FRIA Law

Financial 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.

Requirements:

1. In Rem, binding to the whole world

2. Jurisdiction over all persons involved shall be acquired through publication of the
Notice of Commencement in a newspaper of General Circulation
3. Summary and non-adversarial
a. Less Court hearing
b. Judge will check completeness of documents
c. Approve FRIA

Purpose:

1. Encourage debtors and creditors to collectively and realistically resolve and adjust
competing claims and property rights through Rehabilitation
2. If not feasible, to facilitate speedy and orderly liquidation of debtor's assets and the
settlement of their obligations when they fall due

Actors:

1. Debtor (Individual)
a. Sole Proprietor duly registered with Department of Trade and Industry
b. Partnership duly registered with Security and Exchange Commission
c. Corporation duly organized and existing under Philippine Law
d. An individual debtor who has become insolvent
2. Group of Debtors

A. Corporation that are financially related to one another as Parent Corporations,

subsidiaries, or affiliates

B. Partnership that are owned more than Fifty Percent (50%) by the same person
C. 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 group
of debtors.

Excluded Debtors:

1. Banks – covered by BSP

2. Insurance Companies – Insurance Commission
3. Pre-need Companies – Insurance Commission
4. National and Local Government Agencies and units

*To Avail FRIA – Insolvent

Shall refer to financial condition of a debtor that is generally:

1. Unable to pay its liabilities as they fall due in the ordinary cause of business
2. Has liabilities that are greater than its assets.

Claim – Shall refer 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.

Creditor - Natural or juridical person which has a claim against the debtor that arose on or
before commencement date which can either be secured or unsecured.

Secured – Those whose claims are secured by a lien which entitles a creditor to resort the
property subject of a lien for the payment of his claim. (ex. Loan secured by mortgage)

Unsecured – Neither secured nor preferred

Proceedings under the FRIA

1. Financial Rehabilitation
a. Voluntary – initiated by the debtor
b. Involuntary – initiated by creditor
2. Liquidation
a. Voluntary
b. Involuntary
3. Suspension of Payments

Suspension of Payments

Features:
 1. Possesses sufficient property to cover all his debts but foreseeing the impossibility
of meeting them when they respectively fall due;
2. Purpose is to suspend or delay payment of debts
3. The amount of indebtedness is not affected (Not reduced or discharged)
4. It is immaterial how many creditors
5. Filipino Residents not applicable to foreigners or Filipinos living abroad
6. RTC where debtor resides

Requisites:

1. Calling the creditors to a meeting to propose on a schedule of payments

2. Prevent debtor from making any payment outside the necessary or legitimate
expenses of the business
Ex. Buying personal car (Not intended for business purposes)
3. Issuance of a Suspension order to prevent pending executions against the debtor

Note: Suspension of Payments only apply to individual debtor

Suspension Order

1. Upon motion filed by the individual debtor, the court may issue an order suspending
any pending execution against the individual debtor
2. No creditor shall sue or institute proceedings to collect his claim from the debtor
from the filing of the petition for Suspension of Payments and for as long as
proceedings remain pending except:
a. 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
sixty (60) days immediately prior to the filing of the petition
b. Secured Creditors (Real estate mortgages)
3. Will only last for 3 months, need to come up with a compromise agreement with
your creditors approved by Court.

Prohibited Acts of the Debtor

After filing and during pendency, the debtor cannot:

 1. Sell, transfer, encumber or dispose of in any manner his property, except those
used in ordinary operations of commerce or industry in which the petitioning
individual is engaged.
2. Making any payments outside of the necessary or legitimate expenses of his
business or industry.

Creditor's Meeting

The debtor shall attach to his petition a proposed agreement with creditors, which shall be
approved in a creditor's meeting:

1. Quorum – Presence of creditors holding at least 60% of the liabilities of the debtor
2. Approval – Double Majority is required:
a. 2/3 of the creditors voiding
b. Claim of the majority vote amount to at least 60% of the total liabilities

Financial 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.

Types of Rehabilitation:

1. Court Supervised Rehabilitation

A. Voluntary – Initiated by the debtor upon showing that

1. Debtor is insolvent
2. Viability of Rehabilitation
3. Who will fie?
a. Sole Proprietor – Owner / Proprietor
b. Partnership – Majority of the Partners
c. Corporation – Majority of the directors or trustees + 2/3 stockholders /
members
 B. Involuntary – Filed by any creditor or group of creditors with a claim of, or the
aggregated of whose claim is:
a. One Million Pesos or
b. At least 25% of the subscribed capital stock or partner's contribution

Whichever is higher, may initiate involuntary proceedings against the debtor by filing
a petition for Rehabilitation.

When Involuntary Rehabilitation available to Creditors:

1. There is no genuine issue of fact of law on the claims of the petitioner's

2. Due and demandable payments thereon have not been made for at least 60 days
3. Debtor have failed generally to meet its liabilities as they fall due
4. Creditor, other than the Petitioner/s, has initiated foreclosure proceedings against
the debtor that will prevent the debtor from paying its debt as they become due or
will render it insolvent.

Commencement Order / Stay Order

- Upon motion filed by the debtor, the court may issue an order suspending any
pending execution against the individual debtor
- No creditor shall sue or institute proceedings to collect his claim from the debtor
from the filing of the petition for Commencement Order / Stay Order and for as long
as proceedings remain pending except:
o 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
sixty (60) days immediately prior to the filing of the petition
o Secured Creditors
- Issued within 5 days from filing of the Petition

Note: During Rehabilitation and the court sees that rehabilitation is already unfit it can
order immediate liquidation

Court Action

Upon filing of the petition for rehabilitation, the court may:

1. Give due course to the petition if:

 a. Debtor is insolvent
b. There is substantial likelihood for the debtor to be successfully rehabilitated

2. Deny the petition, if any of the following are present:

a. Debtor is not insolvent
b. If the petition is a sham filing intended only to delay enforcement of the rights
of the creditors (Delay Collection)
c. Petition / Rehabilitation Plan / and the attachments are false and misleading
d. Debtor has committed acts of misrepresentation in fraud of creditors

3. Convert to Liquidation

Management of the Business of the Debtor

- During the rehabilitation proceedings, the management of the debtor shall be done
by:
1. Existing board / Management
2. Upon motion, the court may appoint
a. Rehabilitation Receiver
b. Management Committee

Rehabilitation Receiver – Refer to a person or persons, natural or juridical, appointed as

such by the court pursuant to the FRIA and which shall be entrusted with such powers and
duties as set forth within.

Grounds of appointing a Rehabilitation Receiver:

a. Actual or imminent danger or dissipation, loss, wastage or destruction of the

debtor's assets or other properties
b. Paralyzation of the business operations of the debtor; or
c. Gross mismanagement of the debtor or fraud or other wrongful conduct on the part
of, or gross or willful violation of this act bym existing management of the debtor or
the owner, partner, director, officer, or representatives in management of the
debtor
Duties of the Rehabilitation Receiver:

The Rehabilitation Receiver shall be deemed an officer of the Court with the principal duty
of:

1. Preserving and maximizing the value of the assets of the debtor during the
rehabilitation proceedings
2. Determine the viability of the rehabilitation of the debtor
3. Preparing and recommending a rehabilitation plan to the court; and
4. Implementing the approved rehabilitation plan

Qualifications:

1. Citizens of the Philippines

2. Resident of the Philippines in the 6 months immediately preceding the nomination
3. Has the requisite knowledge of insolvency and commercial law
4. No conflict of interest

Management Committee

- When appointed by the court, shall take the place of the management and
governing body of the debtor and assume their rights and responsibilities.

Creditors Committee

Creditors belonging to a class may formally organize a committee or as a body create a

committee composed of each class of creditors such as:

1. Secured Creditors
2. Unsecured Creditors
3. Trade creditors and supplies
4. Employees of the debtor

The role of the creditor's committee is to assist the Rehabilitation Receiver in

communicating with the creditors and shall be the primary liason between the
Rehabilitation Receiver and the Creditors.

They cannot exercise or waive any right or give any consent on behalf of any creditor unless
specifically authorized in writing by such creditor.
Acts of Debtors / Owners / Partners / Directors or Officers which may subject them to
liability

1. Dispose or cause to be disposed 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 debtors or creditors.
2. Conceal or authorize or approve concealment, from creditors, or embezzles or
misappropriates, any property of the debtor.

Rehabilitation Plan

- 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;

1. Debt Forgiveness
2. Debt Rescheduling
3. Reorganization or quasi reorganization
4. Dacion en pago
5. Debt equity conversion
6. Sale of the business (Or parts of it) as a going concern,
7. Setting up of new business entity
8. Other Similar arrangements

Who approves the Rehabilitation Plan?

1. Creditors representing 50% of the total claims

2. The court even without the approval of the creditors or even over the objections of
the creditors, in the following cases:
a. The RP complies with the requirements of FRIA
b. The RP Receiver recommends the confirmation of the RP
c. Shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the RP
d. The RP would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they
would have received if the debtor were under liquidation.

Submission of the Rehabilitation Plan "RP”

If the RP is approved:

1. The Rehabilitation Receiver shall submit the same to the court for confirmation
2. Within 5 days from the receipt of the RP, the court shall notify the creditors that the
RP has been submitted for confirmation
3. Any creditor may obtain copies thereof and may file objections thereto

Object of Creditors

- May be filed within 20 days from the receipt of notice from the court, that the RP has
been submitted for confirmation on the following grounds:
1. The creditors support was induced by fraud
2. Documents or data received upon in the plan are materially false or misleading
3. The plan is in fact not supported by the voting creditors

Confirmation of the RP

The court shall issue an order confirming the RP if:

1. No objections are filed within the relevant period

2. If objections are filed, the court finds lacking in merit
3. The court determines that the basis for the objection has been cured
4. The court determines the debtor complied within an order to cure objection

The court may confirm the RP notwithstanding unresolved disputes over claims if the RP
has made adequate provisions for paying such claims.

Period of Confirmation of the RP

- Must be within 1 year from the date of filing the petition

- If no plan is confirmed within the said period, the proceedings may upon motion, or
motu proprio, be converted into one for the liquidation of the debtor.

Cram Down Effect – A RP approved by the court shall be binding upon:

1. The debtor
2. All persons who may be affected by it, including creditors, whether or not such
persons:
a. Have participated in the proceedings
 b. Oppose to the Plan
c. Whether or not the claim have been scheduled

Suspension of Payments Rehabilitation

Applies to individual Debtors Applies to Business Organization

Debtor has sufficient Assets to Debtor is insolvent

cover its liabilities

Secured debtors are not affected Filed by Creditors or Debtors

Filed by Debtor Filed by Creditors or debtors

No minimum amount of claim One Million Pesos or at least 25% of the

subscribed Capital Stock or Partners
contribution

(Whichever is higher)

Pre-Negotiated (Out of Court Rehabilitation)

Requisites:

1. Debtor must agree to the Out of Court or informal Restructuring agreement or RP

2. Approved by Creditors
a. Representing at least 65% of the secured obligations
b. Representing at least 75% of the unsecured obligations
c. Holding at least 85% of the total liabilities, secured and unsecured

Standstill Period – A standstill period may be agreed upon by the parties pending
negotiation and finalization of the Out of Court or informal Restructuring Agreement or RP
and it shall be effective and enforceable not only against the contracting parties but also
against the creditors if:

1. The agreement is approved by the creditors representing more than 50% of the total
liabilities of the debtor
2. Notice is published in a newspaper of general circulation for 2 consecutive weeks
3. The standstill period does not exceed 120 days from the date of effectivity.
Liquidation – A proceeding where the asset of the insolvent debtor is disposed of and the
proceeds are divided among the creditors who has filed their claims:

- Filed in RTC which has jurisdiction over its principal office as specified in its articles
of incorporation or partnership
- May be voluntary (Filed by a Debtor)
- Involuntary (Filed by a Creditor)
- For individual debtors, liquidation procee
- dings may be filed when liabilities exceed assets, and the total debt exceed 500
thousand Pesos

Suspension of Payments VS Liquidation

Applies to Individual Debtors Debtor already insolvent

Debtor has sufficient Assets to cover Obligations are discharged

its liabilities

Secured Debtors are not affected Also applies to business

organization

Filed by Debtor May be filed by Creditor

No Minimum amount of claim Debt must at least be 500

Thousand

Rules on concurrence and preference of Applicable

credits do not apply

Voluntary Liquidation (Filed by the debtor)

- 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:
o Schedule of the debtor's debts and liabilities including a list of creditors with
their addresses, amounts of claims and collateral, or securities, if any;
o An inventory of all its assets including receivables and claim against third
parties
o The names of at least (3) nominees to the position of liquidator
Involuntary Liquidation (Filed by the Creditors)

- Three or more creditors

- The aggregate of whose claims is at least either
o 1 million Pesos or
o 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.

Voluntary Involuntary

- Debtor must be insolvent - Debtor must be insolvent

- The amount of debt is 500 thousand - The amount of Debt must be at
least 1M
- Debtor need not prove acts to - The creditors must first prove
Initiate liquidation acts of insolvency

- Debtor files the petition - Creditors initiate the action.

Petition may be done even if the

debtor is absent

- Creditors are not required to post Creditors are required to post a

bond bond
- Liquidation order shall be issued without - Liquidation orders shall be
trial issued after a trial
- Number of creditors is immaterial - Must be at least 3 or more
creditors whose claim is at least
1M or 25% of the subscribed
capital stock or partner's
contribution, whichever is higher
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 liquidate proceedings.

1. If a petition is rehabilitation is filed but there is no substantial likelihood for the

debtor to be successfully rehabilitated.
2. If no rehabilitation plan is confirmed within a period of 1 year from the filing of
rehabilitation
3. Failure of rehabilitation or dismissal of the petition for rehabilitation on technical
grounds
4. Upon filing of the verified motion of the debtor during the pendency of the court
supervised or pre negotiated rehabilitation proceedings.