FRIA NOTES SABH USL 2021

RA 10142: Financial Rehabilitation and Insolvency Act (FRIA) of 2010

Before proceeding: Please read the note at the end of this handout.

The Purpose and Scope of the FRIA Law

To encourage debtors, both juridical and natural persons, and their creditors to collectively and
realistically resolve and adjust competing claims and property rights, Republic Act No. 10142, or

Basically, FRIA is a law which governs the rehabilitation or liquidation of debtors, may it be a sole
proprietorship, partnership, corporation or an individual debtor. It guarantees a timely, fair,
transparent, effective and efficient rehabilitation or liquidation of debtors.
Under this law, rehabilitation refers to the restoration of the debtor to a condition of successful
operation and solvency. When rehabilitation is not feasible, it is in the interest of the State to

obligations. On the other hand, liquidation is a process by which assets are converted to cash.
The proceedings involved under FRIA are considered as in rem, which means that it binds the
whole world. 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.

The definition of a debtor is important to be able to determine if the parties may avail of the
proceedings provided by FRIA. The term debtor covers 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.
However, the term debtor does not include banks, insurance companies, pre-need companies,
and national and local government agencies or units.
Rehabilitation under the FRIA Law
Rehabilitation refers to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its 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.
There are three types of rehabilitation, namely:
1. Court-supervised rehabilitation
2. Pre-negotiated rehabilitation; and
3. Out-of-court/Formal Restructuring

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A. Court-Supervised Rehabilitation
Court-supervised rehabilitation may be initiated through voluntary proceedings or involuntary
proceedings.
Voluntary Proceedings
Voluntary Proceedings may be initiated by an insolvent debtor through filing a petition for
rehabilitation with the court and on the grounds provided under the FRIA.
The filing of the petition for rehabilitation must be approved by the owner in case of a sole
proprietorship, or by a majority of the partners in case of a partnership, or in case of a
corporation, by a majority vote of the board of directors or trustees and authorized by the vote
of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in
case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a

A group of debtors may jointly file a petition for rehabilitation when one or more of its members
foresee the impossibility of meeting debts when they respectively fall due, and the financial
distress would likely adversely affect the financial condition and/or operations of the other
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.
Rehabilitation Plan shall refer to a plan by which the financial well-being and viability of an
insolvent debtor can be restored using various means including, but not limited to, debt
forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-
equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of new
business entity, or other similar arrangements as may be approved by the court or creditors.
Involuntary Proceedings
Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least
One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed

against the debtor by filing a petition for rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due
and demandable payments thereon have not been made for at least sixty (60) days or that the
debtor has failed generally to meet its liabilities as they fall due; or
(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the
debtor that will prevent the debtor from paying its debts as they become due or will render it
insolvent.

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B. Pre-negotiated Rehabilitation
The second way of rehabilitation is the pre-negotiated. Under this preceding, 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.
C. Out-of-court or Informal Restructuring Agreements or Rehabilitation Plans
For an out-of-court or informal restructuring/workout agreement or Rehabilitation Plan to
qualify, it must meet the following minimum requirements:
1. The debtor must agree to the out-of-court or informal restructuring/workout agreement
or Rehabilitation Plan;
2. It must be approved by creditors representing at least sixty-seven (67%) of the secured
obligations of the debtor;
3. It must be approved by creditors representing at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and
4. It must be approved by creditors holding at least eighty-five percent (85%) of the total
liabilities, secured and unsecured, of the debtor.
What is a Standstill Period?
A standstill period, which does not exceed one hundred twenty (120) days from the date of
effectivity, is a 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.
The agreement must be approved by creditors representing more than fifty percent (50%) of the
total liabilities of the debtor and notice thereof is published in a newspaper of general circulation
in the Philippines once a week for two (2) consecutive weeks.
The standstill period shall be effective and enforceable not only against the contracting parties
but also against the other creditors.

Who is a rehabilitation receiver and what are his or her qualifications?

A rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed as
such by the court and which shall be entrusted with such powers and duties.

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The rehabilitation receiver shall have the following minimum qualifications:

1. A citizen of the Philippines or a resident of the Philippines in the six (6) months
immediately preceding his nomination;
2. Of good moral character and with acknowledged integrity, impartiality and
independence;
3. Has the requisite knowledge of insolvency and other relevant commercial laws, rules and
procedures, as well as the relevant training and/or experience that may be necessary to
enable him to properly discharge the duties and obligations of a rehabilitation receiver;
and
4. Has no conflict of interest: Provided, That such conflict of interest may be waived,
expressly or impliedly, by a party who may be prejudiced thereby.
What is management committee and its qualifications?
The management committee shall take the place of the management and the governing body of
the debtor and assume their rights and responsibilities.
The qualifications and disqualifications of the members of the management committee shall be
set forth in the procedural rules, taking into consideration the nature of the business of the
debtor and the need to protect the interest of all stakeholders concerned.

Liquidation
Liquidation is the process by which assets are converted to cash. A liquidator is a natural person
or juridical entity appointed as such by the court and entrusted with such powers and duties as
set forth under the FRIA. If the liquidator is a juridical entity, it must designate a natural person
who possesses all the qualifications and none of the disqualifications as its representative, it
being understood that the juridical entity and the representative are solidarity liable for all
obligations and responsibilities of the liquidator.
Liquidation can be voluntary or involuntary.
A. Voluntary Liquidation
In 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:
-
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.

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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.
If the petition or the motion, as the case may be, is sufficient in form and substance, the court
shall issue a Liquidation Order. 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.
B. Involuntary Liquidation
In case of 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 partn
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

proceedings by filing a motion in the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into liquidation proceedings.
In case of an individual debtor, involuntary liquidation takes place when a creditor or group of
creditors with a claim of, or with claims aggregating at least Five hundred thousand pesos
(Php500, 000.00) files a verified petition for liquidation with the court of the province or city in
which the individual debtor resides.

Reference: Nicolas and De Vera Law Offices

Note: This handout is made as if it is actually talking to the reader. Reading it alone will already give
you a better understanding of the concepts, and will be substantiated and explained further in class.
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