion and sale of the business (or parts of it) as a going concern, or
setting-up of a new business entity, or
other similar arrangements as may be approved by the court or creditors.
The contents of a Rehabilitation Plan are provided for in Section 62 of FRIA.
Pacific Wide Realty and Development Corp. v. Puerto Azul Land, Inc. G.R. No. 178768, November 25, 2009:
Successful rehabilitation of a distressed corporation will benefit its debtors, creditors, employees, and the economy in general.
The court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment: EM
the rehabilitation of the debtor is feasible and
the opposition of the creditors is manifestly unreasonable.
The rehabilitation plan, once approved, is binding upon the debtor and all persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or have opposed the plan or whether or not their claims have been scheduled.
Economic Feasibility Rule.
The Rehabilitation Plan must be characterized by the following: APD
The debtor has assets that can generate more cash if used in its daily operations than if sold;
Liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations;
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.
The circumstances that might demonstrate in a convincing and compelling manner that the debtor could successfully be rehabilitated include the following:
the business fortunes of the debtor have actually improved since the petition was filed;
the general circumstances and forecast for the sector in which the debtor is operating supports the likelihood that the debtor's business will revive;
the debtor has taken concrete steps to improve its operating efficiency;
Cost Reduction, Increased Productivity
the debtor has obtained legally binding investment commitments from parties contingent on the approval of a rehabilitation plan;
outside support strengthens the plan's credibility and indicates confidence
the debtor has successfully addressed other factors that would increase the risk that the debtor's rehabilitation plan would fail;
Restructuring Debt, Addressing Management Issues
the majority of the secured and unsecured creditors have expressly demonstrated a preference that the debtor be rehabilitated rather than liquidated and are willing to compromise on their claims to reach that result; and
the debtor's shareholders have expressed a willingness to dilute their equity in connection with a debt equity swap.
Bank of Philippine Islands v. Sarabia Manor Hotel Corporation, G.R. No. 175844, July 29, 2013:
In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough examination and analysis of the distressed corporation’s financial data must be conducted.
If the results of such examination and analysis show that there is a real opportunity to rehabilitate the corporation in view of the assumptions made and financial goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation is feasible.
In this accord, the rehabilitation court should not hesitate to allow the corporation to operate as an on-going concern, albeit under the terms and conditions stated in the approved rehabilitation plan.
On the other hand, if the results of the financial examination and analysis clearly indicate that there lies no reasonable probability that the distressed corporation could be revived and that liquidation would, in fact, better subserve the interests of its stakeholders, then it may be said that a rehabilitation would not be feasible.
In such case, the rehabilitation court may convert the proceedings into one for liquidation.
Wonder Book Corporation V. Philippine Bank of Communications, G.R. No. 187316, July 16, 2012:
Rehabilitation is therefore available to a corporation who, while illiquid, has assets that can generate more cash if used in its daily operations than sold.
Its liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and anchored on realistic assumptions and goals.
This remedy should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by the following: ABS-CN
the absence of a sound and workable business plan;
baseless and unexplained assumptions, targets and goals;
speculative capital infusion or complete lack thereof for the execution of the business plan;
cash flow cannot sustain daily operations; and
negative net worth and the assets are near full depreciation or fully depreciated.
Metropolitan Bank & Trust Co. v. Fortuna Paper Mill & Packaging Corp, G.R. No. 190800, November 7, 2018:
Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests specific characteristics of an economically feasible rehabilitation plan: APD
The debtor has assets that can generate more cash if used in its daily operations than if sold.
Liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations.
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.
These requirements put emphasis on liquidity: the cash flow that the distressed corporation will obtain from rehabilitating its assets and operations.
A corporation's assets may be more than its current liabilities, but some assets may be in the form of land or capital equipment, such as machinery or vessels. Rehabilitation sees to it that these assets generate more value if used efficiently rather than if liquidated.
On the other hand, this court enumerated the characteristics of a rehabilitation plan that is infeasible: ABS-CN
the absence of a sound and workable business plan;
baseless and unexplained assumptions, targets and goals;
speculative capital infusion or complete lack thereof for the execution of the business plan;
cash flow cannot sustain daily operations; and
negative net worth and the assets are near full depreciation or fully depreciated.
The rationale behind corporate rehabilitation must be upheld at all times and must not be allowed to be abused and misused by corporations whose aim is solely to thwart the enforcement of legal rights by a creditor, in this case, the Rehabilitation Plan which absolutely lacks feasibility and the lack of any abuse appurtenant to the provisions therein.
5.05. Approval of the Plan.
The Rehabilitation Plan: AC
must be approved by the creditors (representing 50% of the total claims); and
confirmed by the court
after approval of the creditors or
even without such approval or
even over the objection of the creditors.
However, if the creditors do not approve the Rehabilitation Plan, the Court may still approve the same Plan and its implementation.
Cram Down Rule.
The Rehabilitation Plan confirmed by the Court shall be binding upon the debtor and all persons who may be affected by it, including creditors, whether or not such persons have participated in the proceedings, or opposed the Plan, or whether or not their claims have been scheduled.
Bank of Philippine Islands v. Sarabia Manor Hotel Corporation, G.R. No. 175844, July 29, 2013:
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that:
rehabilitation is feasible and
the opposition of the creditors is manifestly unreasonable.
Also known as the "cram-down" clause, this provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders.
Otherwise stated, it forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.
Republic v. PET Plans, Inc., G.R. No. 220782, December 6, 2018:
An approved Rehabilitation Plan may still be modified upon recommendation of the Receiver.
Rehabilitation receivers
are officers of the court tasked: SI
to study the best way to rehabilitate the company and
to implement the rehabilitation plan after its approval.
Their qualifications include: EK
expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor and
knowledge in management, finance and rehabilitation of distressed companies.
Their recommendation bears much weight as it is one of the factors which must be considered by the court if it were to approve any modification of an approved rehabilitation plan.
5.06. Stay Order
The Stay Order is included in the Commencement Order to be issued by the court having jurisdiction over the rehabilitation case under Section 6 of FRIA.
The Stay or Suspension Order shall: CJ-SP
suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;
suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;
prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and
prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.
The Commencement Order and consequently, the Stay Order shall be effective for the entire duration of the rehabilitation proceedings.
The order may be lifted if there is no substantial likelihood for the debtor to be successfully rehabilitated.
Rationale of Suspension of Claims.
The claims against the corporation under rehabilitation are suspended for the following reasons: E-S
To enable the rehabilitation receiver to effectively exercise its/his powers free from or unburdened by any judicial or extrajudicial interference that might unduly hinder or prevent the 'rescue' of the debtor company (time, resources and effort will be used to litigate); and
To enable the management committee or the rehabilitation receiver to substitute the defendant in any pending action against it before any court, tribunal, board or body.
Although decided before FRIA, the observation of the Supreme Court in Alemar's Sibal & Sons, Inc. v. Elbinias, G.R. No. 76414, June 4, 1990 is instructive:
During rehabilitation receivership, the assets are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of an attachment, execution or otherwise.
For what would prevent an alert creditor, upon learning of the receivership, from rushing post haste to the courts to secure judgments for the satisfaction of its claims to the prejudice of the less alert creditors.
As between creditors, the key phrase is "equality is equity."
When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on an equal footing.
Not anyone of them should be given any preference by paying one or some of them ahead of the others.
This is precisely the reason for the suspension of all pending claims against the corporation under receivership.
Instead of creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a duly appointed officer of the SEC.
Far East Bank and Trust Co. v. Union Bank of the Philippines, G.R. No. 196637, June 3, 2019:
In addition, without suspension of the claims against the debtor, the performance of the functions of the receiver will be hampered.
To allow other actions to continue would only add to the burden of the rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the debtor instead of being directed toward its restructuring and rehabilitation.
5.07. Prior Hearing Not Necessary.
The Financial Rehabilitation Rules of Procedure (2013) does not require a hearing before the issuance of a stay order.
What it requires is an initial hearing before it can give due course or dismiss the petition for rehabilitation.
The trial court has discretion to call a hearing when it is not confident that the allegations in the petition are sufficient in form and substance, as long as the hearing is held within the five day period from the filing of the petition as provided in the Rules.
5.08. Suspended Claims.
“Claim”
refers to all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to: GD
all claims of the government, whether national or local, including taxes, tariffs and customs duties; and
claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority.
Under the expanded concept of "claim," the following are covered by the Stay Order:
Money claim for missing luggage against a common carrier;
Illegal dismissal cases with claims for back wages and other unpaid benefits filed before the National Labor Relations Commission;
Case filed before the Housing and Land Use Regulatory Board to rescind a sale of a subdivision lot with corresponding refund of the price.
Ejectment cases;
Complaint for rescission of contract of assignment of leasehold right with damages;
Enforcement of repairman's maritime lien;
A claim for the value of shares belonging to the plaintiff that was illegally sold by the liquidators of a corporation.
Although the original claim was for the return of the shares, the claim was the subject of a supervening event, the sale of the shares.
After the sale, the money raised therefrom became generic in the form of money that were commingled with cash and other assets of the corporation.
Secured Creditors and Foreclosure.
The Stay Order will stay or suspend all actions or claims against the debtor including claims by secured and unsecured creditors.
What is sought to be achieved is equality in equity.
Foreclosure of mortgage is likewise suspended because Section 8, Rule 2 of the Financial Rehabilitation Rules of Procedure (2013) prohibits the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business.
Nevertheless, the preferred status over the unsecured creditors relative to a mortgage lien is retained but the enforcement of such preference is suspended.
In the event that rehabilitation is no longer feasible and the claims against the distressed corporation would eventually have to be settled the secured creditors shall enjoy preference over the unsecured creditors. The rights of a preferred secured creditor is therefore respected and recognized, “to hold otherwise would render said rights inutile and illusory.”
Situs Dev. Corporation v. Asiatrust Bank, G.R. No. 180036, January 16, 2013.
Section 146 of the FRIA, which makes the Stay Order applicable to “all further proceedings in insolvency, suspension of payments and rehabilitation cases x x x except to the extent that in the opinion of the court their application would not be feasible or would work injustice,” still presupposes a prospective application.
The wording of the law clearly shows that the Stay Order is applicable to all further proceedings.
In no way could it be made retrospectively applicable to the Stay Order issued by the rehabilitation court back in 2002.
Nowhere in the Interim Rules is the rehabilitation court authorized to suspend foreclosure proceedings against properties of third-party mortgagors.
Sale of Properties
Section 53 of FRIA likewise allows the sale of properties that are subject to: RDD
rapid obsolescence,
depreciation and
diminution of value.
Upon the application of a secured creditor holding a lien against or holder of an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the Court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable steps necessary to prevent the depreciation.
Tax Deficiency.
It was improper for the Bureau of Internal Revenue to collect, or even attempt to collect, deficiency taxes from the insolvent corporation outside of the rehabilitation proceedings concerning the latter, and in the process, willfully disregard the Commencement Order lawfully issued by the Rehabilitation Court.
The Stay Order applies even to truces.
5.09. Stage of Suspended Actions.
Subject to the exceptions enumerated below, all actions for claims against a corporation pending before any court, tribunal or board shall ipso jure be suspended in whatever stage such actions may be found upon the appointment by the SEC of a management committee or a rehabilitation receiver.
This was taken to embrace all phases of the suit, be it before the trial court or any tribunal or on appeal before the Court of Appeals such that no other action may be taken in, including the rendition of judgment during the state of suspension - what are automatically stayed or suspended are the proceedings of an action or suit and not just the payment of claims during the execution stage after the case had become final and executory.
5.10. Exceptions to the Stay Order.
The Stay or Suspension Order shall not apply: S-Q-STL-C-L-C-C
to cases already pending appeal in the Supreme Court as of commencement date.
Any final and executory judgment arising from such appeal shall be referred to the rehabilitation court for appropriate action;
subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court, is capable of resolving the claim more quickly, fairly and efficiently than the court.
Any final and executory judgment of such court or agency shall be referred to the rehabilitation court and shall be treated as a non-disputed claim;
to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;
to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;
to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;
the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and
any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under the FRIA.
5.11. Solidary Creditors.
The Stay Order does not apply to sureties who are solidarily liable.
Section 18(c) of FRIA provides that the Stay Order does not apply to "the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver.
Metropolitan Waterworks and Sewerage System v. Daway, G.R. No. 160732, June 21, 2004:
The Supreme Court ruled that the claims that are enjoined do not cover claims against the solidary guarantors or sureties of the debtor who is under rehabilitation.
Solidary claims can be pursued separately from and independent of the rehabilitation case.
Thus, claims against a bank that issued a letter of credit can be pursued because in the absence of any stipulation to the contrary, the obligation of banks issuing letters of credit is solidary with the person who applied for its issuance.
Trade and Investment Development Corporation of the Philippines v. Philippine Veterans Bank, G.R. No. 233850, July 1, 2019:
The Stay Order shall also not apply to a person who is named a guarantor if the Guarantee Agreement states that the creditor can claim directly from the said guarantor without the former having to exhaust all the properties of and without need of prior recourse against the debtor.
nder Section 18(c) of FRIA, the issuance of the Stay Order by the Rehabilitation Court does not prevent the Regional Trial Court from acquiring jurisdiction over a Complaint that is filed by the creditor against the guarantor.
The waiver (of the benefit of excussion and prior recourse against the debtor) in the Guaranty Agreement makes the guarantor solidarily liable.
The rule does not apply to a guarantor whose liability is subsidiary only, not solidary.
Situs Development Corporation v. Asiatrust Bank 701 Phil. 569, 572-573 (2013):
The Supreme Court held that when a stay order is issued, the rehabilitation court is only empowered to suspend claims against the debtor, its guarantors, and sureties who are solidarily liable with the debtor.
The general rule is that a guarantor will not be liable unless the creditor first exhausts all the properties of the debtor and seeks prior recourse against the debtor.
Although guarantors are not identified in the current rule, which is Rule 2 of the Financial Rehabilitation Rules of Procedure (2013), the previous Section 6, Rule 4 of AM. No. 00-8-10-SC or the Interim Rules of Procedure on Corporate Rehabilitation stated that a stay order has the effect of staying enforcement only with respect to claims made "against the debtor, its guarantors and persons not solidarily liable with the debtor."
It is believed that the fact that new rule does not expressly mention the guarantor does not change the previous rule that the stay order applies to the guarantor.
While it is true that under Article 2059 of the New Civil Code, the guarantor loses the benefit of excussion in case of insolvency of the debtor, the creditor is nonetheless still required to resort to all legal remedies against the debtor; the filing of an action against the principal debtor is still a precondition to the liability of the guarantor. This action against the principal debtor cannot be maintained if there is already a stay order.
Post-Commencement Obligations.
The debtor may validly incur obligations that are not included in the claims.
They will be treated as administrative expenses.
Sections 54 to 56 of FRIA provide:
Section 54. Post-commencement Interest.
The rate and term of interest, if any, on secured and unsecured claims shall be determined and provided for in the approved Rehabilitation Plan.
Section 55. Post-commencement Loans and Obligations.
With the approval of the court upon the recommendation of the rehabilitation receiver, the debtor, in order to enhance its rehabilitation. May:
enter into credit arrangements; or
enter into credit arrangements, secured by mortgages of its unencumbered property or secondary mortgages of encumbered property with the approval of senior secured parties with regard to the encumbered property; or
incur other obligations as may be essential for its rehabilitation.
The payment of the foregoing obligations shall be considered administrative expenses under this Act.
Section 56. Treatment of Employees, Claims.
Compensation of employees required to carry on the business shall be considered an administrative expense. Claims of separation pay for months worked prior to the commencement date shall be considered a pre-commencement claim. Claims for salary and separation pay for work performed after the commencement date shall be an administrative expense.
PROBLEM: Metropolitan. Waterworks and Sewerage System u. Hon. Reynaldo B. Daway, et al., G.R. No. 160732, June 21, 2004
BC Company filed a Petition for Rehabilitation with the Court. An Order was issued by the Court: (1) staying enforcement of all claims, whether money or otherwise against ABC Company, its guarantors and sureties not solidarily liable with the company; and (2) prohibiting ABC Company from making payments of its liabilities, outstanding as of the date of the filing of the Petition. XYC Company is a holder of an irrevocable Standby Letter of Credit previously procured by ABC Company in favor of XYC Company to secure performance of certain obligations.
In the light of the Order issued by the Court, can XYC Company still be able to draw on their irrevocable Standby Letter of Credit when due? Explain your answer.
Yes, XYZ Company can still draw on the Standby Letter of Credit. The claim against the Jetter of credit is not affected by the rehabilitation proceedings against the debtor. The claim is not a claim against the debtor under rehabilitation. It is also well settled that the claim against the bank under a letter of credit is solidary in nature.
Under Section 18(c) of the FRIA, a Stay or Suspension Order shall not apply to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit.
Also, under the independence principle, the letter of credit is an independent contract between the issuer bank and the beneficiary (XYC Company). As a separate contract, the letter of credit is independent of the claims of the issuing bank against the debtor (ABC Company), which claims are covered by the Order of the Court.
5.12 Criminal Cases Not Suspended.
The filing of a criminal case is not a “claim” that can be enjoined within the purview of Presidential Decree No. 902-A.
As far as the criminal aspect is concerned, the provisions of Section 6(c) of Presidential Decree No. 902-A should not interfere with the prosecution of a criminal case, even if restitution, reparation or indemnification could be ordered, because an absurdity would result.
Example: One who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer
The same rule applies under FRIA - the creditors or third parties are not prohibited from filing criminal cases against the directors and officers acting in their personal capacities.
At any rate, should the Court deem it fit to award indemnification in cases involving corporate obligations like Batas Pambansa Blg. 22 cases, such award would now fall under the category of a claim under Section 6(c) of Presidential Decree No. 902-A, considering that it is already one for monetary or pecuniary consideration.
Only to this extent can the order of suspension be considered obligatory upon any court, tribunal, branch or body where there are pending actions for claims against the distressed corporation.
However, the rule should be clarified that suspension is only possible:
if it is the corporation who commits a crime through its officers or agents or
when there is vicarious liability on the part of the corporation.
5.13. Third Party Mortgagors.
Pacific Wide Realty and Development Corp. v. Puerto Azul Land, Inc, G.R. Nos. 178768 & 180893, November 25, 2009:
The Supreme Court ruled that the issuance of a Stay Order cannot suspend the foreclosure of third party accommodation mortgages.
Whether or not the properties subject of the third-party mortgage are used by the debtor corporation or are necessary for its operation is of no moment, as the Interim Rules do not make a distinction.
To repeat, when the Stay Order was issued, the rehabilitation court was only empowered to suspend claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor.
Thus, it was beyond the jurisdiction of the rehabilitation court to suspend foreclosure proceedings against properties of third-party mortgagors.
This rule is expressly recognized under Section 18(c) of FRIA.
Situs Dev. Corporation v. Asiatrust Bank, G.R. No. 180036, January 16, 2013:
By way of exception, Section 18(c) of FRIA provides that the Stay Order may now cover third-party or accommodation mortgages, in which the "mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver."
5.14. Enforced Claims.
While the issuance of the Stay Order suspends the enforcement of all claims against the debtor, whether for money or otherwise, and whether such enforcement is by court action or otherwise, effective until the dismissal of the petition or the termination of the rehabilitation proceedings, the Stay Order issued by the Rehabilitation Court, however, cannot apply to the mortgage obligations which had already been enforced before the filing of the Petition.
Hence, the mortgage obligation is not stayed if the redemption period has already expired.
5.15. Retroactive Effect.
Under the Financial Rehabilitation Rules of Procedure (Rehabilitation Rules), the effects of a Commencement Order, which include the Stay Order, shall retroact to the date when the petition was filed, and renders void any attempt to collect on or enforce a claim against the debtor or to set off any debt by the debtor's creditors, after the commencement date.
The rehabilitation proceedings shall be deemed to have commenced from the date of filing of the petition, which is also termed the commencement date.
Allied Banking Corp. v. Equitable PCI Bank, Inc., G.R. No. 191939, March 14, 2018:
Section 2, Rule 1 of the Rehabilitation Rules governs rehabilitation cases already pending, except when its application would not prove feasible or would work injustice, to wit:
SEC. 2. SCOPE.
These Rules shall apply to petitions for rehabilitation of corporations, partnerships, and sole proprietorships, filed pursuant to Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010.
These Rules shall similarly govern all further proceedings in suspension of payments and rehabilitation cases already pending, except to the extent that, in the opinion of the court, its application would not be feasible or would work injustice, in which event the procedures originally applicable shall continue to govern.
The above provision is consistent with the mandate under R.A. No. 10142, viz:
SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases.
This Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending, except to the extent that in the opinion of the court their application would not be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall apply.
The soundness of upholding the retroactive effect of a commencement order is easily discernible.
x x x
The filing of a petition for the rehabilitation of a debtor, when the court finds that it is sufficient in form and substance, is both: AA
an acknowledgment that the debtor is presently financially distressed; and
an attempt to conserve and administer its assets in the hope that it will eventually return to its former state of successful financial operation and liquidity.
The inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the distressed corporation during the rehabilitation period by providing the best possible framework for the corporation to gradually regain or achieve a sustainable operating form.
Certainly, when a petition for rehabilitation is filed and subsequently granted by the court, its purpose will be defeated if the debtors are still allowed to arbitrarily dispose of their property and pay their liabilities, outside of the ordinary course of business and what is allowed by the court, after the filing of the said petition. Such a scenario does not promote an environment where the debtor could regain its operational footing, contrary to the dictates of rehabilitation.
The petition itself, when granted by the court, is already a recognition of the debtor's distressed financial status not only at the time the order is issued, but also at the time the petition is filed. It is, therefore, more consistent with the objectives of rehabilitation to recognize that the effects of an order commencing rehabilitation proceedings and staying claims against the debtor should retroact to the date the petition is filed.
Accordingly, the Court finds that application of the Rehabilitation Rules to the case at bar is proper, insofar as it clarifies the effect of an order staying claims against a debtor sought to be rehabilitated.
Such application promotes a just and sound resolution to the present controversy, bearing in mind the inherent purpose of rehabilitation proceedings. It is also feasible, considering the subject resolution was within the Rehabilitation Court's powers, wielded for the same purpose identified in both the Interim Rules and the Rehabilitation Rules which is to promote a timely, fair, transparent, effective, and efficient rehabilitation of debtors.
5.16 Effect of Stay Order on Contracts.
The suspension of claims does not result in amendment of contracts.
There is nothing in FRIA that authorizes the change or modification of contracts entered into by the distressed corporation and its creditors.
Example:
The Rehabilitation Plan is void if it amends the rental rates agreed upon in a contract of lease.
Dacion en Pago.
A Plan that imposes a dacion en pago is also not tenable.
However, the Rehabilitation Plan may propose such dacion en pago so long as no compulsion is involved.
5.17. Management.
Generally, the existing Board and/or Management of the debtor shall continue to function while the Petition for Rehabilitation is pending.
However, upon motion, the court may appoint either the Rehabilitation Receiver or a Management Committee to undertake the management of the debtor in the following cases: DP-GFG
Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor's assets or properties;
Paralyzation of the business operations of the debtor; or
Gross mismanagement of the debtor, or
fraud or other wrongful conduct on the part of, or
gross or willful violation of the FRIA by existing management of the debtor, owner, partner, director, officer or representative/a in the management of the debtor.
5.18. Administrative Expenses.
Certain administrative expenses as defined under Section 3 of FRIA should be paid even if there is a Stay Order.
Example:
The Rehabilitation Plan may provide for payment of rentals.
5.19. Disposition of the Case.
The Court may take any of the following alternative actions in the rehabilitation proceedings: DDC
give due course to the Petition; or
dismiss the Petition; or
convert the Proceedings to Liquidation Proceedings.
The court shall give due course to the petition upon finding that: I-S
the debtor is insolvent; and
there is a substantial likelihood for the debtor to be successfully rehabilitated.
The court may dismiss the petition upon finding that: NS-MM
the debtor is not insolvent;
the petition is a sham filing intended only to delay the enforcement of the rights of the creditors/s or of any group of creditors;
the petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading statements; or
the debtor has committed acts of misrepresentation or in fraud of creditor/s or a group of creditors.
In the alternative, the court may convert the proceedings into Liquidation Proceedings upon finding that: I-N
the debtor is insolvent; and
there is no substantial likelihood for the debtor to be successfully rehabilitated.
The liquidation of a corporation can result: DR
by virtue of direct petition for liquidation of an insolvent corporation; or alternatively
from a rehabilitation proceeding that was converted by the court to a liquidation proceeding.
The assets of the insolvent debtor shall be divided among the creditors in accordance with the Liquidation Plan submitted by the Liquidator and approved by the Court.
The rules on concurrence and preference of credits under the New Civil Code and other relevant laws shall be observed in the Liquidation Plan.
The rules on concurrence and preference of credits under the New Civil Code and Article 110 of the Labor Code do not apply in rehabilitation proceedings.
Said rules apply only if there is an insolvency or liquidation proceeding.
It does not apply to rehabilitation proceedings because the purpose of rehabilitation is precisely to enable the company debtor to gain new lease on life and thereby allow its creditors to be paid their claims from its (the debtor's) earnings.
If the rehabilitation of the corporation is no longer feasible and the assets of the corporation are finally liquidated the rules on concurrence and preference of credit would then apply. This happens if the court converts the rehabilitation proceedings to liquidation proceedings.
6. Pre-Negotiated Rehabilitation.
The insolvent debtor and the creditors may agree on a rehabilitation plan without court assistance.
The insolvent debtor alone or together with the creditors may then file a petition for the approval of the pre-negotiated plan.
The provisions of FRIA are as follows:
Section 76. Petition by Debtor.
An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. The petition shall include as a minimum: SIPS
a schedule of the debtor's debts and liabilities;
an inventory of the debtor's assets;
the pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for rehabilitation receiver; and
a summary of disputed claims against the debtor and a report on the provisioning of funds to account for appropriate payments should any such claims be ruled valid or their amounts adjusted.
Section 77. Issuance of Order.
Within five (5) working days, and after determination that the petition is sufficient in form and substance, the court shall issue an Order which shall;
identify the debtor, its principal business of activity/ies and its principal place of business;
declare that the debtor is under rehabilitation;
summarize the grounds for the filling of the petition;
direct the publication of the Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance;
direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least ten percent (10%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days;
state that copies of the petition and the Rehabilitation Plan are available for examination and copying by any interested party;
state that creditors and other interested parties opposing the petition or Rehabilitation Plan may file their objections or comments thereto within a period of not later than twenty (20) days from the second publication of the Order;
appoint a rehabilitation receiver, if provided for in the Plan; and
include a Suspension or Stay Order as described in this Act.
Section 78. Approval of the Plan.
Within ten (10) days from the date of the second publication of the Order, the court shall approve the Rehabilitation Plan unless a creditor or other interested party submits an objection to it in accordance with the next succeeding section.
Section 79. Objection to the Petition or Rehabilitation Plan.
Any creditor or other interested party may submit to the court a verified objection to the petition or the Rehabilitation Plan not later than eight (8) days from the date of the second publication of the Order mentioned in Section 77 hereof. The objections shall be limited to the following:
The allegations in the petition or the Rehabilitation Plan or the attachments thereto are materially false or misleading;
The majority of any class of creditors do not in fact support the Rehabilitation Plan;
The Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim in not categorically declared as a contested claim; or
The support of the creditors, or any of them was induced by fraud.
Copies of any objection to the petition of the Rehabilitation Plan shall be served on the debtor, the rehabilitation receiver (if applicable), the secured creditor with the largest claim and who supports the Rehabilitation Plan, and the unsecured creditor with the largest claim and who supports the Rehabilitation Plan.
Section 80. Hearing on the Objections.
After receipt of an objection, the court shall set the same for hearing. The date of the hearing shall be no earlier than twenty (20) days and no later than thirty (30) days from the date of the second publication of the Order mentioned in Section 77 hereof. If the court finds merit in the objection, it shall direct the debtor, when feasible, to cure the detect within a reasonable period. If the court determines that the debtor or creditors supporting the Rehabilitation Plan acted in bad faith, or that the objection is non-curable, the court may order the conversion of the proceedings into liquidation. A finding by the court that the objection has no substantial merit, or that the same has been cured shall be deemed an approval of the Rehabilitation Plan.
Section 81. Period for Approval of Rehabilitation Plan.
The court shall have a maximum period of one hundred twenty (120) days from the date of the filing of the petition to approve the Rehabilitation Plan. If the court fails to act within the said period, the Rehabilitation Plan shall be deemed approved.
Section 82. Effect of Approval.
Approval of a Plan under this chapter shall have the same legal effect as confirmation of a Plan under Chapter II of this Act.
7. Out-of-Court Rehabilitation.
An out-of-court or informal restructuring agreement or Rehabilitation Plan that meets the minimum requirements is recognized under the FRIA as an alternative remedy available to a distressed debtor.
This Out-of Court Rehabilitation is similar to what is known in the Bankruptcy laws in the United States as “Workouts” which is a private, negotiated adjustment of creditor-company relations and is sometimes called in Common Law as a “Common Law Composition.”
Out-of Court rehabilitation agreed upon by the parties has the following advantages: EES
It is more expeditious because unbridled by court proceedings, the debtors and creditors enjoy flexibility;
It is more economic because it avoids the superstructure of reorganizations including receivers, committees or trustees;
It is more sensible because it contemplates participation of the parties in interest, good faith, conciliation and candor; "the alternative is litigation and its bedfellows bluff, pettifoggery and strife."
The minimum requirements of Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans are as follows: A-67-75-85
The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan;
The Rehabilitation Plan must be approved by creditors representing at least 67% of the secured obligations of the debtor;
It must be approved by creditors representing at least 75% of the unsecured obligations of the debtor; and
It must be approved by creditors holding at least 85% of the total liabilities, secured and unsecured, of the debtor.
Standstill Period.
Standstill period shall refer to the period agreed upon by the debtor and its creditors to enable them to negotiate and enter into an out-of-court or informal restructuring/workout agreement or rehabilitation plan.
Section 85 of FRIA provides for the applicability of the cram down rule and recognition of a standstill period:
Section 85. Standstill Period.
A standstill period that may be agreed upon by the parties pending negotiation and finalization of the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not only against the contracting parties but also against the other creditors: Provided, That 50-2-120
such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor;
notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; and
the standstill period does not exceed one hundred twenty (120) days from the date of effectivity.
The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement and notify them that said agreement will be binding on all creditors if the required majority votes prescribed in Section 84 of this Act are met.
An agreement on standstill period may be binding if the following requisites are present: A50-P1,2-120
The agreement is approved by creditors representing more than 50% of the total liabilities of the debtor;
Notice thereof is published in a newspaper of general circulation in the Philippines once a week for two consecutive weeks; and
The standstill period does not exceed 120 days from the date of effectivity.
Cram Down Rule.
Section 86 of FRIA provides:
Section 86. Cram Down Effect.
A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal workout framework referred to in this chapter shall have the same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the notice thereof.
7.01. Requirements for Out-of-Court Rehabilitation.
Section 83 of FRIA recognizes the validity of an out of-court or informal restructuring agreement or Rehabilitation Plan that meets the minimum requirements provided in the same law. The provisions of FRIA that apply are as follows:
Section 83. Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans.
An out-of-court or informal restructuring agreement or Rehabilitation Plan that meets the minimum requirements prescribed in this chapter is hereby recognized as consistent with the objectives of this Act.
Section 84. Minimum Requirements of Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans.
For an out-of-court or informal restructuring/workout agreement or Rehabilitation Plan to qualify under this chapter, it must meet the following minimum requirements: A-67-75-85
The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan;
The Rehabilitation Plan must be approved by creditors representing at least 67% of the secured obligations of the debtor;
It must be approved by creditors representing at least 75% of the unsecured obligations of the debtor; and
It must be approved by creditors holding at least 85% of the total liabilities, secured and unsecured, of the debtor.
Section 85. Standstill Period.
A standstill period that may be agreed upon by the parties pending negotiation and finalization of the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not only against the contracting parties but also against the other creditors: Provided, That 50-1,2-120
such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor;
notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; and
the standstill period does not exceed one hundred twenty (120) days from the date of effectivity.
The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement and notify them that said agreement will be binding on all creditors if the required majority votes prescribed in Section 84 of this Act are met.
Section 86. Cram Down Effect.
A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal workout framework referred to in this chapter shall have the same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the notice thereof.
Section 87. Amendment or Modification.
Any amendment of an out-of-court restructuring/workout agreement or Rehabilitation Plan must be made in accordance with the terms of the agreement and with due notice on all creditors.
Section 88. Effect of Court Action or Other Proceedings.
Any court action or other proceedings arising from, or relating to, the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan shall not stay its implementation, unless the relevant party is able to secure a temporary restraining order or injunctive relief from the Court of Appeals.
Section 89. Court Assistance.
The insolvent debtor and/or creditor may seek court assistance for the execution or implementation of a Rehabilitation Plan under this Chapter, under such rules of procedure as may be promulgated by the Supreme Court.
8. Petition for Suspension of Payments.
A petition for suspension of payment is a petition that can be filed by an individual debtor who: SI
has sufficient properties to cover all his debts but
he foresees the impossibility of meeting his debts when they respectively fall due
for the purpose of asking the court to order the suspension or delay of payment of his indebtedness.
Thus, the petition requires the following: IS-FS
The petitioner should be an individual debtor;
The debtor has sufficient properties to cover all his debts;
The debtor foresees the impossibility of meeting his debts when they respectively fall due;
The purpose of the petition is to suspend or delay the payment of debts.
The amount of indebtedness is not affected by the Petition.
The debts are neither reduced nor discharged because the sole purpose is to delay the payment of obligations.
Unlike the other petitions filed under FRIA, the number of creditors is immaterial.
There is no required number of creditors before the petition for suspension can be filed.
8.01. Distinctions.
Suspension of Payments
❌ Debtor is not insolvent - the debtor has sufficient assets to cover his liabilities.
❌ Payment of obligations is stayed.
Applies only to individual debtor.
May be filed by the debtor;
❌ There is no minimum amount of liabilities prescribed.
❌ The rules on concurrence and and preference of credits under the New Civil Code do not apply.
Liquidation
✅ Debtor is insolvent - his assets are insufficient to cover his Ii abilities.
✅ The obligations are discharged.
Proceedings can cover juridical persons and individual debtors.
May be initiated by the debtor (voluntary insolvency) or by the creditors (involuntary insolvency).
✅ It is required that the debt of the individual debtor is not less than P500,000.00.
✅ The rules on concurrence preference of credits under Articles 2236 and 2261 of the New Civil Code apply.
Suspension of Payments
Applies to Individual Debtor.
❌ Debtor is not insolvent - the debtor has sufficient assets to cover his liabilities.
❌ Secured debtors are not affected.
Applies only to individual debtor.
Filed by the debtor.
❌ There is no minimum requirement for the amount of the claims.
Rehabilitation
Applies to Business Organizations - Single Proprietorship, Partnership and Corporation
✅ The debtor is insolvent.
✅ Secured debtors are affected by stay order.
May be availed of by juridical persons and individual debtors.
May be initiated by the debtor (voluntary rehabilitation) or· by the creditors (involuntary rehabilitation).
✅ The claim of, or the aggregate of claims against the debtor is at least P 1 million or at least 25% of the subscribed capital stock or partners' contributions, whichever is higher.
8.02 Suspension Order.
Upon motion filed by the individual debtor, the court may issue an order suspending any pending execution against the individual debtor.
Properties held as security by secured creditors shall not be the subject of such suspension order.
The suspension order shall lapse: 3D
when three months shall have passed without the proposed agreement being accepted by the creditors or
as soon as such agreement is denied.
No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition f or suspension of payments and for as long as proceedings remain pending.
8.03. Exceptions.
The following creditors are not affected by the Stay Order. PS
Those creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred in the 60 days immediately prior to the filing of the petition; and
Secured creditors..
These excepted creditors are not affected by the proposed agreement with the debtor unless the same creditors participated and voted in the creditors meeting.
8.04. Prohibited Acts.
The individual debtor is prohibited (in the Order to be issued by the court after the filing of the Petition for Suspension of Payments) from: SP
Selling, transferring, encumbering or disposing in any manner of his property, those used in the ordinary operations of commerce or of industry in which the petitioning individual debtor is engaged so long as the proceedings relative to the suspension of payments are pending; and
Making any payment outside of the necessary or legitimate expenses of his business or industry, so long as the proceedings relative to the suspension of payments are pending.
8.05. Creditor’s Meeting.
The individual debtor shall attach to the Petition for Suspension of Payment a proposed agreement with the creditors.
The proposed agreement shall be approved or rejected in the Creditors' Meeting.
The presence of creditors holding claims amounting to at least 3/5 of the liabilities of the debtor is necessary for the meeting.
A creditor has no right to vote if he incurred his credit within 90 days prior to the filing of the petition for suspension.
Double Majority is necessary for the approval of proposed agreement with the creditors, to wit: ⅔-⅗
Two-thirds (2/3) of the creditors voting unite upon the same proposition; and
The claims represented by said majority vote amount to at least 3/5 of the total liabilities of the debtor mentioned in the petition.
Effect of Disapproval by Creditors.
If there is no approval of the double majority, the suspension of payments proceedings will be terminated and the creditors shall be at liberty to enforce their rights that correspond to them.
9. Liquidation.
There are different sets of rules for juridical debtors and for individual debtors.
Liquidation proceedings may be voluntary or involuntary.
Voluntary liquidation is at the instance of the debtor and initiated by filing a petition in court.
Involuntary liquidation is filed by creditors and requires the presence of grounds provided for under Section 91 for juridical debtors and Section 105 for individual debtors.
9.01 Liquidation for Juridical Debtors.
Section 90. Voluntary Liquidation.
An insolvent debtor may apply for liquidation by filing a petition for liquidation with the court. The petition shall be verified, shall establish the insolvency of the debtor and shall contain, whether as an attachment or as part of the body of the petition;
a schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any;
an inventory of all its assets including receivables and claims against third parties; and
the names of at least three (3) nominees to the position of liquidator.
At any time during the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the debtor may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the debtor is seeking immediate dissolution and termination of its corporate existence.
If the petition or the motion, as the case may be, is sufficient in form and substance, the court shall issue a Liquidation Order mentioned in Section 112 hereof.
Section 91. Involuntary Liquidation.
Three (3) or more creditors the aggregate of whose claims is at least either One million pesos (Php1,000,000,00) or at least twenty-five percent (25%) of the subscribed capital stock or partner's contributions of the debtor, whichever is higher, may apply for and seek the liquidation of an insolvent debtor by filing a petition for liquidation of the debtor with the court. The petition shall show that:
there is no genuine issue of fact or law on the claims/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least one hundred eighty (180) days or that the debtor has failed generally to meet its liabilities as they fall due; and
there is no substantial likelihood that the debtor may be rehabilitated.
At any time during the pendency of or after a rehabilitation court-supervised or pre-negotiated rehabilitation proceedings, three (3) or more creditors whose claims is at least either One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital or partner's contributions of the debtor, whichever is higher, may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the movants are seeking the immediate liquidation of the debtor.
If the petition or motion is sufficient in form and substance, the court shall issue an Order:
directing the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; and
directing the debtor and all creditors who are not the petitioners to file their comment on the petition or motion within fifteen (15) days from the date of last publication.
If, after considering the comments filed, the court determines that the petition or motion is meritorious, it shall issue the Liquidation Order mentioned in Section 112 hereof.
Section 92. Conversion by the Court into Liquidation Proceedings.
During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation proceedings pursuant to
Section 25(c) of this Act; or
Section 72 of this Act; or
Section 75 of this Act; or
Section 90 of this Act; or
at any other time upon the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible.
Thereupon, the court shall issue the Liquidation Order mentioned in Section 112 hereof.
Section 93. Powers of the Securities and Exchange Commission (SEC).
The provisions of this chapter shall not affect the regulatory powers of the SEC under Section 6 of Presidential Decree No. 902-A, as amended, with respect to any dissolution and liquidation proceeding initiated and heard before it.
Persons Who can File.
Petition for liquidation can be availed of by different business organizations and the persons who will file and/or approve the same are as follows:
9.02. Liquidation of Individual Debtors.
Liquidation of individual debtors may be:
voluntary or
involuntary.
Voluntary Liquidation.
Section 103. Application.
An individual debtor whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five hundred thousand pesos (Php500,000.00), may apply to be discharged from his debts and liabilities by filing a verified petition with the court of the province or city in which he has resided for six (6) months prior to the filing of such petition. He shall attach to his petition a schedule of debts and liabilities and an inventory of assets. The filing of such petition shall be an act of insolvency.
Section 104. Liquidation Order.
If the court finds the petition sufficient in form and substance it shall, within five (5) working days issue the Liquidation Order mentioned in Section 112 hereof.
Involuntary Liquidation.
Section 105. Petition; Acts of Insolvency.
Any creditor or group of creditors with a claim of, or with claims aggregating at least Five hundred thousand pesos (Php500,000.00) may file a verified petition for liquidation with the court of the province or city in which the individual debtor resides.
The following shall be considered acts of insolvency, and the petition for liquidation shall set forth or allege at least one of such acts:
That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors;
That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent;
That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying the liquidation or of defrauding any creditors or claimant;
That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;
That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors;
That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;
That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days;
That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary; and
That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment.
The petitioning creditor/s shall post a bond in such as the court shall direct, conditioned that if the petition for liquidation is dismissed by the court, or withdrawn by the petitioner, or if the debtor shall not be declared an insolvent the petitioners will pay to the debtor all costs, expenses, damages occasioned by the proceedings and attorney's fees.
Section 106. Order to Individual Debtor to Show Cause.
Upon the filing of such creditors' petition, the court shall issue an Order requiring the individual debtor to show cause, at a time and place to be fixed by the said court, why he should not be adjudged an insolvent. Upon good cause shown, the court may issue an Order forbidding the individual debtor from making payments of any of his debts, and transferring any property belonging to him. However, nothing contained herein shall affect or impair the rights of a secured creditor to enforce his lien in accordance with its terms.
Section 107. Default.
If the individual debtor shall default or if, after trial, the issues are found in favor of the petitioning creditors the court shall issue the Liquidation Order mentioned in Section 112 hereof.
Section 108. Absent Individual Debtor.
In all cases where the individual debtor resides out of the Republic of the Philippines; or has departed therefrom; or cannot, after due diligence, be found therein; or conceals himself to avoid service of the Order to show cause, or any other preliminary process or orders in the matter, then the petitioning creditors, upon submitting the affidavits requisite to procedure an Order of publication, and presenting a bond in double the amount of the aggregate sum of their claims against the individual debtor, shall be entitled to an Order of the court directing the sheriff of the province or city in which the matter is pending to take into his custody a sufficient amount of property of the individual debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings. Upon receiving such Order of the court to take into custody of the property of the individual debtor, it shall be the duty of the sheriff to take possession of the property and effects of the individual debtor, not exempt from execution, to an extent sufficient to cover the amount provided for and to prepare within three (3) days from the time of taking such possession, a complete inventory of all the property so taken, and to return it to the court as soon as completed. The time for taking the inventory and making return thereof may be extended for good cause shown to the court. The sheriff shall also prepare a schedule of the names and residences of the creditors, and the amount due each, from the books of the debtor, or from such other papers or data of the individual debtor available as may come to his possession, and shall file such schedule or list of creditors and inventory with the clerk of court.
Section 109. All Property Taken to be Held for All Creditors; Appeal Bonds; Exemptions to Sureties.
In all cases where property is taken into custody by the sheriff, if it does not embrace all the property and effects of the debtor not exempt from execution, any other creditor or creditors of the individual debtor, upon giving bond to be approved by the court in double the amount of their claims, singly or jointly, shall be entitled to similar orders and to like action, by the sheriff; until all claims be provided for, if there be sufficient property or effects. All property taken into custody by the sheriff by virtue of the giving of any such bonds shall be held by him for the benefit of all creditors of the individual debtor whose claims shall be duly proved as provided in this Act. The bonds provided for in this section and the preceding section to procure the order for custody of the property and effects of the individual debtor shall be conditioned that if, upon final hearing of the petition in insolvency, the court shall find in favor of the petitioners, such bonds and all of them shall be void; if the decision be in favor of the individual debtor, the proceedings shall be dismissed, and the individual debtor, his heirs, administrators, executors or assigns shall be entitled to recover such sum of money as shall be sufficient to cover the damages sustained by him, not to exceed the amount of the respective bonds. Such damages shall be fixed and allowed by the court. If either the petitioners or the debtor shall appeal from the decision of the court, upon final hearing of the petition, the appellant shall be required to give bond to the successful party in a sum double the amount of the value of the property in controversy, and for the costs of the proceedings.
Any person interested in the estate may take exception to the sufficiency of the sureties on such bond or bonds. When excepted to the petitioner's sureties, upon notice to the person excepting of not less than two (2) nor more than five (5) days, must justify as to their sufficiency; and upon failure to justify, or of others in their place fail to justify at the time and place appointed the judge shall issue an Order vacating the order to take the property of the individual debtor into the custody of the sheriff, or denying the appeal, as the case may be.
Section 110. Sale Under Execution.
If, in any case, proper affidavits and bonds are presented to the court or a judge thereof, asking for and obtaining an Order of publication and an Order for the custody of the property of the individual debtor and thereafter the petitioners shall make it appear satisfactorily to the court or a judge thereof that the interest of the parties to the proceedings will be subserved by a sale thereof, the court may order such property to be sold in the same manner as property is sold under execution, the proceeds to de deposited in the court to abide by the result of the proceedings.
The similarities and distinctions between voluntary and involuntary liquidation of an individual debtor are as follows:
Involuntary Liquidation of Individual Debtors distinguished from Involuntary Liquidation of Business Organizations.
10. Liquidation Process.
This is the proceeding where claims are filed and the assets of the insolvent debtor are disposed of and the proceeds are divided among the creditors.
These rules apply to individual debtors, sole proprietorships, partnerships and corporations.
The rules below apply to original liquidation proceedings and proceedings that are originally rehabilitation proceedings but converted into liquidation proceedings.
(A) The Liquidation Order.
Section 112. Liquidation Order.
The Liquidation Order shall:
declare the debtor insolvent;
order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution;
order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks;
direct payments of any claims and conveyance of any property due the debtor to the liquidator;
prohibit payments by the debtor and the transfer of any property by the debtor;
direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;
authorize the payment of administrative expenses as they become due;
state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and
set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication.
Section 113. Effects of the Liquidation Order.
Upon the issuance of the Liquidation Order:
the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;
legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court;
all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees;
no separate action for the collection of an unsecured claim shall be allowed. Such actions already pending will be transferred to the Liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executor judgment therein for a claim against the debtor shall be filed and allowed in court; and
no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.
Section 114. Rights of Secured Creditors.
The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may:
waive his right under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or
maintain his rights under the security or lien:
If the secured creditor maintains his rights under the security or lien:
the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance. If its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtor's right of redemption upon receiving the excess from the creditor;
the liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds of the sale; or
the secure creditor may enforce the lien or foreclose on the property pursuant to applicable laws.
(B) The Liquidator.
Section 115. Election of Liquidator.
Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless:
he waives his security or lien; or
has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim.
The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of amount of claims, ad who is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator.
Section 116. Court-Appointed Liquidator.
The court may appoint the liquidator if:
on the date set for the election of the liquidator, the creditors do not attend;
the creditors who attend, fail or refuse to elect a liquidator;
after being elected, the liquidator fails to qualify; or
a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the court may instead set another hearing of the election of the liquidator.
Provided further, That nothing in this section shall be construed to prevent a rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, from being appointed as a liquidator.
Section 117. Oath and Bond of the Liquidator.
Prior to entering upon his powers, duties and responsibilities, the liquidator shall take an oath and file a bond, In such amount to be fixed by the court, conditioned upon the proper and faithful discharge of his powers, duties and responsibilities.
Section 118. Qualifications of the Liquidator.
The liquidator shall have the qualifications enumerated in Section 29 hereof. He may be removed at any time by the court for cause, either motu propio or upon motion of any creditor entitled to vote for the election of the liquidator.
Section 119. Powers, Duties and Responsibilities of the Liquidator.
The liquidator shall be deemed an officer of the court with the principal duly of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and discharging to the extent possible all the claims against the debtor. The powers, duties and responsibilities of the liquidator shall include, but not limited to:
to sue and recover all the assets, debts and claims, belonging or due to the debtor;
to take possession of all the property of the debtor except property exempt by law from execution;
to sell, with the approval of the court, any property of the debtor which has come into his possession or control;
to redeem all mortgages and pledges, and so satisfy any judgement which may be an encumbrance on any property sold by him;
to settle all accounts between the debtor and his creditors, subject to the approval of the court;
to recover any property or its value, fraudulently conveyed by the debtor;
to recommend to the court the creation of a creditors' committee which will assist him in the discharge of the functions and which shall have powers as the court deems just, reasonable and necessary; and
upon approval of the court, to engage such professional as may be necessary and reasonable to assist him in the discharge of his duties.
In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall have the right and duty to take all reasonable steps to manage and dispose of the debtor's assets with a view towards maximizing the proceedings therefrom, to pay creditors and stockholders, and to terminate the debtor's legal existence. Other duties of the liquidator in accordance with this section may be established by procedural rules.
A liquidator shall be subject to removal pursuant to procedures for removing a rehabilitation receiver.
Section 120. Compensation of the Liquidator.
The liquidator and the persons and entities engaged or employed by him to assist in the discharge of his powers and duties shall be entitled to such reasonable compensation as may determined by the liquidation court, which shall not exceed the maximum amount as may be prescribed by the Supreme Court.
Section 121. Reporting Requirements.
The liquidator shall make and keep a record of all moneys received and all disbursements mad by him or under his authority as liquidator. He shall render a quarterly report thereof to the court , which report shall be made available to all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final report at the end of the liquidation proceedings.
Section 122. Discharge of Liquidator. - In preparation for the final settlement of all the claims against the debtor , the liquidator will notify all the creditors, either by publication in a newspaper of general circulation or such other mode as the court may direct or allow, that will apply with the court for the settlement of his account and his discharge from liability as liquidator. The liquidator will file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator.
(C) Determination of Claims
Section 123. Registry of Claims.
Within twenty (20) days from his assumption into office the liquidator shall prepare a preliminary registry of claims of secured and unsecured creditors. Secured creditors who have waived their security or lien, or have fixed the value of the property subject of their security or lien by agreement with the liquidator and is admitted as a creditor for the balance , shall be considered as unsecured creditors. The liquidator shall make the registry available for public inspection and provide publication notice to creditors, individual debtors owner/s of the sole proprietorship-debtor, the partners of the partnership-debtor and shareholders or members of the corporation-debtor, on where and when they may inspect it. All claims must be duly proven before being paid.
Section 124. Right of Set-off.
If the debtor and creditor are mutually debtor and creditor of each other one debt shall be set off against the other, and only the balance, if any shall be allowed in the liquidation proceedings.
Section 125. - Opposition or Challenge to Claims.
Within thirty (30) days from the expiration of the period for filing of applications for recognition of claims, creditors, individual debtors, owner/s of the sole proprietorship-debtor, partners of the partnership-debtor and shareholders or members of the corporation -debtor and other interested parties may submit a challenge to claim or claims to the court, serving a certified copy on the liquidator and the creditor holding the challenged claim. Upon the expiration of the (30) day period, the rehabilitation receiver shall submit to the court the registry of claims containing the undisputed claims that have not been subject to challenge. Such claims shall become final upon the filling of the register and may be subsequently set aside only on grounds or fraud, accident, mistake or inexcusable neglect.
Section 126. Submission of Disputed to the Court.
The liquidator shall resolve disputed claims and submit his findings thereon to the court for final approval. The liquidator may disallow claims.
10.01. Liquidation Order.
The Court that has jurisdiction over the liquidation proceedings shall, in proper cases, issue a Liquidation Order which includes, among other matters:
Declaring that the debtor is insolvent;
Ordering the liquidation of the debtor;
In case of juridical person, declaring it as dissolved;
Prohibiting payments and/or transfer of property by the debtor; and
Directing all claims to be filed with the liquidator.
The contents of the Liquidation Order are provided for in Section 112 of FRIA quoted above.
10.02. Effects of Liquidation Order.
Section 113 of FRIA provides the following effects of the Liquidation Order:
The juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;
Legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator pending his election, or appointment, with the court;
All contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within 90 days from the date of his assumption of office, declares otherwise and the contracting party agrees;
No separate action for the collection of an unsecured claim shall be allowed. (Actions already pending will be transferred to the Liquidator for him to accept and settle or contest).
No foreclosure proceeding shall be allowed for a period of 180 days.
With respect to partnerships, however, the rule is that the dissolution of the partnership does not by itself discharge existing liability of any partner.
It should be recalled that all partners, including industrial partners, shall be liable pro rata with all their property and after all partnership assets have been exhausted.
Hence, even if partnership assets have already been liquidated, the partners are still liable for the unpaid obligation.
10.03. Rights of Secured Creditors.
Section 114 of FRIA expresses the rule that the Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law.
A secured creditor may:
Waive his right under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or
Maintain his rights under the security or lien.
If the secured creditor maintains his rights under the security or lien:
The value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance. If its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtor's right of redemption upon receiving the excess from the creditor;
The liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds of the sale; or
The secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.
Section 59 of Rule 2 of the Financial Rehabilitation Rules of Procedure (2013) expressly provides for non-diminution of secured creditors' rights.
Although there is a Suspension or Stay Order, the court, upon motion may allow a secured creditor to enforce his security or lien, or foreclose upon the property of the debtor securing his/its claim, if the property is not necessary for the rehabilitation of the debtor.
The secured creditor and/or other lien holders shall be admitted to the rehabilitation proceedings only for the balance, if any, of his claim.
Similarly, Section 4 of Rule 4 of Financial Liquidation and Suspension of Payment Rules of Procedure for Insolvent Debtors (2015) or A.M. No. 15-04-06-SC dated April 21, 2015 provides that "the Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law, unless he waives his right."
Rule 4 of the Financial Liquidation and Suspension of Payment Rules of Procedure for Insolvent Debtors (2015) provide:
SECTION 4. Rights of Secured Creditors.
The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law, unless he waives his right.
SECTION 5. Duty of Secured Creditors.
At any time prior to the election of the liquidator, a secured creditor shall manifest in writing to the court whether he is:
waiving his right under the security or lien in accordance with Section 6 of this Rule; or
maintaining his right under the security or lien.
If a secured creditor fails to file such a manifestation, he shall be deemed to have opted to maintain his right under the security or lien.
SECTION 6. Waiver of Security or Lien.
A secured creditor shall not be deemed to have waived his right under the security or lien unless the waiver is made in a public document, in unequivocal language, and with full knowledge of the consequences of his action. If a secured creditor waives his right, he shall be entitled to participate in the liquidation proceedings as an unsecured creditor.
SECTION 7. When a Secured Creditor Maintains His Security or Lien.
If a secured creditor elects to enforce or maintain his right under the security or lien, at his option:
the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator, and approved by the court.
When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as an unsecured creditor for the balance. If the value of the property exceeds the claim secured, the liquidator may convey the property to the secured creditor and waive the debtor's right of redemption upon receiving the excess from the creditor. In any case, any other creditor or interested party may, upon a prima facie showing that the valuation is too low, contest the valuation and propose another mode by which to dispose of the property, or to otherwise convert it to cash or its equivalent, to ensure that the true maximum value of the property under the circumstances is obtained. A dissenting creditor or any other creditor or interested party may also offer to purchase the property at the price it is valued by the secured creditor and the liquidator, as approved by the court. At all times, it shall be the duty of the court to ensure that the property is valued at its maximum under the circumstances. In case there is conflict on the valuation of the property, the court may appoint an independent third party appraiser to assist in determining the proper valuation of the property;
the liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds of the sale. The sale shall be made under such terms and conditions as the liquidator and the secured creditor may agree upon, as approved by the court, provided, that the costs of the sale, if any, shall be for the account of the secured creditor; or
the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.
11. Distribution of Assets.
The assets of the insolvent debtor shall be divided among the creditors in accordance with the Liquidation Plan submitted by the Liquidator and approved by the Court.
The rules on concurrence and preference of credits under the New Civil Code and other relevant laws shall be observed in the Liquidation Plan.
These rules are discussed in the previous Chapter of this work.
12. Cross-Border Insolvency.
The FRIA adopted the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development as part thereof. (UN-ITD)
If there is a rehabilitation proceeding filed by a foreign entity in another jurisdiction, a petition may be filed by the latter's representative and the court may issue orders:
Suspending any action to enforce claims against the entity or otherwise seize or foreclose on property of the foreign entity located in the Philippines;
Requiring the surrender of property of the foreign entity to the foreign representative; or
Providing other necessary relief.
In determining whether to grant relief to a foreign entity, the court shall consider:
The protection of creditors in the Philippines and the inconvenience in pursuing their claim in a foreign proceeding;
The just treatment of all creditors through resort to a unified insolvency or rehabilitation proceedings;
Whether other jurisdictions have given recognition to the foreign proceeding;
The extent that the foreign proceeding recognizes the rights of creditors and other interested parties in a manner substantially in accordance with the manner prescribed in the FRIA; and
The extent that the foreign proceeding has recognized and shown deference to proceedings under the FRIA and previous legislation.
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