SPECIAL TOPICS IN BUSINESS LAW (PROFESSIONAL ELECTIVE

3) FINANCIAL REHABILITATION AND INSOLVENCY

Financial Rehabilitation, Insolvency, Liquidation and
Suspension of Payments
(Republic Act No. 10142, Financial Rehabilitation Rules [A. M. No. 12-12-11-SC], and
Financial Liquidation and Suspension of Payments Rules [A. M. No. 15-04-06-SC])

Debtors under FRIA (FRIA, RA 10142, Sec. 4[k])

1. Partnership duly registered w/SEC;
2. Individual debtor - insolvent;
A natural person, resident & citizen of the PH that has become insolvent (FRIA, RA
10142, Sec. 4[o])
3. Corporation duly organized & existing under PH laws; or
4. Sole Proprietorship registered w/DTI

NOTE: A debtor may file for rehabilitation despite having already defaulted on its
obligations to its creditor. If the petition for rehabilitation is sufficient and the
rehabilitation plan feasible, rehabilitation should proceed. (Metrobank v. Liberty
Corrugated, G.R. No. 184317, 25 Jan. 2017)

Claims
All claims / demands of whatever nature or character against the debtor or its property,
whether for money or otherwise, liquidated (SPECIFIC AMOUNT THAT OBLIGED TO PAY) or
unliquidated (HINDI PA MADETERMINED YUNG AMOUNT), fixed or contingent, matured or
unmatured, disputed or undisputed, including, but not limited to:
a. All claims of the government, whether national or local, including taxes, tariffs and
customs duties; and
b. 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.

This inclusion does not prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities.

Proceedings Covered By FRIA

Debtor Proceeding
Sole Voluntary Rehabilitation (FRIA, Sec.12);
Proprietorship Involuntary Rehabilitation (FRIA, Sec. 13);
Partnership Pre-Negotiated Rehabilitation (FRIA, Sec. 76);
Corporation Voluntary Liquidation (FRIA, Sec. 90);
Involuntary Liquidation (FRIA, Sec. 91)
Individual Debtor Suspension of Payment (FRIA, Sec.94)
Voluntary Liquidation (FRIA, Sec. 103)
Involuntary Liquidation (FRIA, Sec. 105)

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SPECIAL TOPICS IN BUSINESS LAW (PROFESSIONAL ELECTIVE
3) FINANCIAL REHABILITATION AND INSOLVENCY
Rehabilitation
The restoration of 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. (Section 4[gg], FRIA Law)

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 (Wonder Book Corporation v. Phil. Bank of Communications, G.R. No. 187316,
2012)

Insolvent
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. (Section 4[p], FRIA Law)

An individual debtor possesses sufficient property to cover all his debts but foresees the
impossibility of meeting them when they respectively fall due. (FRIA, RA 10142, Sec. 94)

Liquidation
corporations preserve their assets in order to sell them. Without assets, business
operations are effectively discontinued. Liquidation allows the corporation to wind up its
affairs and equitably distribute its assets among its creditors. (Viva Shipping Lines, Inc. v.
Keppel Philippines Mining, Inc., G. R. No. 177382, 17 February 2016)

Suspension of payments – HAHABA YUNG TERM NG PAYMENTS, INTEREST NOT APPLY

The remedies under the law were through a suspension of payment (for a debtor who was
solvent but illiquid) or a discharge from debts and liabilities through the voluntary or
involuntary insolvency proceedings (for a debtor who was insolvent).

The objective of suspension of payments is the deferment of the payment of debts until
such time as the debtor, which possesses sufficient property to cover all its debts, is able to
convert such assets into cash or otherwise acquires the cash necessary to pay its debts.

On the other hand, the objective in insolvency proceedings is "to effect an equitable
distribution of the bankrupt’s properties among his creditors and to benefit the debtor by
discharging him from his liabilities and enabling him to start afresh with the property set
apart for him as exempt." (Metropolitan Bank and Trust Company v. S. F. Naguiat
Enterprises, G. R. No. 178407, 18 March 2015)

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SPECIAL TOPICS IN BUSINESS LAW (PROFESSIONAL ELECTIVE
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MODES OF REHABILITATION

COURT-SUPERVISED REHABILITATION
Voluntary Rehabilitation (debtor-initiated) (FRIA, RA 10142, Sec. 12, RA 10142)
Filed by:
1. If sole proprietorship, owner
2. If partnership, majority of partners
3. If corporation, majority of directors/trustees, authorized by stockholders
representing at least 2/3 of the outstanding capital stock or 2/3 of the
members in non-stock corporations
Ground: Insolvent and may be rehabilitated

A group of debtors may jointly file for rehabilitation (FR Rules, Rule 2, Sec. 1)
1. One or more of its members foresee the impossibility of meeting debts when they
respectively fall due, and
2. 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.

Involuntary Rehabilitation (creditor-initiated) (FRIA, RA 10142, Sec. 13 & 14)

Filed by:
1. Any creditor or group of creditors with a claim of at least P1,000,000; or
2. At least 25% of subscribed capital stock or partners’ contributions, whichever is higher

Ground:
1. creditors’ due & demandable claims have not paid for at least 60 days or debtor failed
generally to meet its liabilities as they fall due; or
2. A creditor, other than the petitioners, has initiated foreclosure proceedings – LOAN
OBLIGATION WITH PROPERTY EX: CHATEL MORTAGAGE against the debtor that will prevent the debtor from
paying its debts as they become due or will render it insolvent

NOTE: creditors must establish that debtor may be rehabilitated.

PRE- NEGOTIATED REHABILITATION

Filed by an insolvent debtor, by itself or jointly with any of its creditors

NOTE: Must be supported by an affidavit showing the written approval/endorsement by:

(a) Creditors holding at least 2/3 of total liabilities of the debtor;
(b) Secured creditors holding more than 50% of total secured claims – COLLATERAL
(c) Unsecured creditors holding more than 50% of total unsecured claims (Sec. 76,
RA 10142) – LOAN ARRANGEMENT W/O MORTGAGE

NOTE: Pre-Negotiated Rehabilitation Plans, when approved by the court, have the same legal
effect as confirmation of a judicially supervised plan. (FRIA, RA 10142, Sec. 82)
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Pre-Negotiated Rehabilitation Petition
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 50% of the total secured claims
of the debtor and unsecured creditors holding more than 50% of the total unsecured claims
of the debtor.

OUT – OF – COURT OR INFORMAL RESTRUCTURING AGREEMENT OR

REHABILITATION PLAN
1. The debtor must agree to the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan;
2. Must be approved by creditors representing at least:
a. 85% of total liabilities, secured & unsecured, of the debtor;
b. 67% of secured obligations of the debtor; and – REAL & PERSONAL PROPERTIES
c. 75% of unsecured obligations of the debtor; (FRIA, RA 10142, Sec. 84) and
3. Publication of notice of OCRA once a week for at least 3 consecutive weeks in a
newspaper of general circulation in the Philippines. (FR Rules, Rule 4, Sec. 1)

COMMENCEMENT ORDER
marks official start of rehabilitation proceedings, includes several key components that
ensure proper legal process & creditor involvement. The important elements are as
follows:
1. Identification of the Debtor: debtor's business, activities, and main office.
2. Grounds for Proceedings: reasons for initiating rehabilitation.
3. Relief Sought: It specifies the relief requested and any particular procedures for
that relief.
4. Legal Effects: It explains the legal consequences of the order.
5. Rehabilitation Declaration: It formally declares the debtor is under rehabilitation.
6. Public Notice: It mandates publication in a general newspaper for two consecutive
weeks.
7. Service to Creditors: If debtor initiates petition, creditors holding 10% of
liabilities must receive the petition within 5 days; if creditors file, the debtor is
served similarly.
8. Appointment of Rehabilitation Receiver: receiver - appointed to oversee process,
potentially from nominees proposed by petitioners.
9. Creditor Claims: Creditors must submit their claims five days before the first
hearing.
10. BIR Involvement: The Bureau of Internal Revenue (BIR) must comment on the
petition and any claims against the debtor.
11. Suppliers' Obligations: Suppliers must continue providing goods/services as long
as payments are made post-order.

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12. Administrative Expenses: Authorization for the payment of necessary
administrative expenses during the process.
13. Initial Hearing: Set within 40 days of the petition to assess the debtor's chance of
rehabilitation.
14. Public Access to Documents: Documents related to the debtor and the proceedings
are available for review.
15. Nomination for Receiver: Creditors or the debtor may nominate a rehabilitation
receiver before the initial hearing.
16. Stay or Suspension: A Stay or Suspension Order is issued, protecting the debtor
from certain actions during the proceedings.

This order ensures transparency, legal protection for creditors, and a structured approach for
the debtor's potential rehabilitation.

Effects of the Commencement Order

1. Grants the rehabilitation receiver powers to review debtor records, subject to court
approval.
2. Nullifies any extrajudicial attempts to seize property / enforce claims against
debtor post-commencement, unless allowed by FRIA.
3. Exempts debtor from taxes, fees, penalties, and charges due to the government. -UPON
ISSUANCE OF COMMENCEMENT ORDER
4. Invalidates any setoff of debts owed to the debtor by creditors after the
commencement date.
5. Voids any liens on the debtor's property after the commencement date.
6. Centralizes all legal proceedings involving the debtor in the court, though some
cases may continue in other courts if initiated by the debtor.

STAY OR SUSPENSION ORDER

Effects (FRIA, RA 10142, Sec. 16[q])
1. Suspend all actions or proceedings, in court or otherwise, for the enforcement of
claims against the debtor;
2. Suspend all actions to enforce any judgment, attachment or other provisional
remedies against the debtor;
3. Prohibit the debtor from selling, encumbrancing, transferring or disposing in any
manner any of its properties (except in the ordinary course of business); and
4. Prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date (except as may be provided in the order)

NOTE: The effects of a Stay Order are immediate, and shall also be retroactive to the date of the
filing of the petition.

The issuance of the Commencement Order and the Suspension or Stay Order, and any other
provision of the Act, shall not in any way diminish or impair the security or lien of a
secured creditor, or the value of his lien or security, except that his right to enforce the
security or lien may be suspended during the term of the Stay Order. The court may
allow the
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enforcement of the security or lien if the property is not necessary for the rehabilitation of
the debtor. (FR Rules, Rule 2, Sec. 59)

Effect of violating Stay or Suspension order

 For the Debtor:
o liable for double the value of the property sold, embezzled, or disposed of or
double the transaction involved (FRIA, RA 10142, Sec. 10)
 For the Creditor
o must ventilate their claims before the rehabilitation court, and any “attempts
to seek legal or other resource against the distressed corporation shall be
sufficient to support a finding of indirect contempt of court.” (Bureau of
Internal Revenue v. Lepanto Ceramics, Inc., G.R. No. 224764, 2017)

REHABILITATION RECEIVER
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 herein. (FRIA,
R.A. 10142, Sec. 4(hh))

Principal Duties of the Rehabilitation Receiver

1. Preserving & maximizing the value of the assets of the debtor during the
proceedings;
2. Determining the viability of the rehabilitation;
3. Preparing & recommending a Rehabilitation Plan to the court; and
4. Implementing approved Rehabilitation Plan (FR Rules, Rule 2, Sec. 26)

NOTE: In contrast liquidator preserving & maximizing value and recovering the assets of
the debtor, with the end in view of liquidating them and discharging to the extent possible
all the claims against the debtor. (FLSP Rules, Rule 4, Sec. 12)

MANAGEMENT COMMITTEE
1. Take custody of and control all assets owned or possessed by the debtor;
2. Take the place of the management and governing body of the debtor; and
3. Assume the powers, rights and responsibilities of the debtor (FR Rules, Rule 2, Sec.
33)

NOTE: A majority of all members shall be necessary for the management committee to act
or make a decision (FR Rules, Rule 2, Sec. 35)

Composition of the Management Committee (FR Rules, Rule 2, Sec. 34)

The management committee shall be composed of three qualified members appointed by the
court, as follows:
1. Nominated by the debtor;

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2. Nominated by the creditor/s holding more than 50% of the total obligations of the
debtor;
3. A chairman nominated by the first and second members within 10 days from the
appointment

NOTE: The management committee may overrule or revoke the actions of the previous
management or governing body of the debtor (FR Rules, Rule 2, Sec. 33)

Powers and Duties of the Management Committee

The management committee, acting as officers of the court, has the following key
responsibilities:
1. Investigation & Oversight – Examine the entity’s financial condition, assets,
liabilities, and management practices.
2. Fact-Finding & Reporting – Report fraud, misconduct, or irregularities to the court.
3. Employment of Experts – Hire necessary professionals (lawyers, accountants,
auditors, etc.) to fulfill its duties.
4. Business Monitoring – Report any adverse changes in the entity’s business
operations.
5. Asset & Liability Evaluation – Assess the entity’s financial position and
recommend solutions for rehabilitation or liquidation.
6. Protection of Interests – Recommend actions to safeguard creditors, stockholders,
and public interest.
7. Transaction Control – Prohibit and report unauthorized property transfers or
payments outside the ordinary course of business.
8. Access & Inspection – Have full access to premises, employees, financial records,
and documents.
9. Legal Actions – Modify or revoke transactions harmful to the entity and
recommend termination of proceedings if necessary.
10. Court Applications – Seek court orders as needed to fulfill its duties.
11. Other Powers – Exercise additional powers as granted by the court.

Immunity from Suit (FR Rules, Rule 2, Sec. 38)

The rehabilitation receiver, the members of the management committee, and all persons they
engage shall not be subject to any action, claim or demand for any act or omission in good
faith in the exercise of their powers and functions.

Rehabilitation plan
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. (FRIA, RA 10142, Sec. 4[ii])

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NOTE: Rehabilitation plan should be genuine and made in good faith. (Philippine Bank of
Communications v. Basic Polyprinters and Packaging Corporation, G.R. No. 187581, 2014)

Key Contents of a Rehabilitation Plan

1. Objectives & Procedures – Define financial goals, assumptions, and the plan's
duration.
2. Liquidation Analysis – Compare creditor recoveries under rehabilitation vs.
liquidation.
3. Creditor Information – Provide sufficient data to help creditors decide if the plan is
in their best interest.
4. Creditor Classification – Establish and define voting creditor classes and subclasses.
5. Rehabilitation Methods – Outline strategies such as debt restructuring, asset sales,
or business reorganization.
6. Treatment of Creditors – Ensure equal treatment within each creditor class unless
agreed otherwise.
7. Payment Schedule – Specify payment amounts, dates, and adherence to legal
priorities.
8. Security & Liabilities – Maintain secured creditors' interests and address post-
rehabilitation claims.
9. Management & Compliance – Identify those responsible for implementation,
management, and adherence to contracts.
10. Tax & Expense Settlements – Arrange payment of taxes, administrative expenses,
and creditor obligations.
11. Reporting & Oversight – Include provisions for monitoring, compliance reporting,
and dispute resolution.
12. Investor Considerations – Provide sufficient details to help investors assess the
plan's feasibility

Test of Economic Feasibility

results of examination & 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.
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. (Land Bank of the Philippines v.
Fastech Synergy Philippines, Inc., G.R. No. 206150, 2017)

Approval of the Rehabilitation Plan

Within 20 days from notice to creditors and stakeholders, the creditors shall be convened
for purposes of voting on the approval of the Rehabilitation Plan. The Plan shall be deemed
rejected unless approved by all classes of creditors. (FRIA, RA 10142, Sec. 64)

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The Plan is deemed to have been approved by a class of creditors if members of the said
class holding more than 50% of the total class vote in favor of the plan (FR Rules, Rule 2,
Sec. 62)

CRAM DOWN EFFECT

Notwithstanding the rejection of the Rehabilitation Plan, the court may, motu proprio or
upon motion of any interested party within ten (10) days from notice of the rejection of the
Rehabilitation Plan, confirm the Plan if all of the following circumstances are present:
1. The Rehabilitation Plan complies with the requirements specified in the FRIA and
the FR
1. Rules;
2. The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
3. The shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the Rehabilitation Plan; and
4. The Rehabilitation Plan 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. (FR Rules, Rule 2, Sec. 62)

TYPES OF LIQUIDATION
Voluntary Liquidation – Filed by Juridical Debtors
An insolvent debtor may apply for liquidation by filing a petition for liquidation

Voluntary Liquidation – Filed by Individual Debtors

An individual debtor whose properties are not sufficient to cover his liabilities, and owing
debts exceeding 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
6 months prior to the filing of such petition. (FLSP Rules, Rule 3, Sec. 11)

Involuntary Liquidation – Filed Juridical Debtors

The applicants must be 3 or more creditors whose claim(s) is/are:
1. At least P1,000,000.00; or
2. At least 25% of the subscribed capital stock or partners’ contributions (FLSP Rules,
Rule 2, Sec. 4)

Involuntary Liquidation – Filed by Individual Debtors Party Applicant

Any creditor or group of creditors with a claim of, or with claims aggregating at least
Php500,000.00 may file a verified petition for liquidation with the court of the province or
city in which the individual debtor resides. (FLSP Rules, Rule 3, Sec. 13)

CONVERSION OF REHABILITATION TO LIQUIDATION PROCEEDINGS

At any time during the pendency of or after a rehabilitation court-supervised or pre-
negotiated rehabilitation proceedings, creditors may compel a debtor who is undergoing
rehabilitation to liquidate instead.

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The applicants must be made up of 3 or more creditors whose claim(s) is/are:
1. At least P1,000,000; or
2. At least 25% of the subscribed capital stock or partners’ contributions

LIQUIDATION ORDER
Effects of a Liquidation Order
1. Dissolution of the Debtor – juridical entity ceases to exist.
2. Transfer of Assets – Legal title & control of assets transfer to the liquidator or the
court until a liquidator is appointed.
3. Termination of Contracts – All contracts are considered breached unless the
liquidator reinstates them within 90 days with the other party’s consent.
4. Claims Settlement – Separate collection actions for unsecured claims are prohibited;
pending cases are transferred to the liquidator. Contested claims are resolved by the
court unless under appeal.
5. Foreclosure Suspension – Foreclosure proceedings are halted for 180 days.

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. (FLSP Rules,
Rule 4, Sec. 4)

Options available to a secured creditor

a. 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
b. Maintain his rights under the security or lien.

LIQUIDATOR
natural person/juridical entity appointed by court & entrusted with such powers and
duties.

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. (FLSP Rules, Rule 4, Sec. 8)

Powers, Duties, and Responsibilities of a Liquidator

1. Asset Recovery – Sue & recover assets, debts, claims owed to the debtor.
2. Possession & Sale of Property – Take control of debtor’s assets and, with court
approval, sell them.
3. Debt & Judgment Settlement – Redeem mortgages, satisfy judgments, and settle
creditor accounts.
4. Fraud Recovery – Retrieve fraudulently transferred property.
5. Creditor Committee – Recommend forming a committee to assist in liquidation.
6. Professional Engagement – Hire experts as needed with court approval.

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7. Maximization of Proceeds – Manage and dispose of assets efficiently to pay
creditors and stockholders.
8. Termination of Entity – Ensure the debtor’s legal existence is properly closed.

DETERMINATION OF CLAIMS
Within 20 days of assuming office, the liquidator must:
1. Prepare a Preliminary Registry – List claims of both secured and unsecured
creditors.
2. Reclassify Certain Secured Creditors – Creditors who waive their security or fix
the property’s value by agreement become unsecured creditors for any remaining
balance.
3. Public Notice & Inspection – Make the registry publicly accessible and notify
creditors, debtors, and stakeholders on when and where to inspect it.
4. Proof of Claims – All claims must be duly proven before any payments are made.

LIQUIDATION OF PLAN
Within 3 months from his assumption into office, the Liquidator shall submit a Liquidation
Plan to the court. The Liquidation Plan shall, as a minimum enumerate all the assets of the
debtor and a schedule of liquidation of the assets and payment of the claims. (FLSP Rules,
Rule 4, Sec. 23)

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