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LIQUIDATION IN INSOLVENCY


A. GENERAL CONCEPTS
Insolvency proceedings: the statutory procedures by which a debtor obtains financial relief and
undergoes judicially supervised reorganization or liquidation of its assets for the benefit of creditors
-FRIA is the special law that governs insolvency proceedings
3 types:
a. suspension of payments
b. rehabilitation
c. liquidation

Liquidation:
A judicial insolvency proceeding
assets of an insolvent debtor are recovered and their value preserved and maximized for the purpose of
converting the same into money and discharging (to the extent possible) all the claims v. the insolvent
debtor
Insolvency proceeding in rem- binding v. whole world-All interested persons and all persons that have
an interest in the matter are equally bound
diametrically opposed to Rehabilitation proceedings (both cannot be undertaken at the same time!)

Rehabilitation: FRIA, sec 4: 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 creditor can recover
by way of presented value of payment projected in the plan, more than if the debtor continues as a going
concern than if it is immediately liquidated
a. economic feasibility
b. present value recovery
if the conditions DO NOT CONCUR proper course is liquidation

LIQUIDATION MAY APPLY TO DEBTORS:
1. insolvent individual debtor: natural person who is a resident and citizen of the Philippines that has
become insolvent (balance sheet concept)
2. insolvent juridical debtor: (balance sheet AND illiquidity concept) not defined in FRIA but by
exclusion-
sole proprietorship duly registered with DTI
partnership duly registered with SEC
corporation duly organized and existing under Phil. Laws


B. LIQUIDATION OF INSOLVENT INDIVIDUAL DEBTOR: Voluntary and involuntary

1. voluntary liquidation of insolvent individual debtor: judicial insolvency proceeding instituted by a
debtor that is insolvent
Insolvency: must be insolvent in the BALANCE SHEET CONCEPT (assets of the individual debtor are
insufficient to cover his liabilities vs. juridical balance sheet and illiquidity)
Must be concurrence of insolvency and value requirement! Balance sheet concept AND owing debts
exceeding 500k
Purpose: individual debtor to seek a discharge from his debts and liabilities thus freeing the debtor of legal
responsibility from certain specified obligations
Value requirement: more than 500k on the debts of the individual debtor (does not define debts- so maybe
claims?)
Act of insolvency: insolvent debtor files a petition for voluntary insolvency. He shall attach to his petition a:
a. schedule of debts and liabilities and
b. an inventory of assets.
Liquidation order: if court finds petition sufficient in form and substance will issue an Liquidation order
within 5 working days

2. involuntary liquidation of insolvent individual debtor: judicial insolvency proceeding instituted by a
creditor or group of creditors against an insolvent debtor a file a verified petition that alleges an act of
insolvency and meets the value requirement
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Value requirement: any creditor or group of creditors with claims aggregating at least 500k (without
regard to the # of creditors who file)
Acts of insolvency: must be alleged- sufficient to allege only one.
Acts (generally): establish the intent or purpose of the act was to delay liquidation or defraud creditors
Ex: about to depart/departed from Philippines, absent from Phil, conceals himself to avoid service of legal
process or delay, conceals or removs property, assignment/gift/sale/conveyance or transfer of his
estate/property
Exception: 3 instances when intent or purpose irrelevant
1. debtor who is a merchant or tradesman has generally defaulted in the payment of current obligations
for a period of 30 days
2. debtor has failed for a period of 30 days, demand, after demand failed to pay money deposited with him
or received by him in a fiduciary capacity
3. debtor shall be without sufficient property to satisfy an execution issued against him on a final
judgment for money

SHOW CAUSE ORDER/INJUNCTION/DEFAULT
Sec. 106: order to individual debtor to show cause
1. upon filing of the creditors petition
2. court shall issue an order requiring the indiv debtor to show cause why he should not be adjudged an
insolvent if GOOD CAUSE SHOWN court may issue an INJUNCTION ORDER- forbidding the
individual debtor from making payment on any of his debts and transferring property belonging to him
3. IF NO GOOD CAUSE SHOWN: issue Liquidation order (creditors ask for this)
4. However, nothing shall affect or impair the rights of the SECURED CREDITOR to enforce his lien in
accordance with its terms

ABSENT INDIVIDUAL DEBTOR
Sec. 108: absent individual debtor (resides out of the Phil, departed, cannot be found, concealed, etc)
1. petitioning creditors submit affidavits requisite to procure an order of publication and
2. present bond double in amt of agg. Sum of claims
3. Court will issue an order directing sheriff in province to take into custody property to satisfy demands of
petitioning creditors and costs of proceedings
4. Sheriff will receive order, duty to take possession of property (not exempt!)
5. Within 3 days (may be extended for good cause)-Prepare a complete inventory of the property take
6. Return inventory to the court as soon as completed
7. Sheriff shall prepare a schedule of the names and residence of the creditors, the amount due each
(from the books of the debtors, or other papers of debtor of the debtor as may come to his possession
8. File the schedule or list of creditors and inventory with the clerk

INTERIM MEASURES 109 AND 110: taking of property under custody and sale. Creditors must give
bonds. Sheriff holds the property taken in custody for the benefit of creditors and shall abide by the results of
the liquidation proceedings

CUSTODY OF PROPERTY: SALE
Sec. 109: Property to be taken by court/appeal bonds
1. in all cases where property is to be taken into custody by the sheriff- it will be held by him for benefit of
all creditors (must post bonds to procure order for custody of property and effects)
2. final hearing
if insolvent? Bonds void
if not insolvent? Proceedings dismissed nad debtor entitled to damages not to exceed amt covered by
bond

C. LIQUIDAITON OF INSOLVENT JURIDICAL DEBTORS
1. voluntary liquidation of insolvent juridical debtors
judicial insolvency proceedings instituted by juridical debtor that is insolvent
insolvent: (compare to individual- balance sheet concept) either
a. balance sheet concept (assets are insufficient to cover liabilities) OR
b. illiquidity or equity concept/ is illiquid (possesses sufficient property to cover all its debts but
forseeing the impossibility of meeting them when they respectively fall due)
Purpose: seeking dissolution of its juridical existence
Value requirement? None for voluntary liquidation
Condition: rehabilitation is not economically feasible OR does not result in better present value recovery for
creditors
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How?
1. file a verified petition liquidation with the court: contain schedule of debtors assets and liabilities
including a list of creditors with their addresses, amounts of claims and collaterals or securities if any,
inventory of assets including receivables and claims v 3P, names of at least 3 nominees for liquidator
2. during pendency of court supervised or pre-neg rehab proceedings may initiate liquidation
proceeding by filing a verified motion to convert rehab to liquidation (state seeking immediate
dissolution and termination of corporate existence) if sufficient, court issues LIQUIDATION ORDER

2. involuntary liquidation of insolvent juridical debtors: judicial insolvency proceeding instituted by a
creditor or group of creditors
Who? Requirement of # of creditors AND claims (vs. individual-just value of claims not #)
3 or more creditors AND
with an aggregate of claims of at least 1M or at least 25% of the subscribed capital stock or partners
contributions of the debtor (whichever is higher)
What? Allege ACTS OF INSOLVENCY
a. due and demandable payments on claims of creditors- there being no genuine issue of factor law on the
claims, not paid for at least 180 days, no substantial likelihood that the debtor may be rehabilitated OR
b. debtor failed generally to meet its liabilities as they fall due and no substantial likelihood that the debtor
may be rehabilitated
How?
a. file a petition for liquidation of the debtor with the court alleging the acts of insolvency
b. or during the pendency of court-supervised or pre-negotiated rehabilitation file a verified motion that
shall contain the same acts of insolvency and state that they are seeking the immediate liquidation of
the debtor
c. if PETITION or MOTION sufficient court will issue an Order directing publication in a newspaper of
gen. circulation and direct all creditors (non petitioners) and debtors to file their comments after
last comments filed court determines the petition/motion meritorious issue Liquidation order

D. PROVISIONS COMMON TO LIQUIDATION OF INDIVIDUAL AND JURIDICAL DEBTORS

Who are debtors?
insolvent individual debtor: natural person who is a resident and citizen of the Philippines that has
become insolvent (balance sheet concept)
insolvent juridical debtor: (balance sheet AND illiquidity concept) not defined in FRIA but by exclusion-
sole proprietorship duly registered with DTI
partnership duly registered with SEC
corporation duly organized and existing under Phil. Laws

1. LIQUIDATION ORDER:
Contains a declaration of insolvency (or adjudication of insolvency) that is the trigger event that results
in the application of legal provisions that require the status of insolvency.
Date it is issued = date of liquidation
Sec. 112: shall
1. declare debtor insolvent (vs. commencement order of rehabilitation)
2. order liquidation of debtor (if juridical debtor = declare as dissolved)
3. order sheriff to take possession and control of all property (except those exempt)
4. order publication of the petition or motion in a newspaper of gen. circulation once a week for 2
consecutive weeks
5. direct payment of any claims and conveyance of any property due to the debtor to the LIQUIDATOR
6. prohibit payments to the debtor and transfer of any property to the debtor
7. direct all creditors to file their claims with the LIQUIDATOR
8. authorize payment of admin expenses
9. state that the debtors who are not petitioners may submit their nominees for position of liquidator
10. set the case for the hearing for the election and appointment of the liquidator (date not less than 30
days nor more than 45 days from date of last publication)
Effects of liquidation order: [vs. commencement order = preservative]
1. juridical debtor deemed dissolved, corporate or juridical existence terminated + individual debtor
discharged
2. legal title to and control of all assets (but not exempt) vested on liquidator upon appointment
3. all contracts terminated and/or breached (unless declared otherwise)
4. no separate action for collection of unsecured claim allowed
5. no forclosure proceeding for a period of 180 days!
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2. LIQUIDATOR
a. general concepts
LIQUIDATOR: Sec. 4w- Liquidator shall refer to the natural person or juridical entity appointed as such by
the court and entrusted with such powers and duties as set forth in the Act. He is appointed by
a. election of creditors: creditors who have filed their claims and not barred by statute of limitations (secured
creditor will not be allowed to vote unless he waives his security or fixes the value of the property subject of
the lien with the liquidator and is admitted for the balance of his claim)
b. by appointment of the court: creditors don't attend, fail/refused to elect/liquidator fails to qualify- rehabilitation
receiver may also be appointed!
Files oath an Bond (Sec. 117)
Qualifications (Sec. 118)
Compensation (Sec. 120) reasonable
Discharge of liquidator (Sec. 122)- notify all creditors, apply to court for settlement of account and discharge, final
accounting and proof of notice, hearing, disacharge
b. powers/duties/responsibilities
Sec. 119: liquidator deemed officer of the court, duty of 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
1. within 30 days from assumption of office prepare a PRELIMINARY REGISTRY OF CLAIMS of secured
and unsecured creditors inspection by public/publication all claims proven before paid
2. if there are disputed claims will resolve them and submit finding to court for final approval
3. within 3 months from assumption of office, prepare a LIQUIDATION PLAN and submit to the court
4. sell the unencumbered assets of the debtor and convert the same to money
5. implement the liquidation plan as approved by the court
6. reporting requirements: quarterly reports, reports as required, final report
3. CLAIMS: all claims and demands of whatever nature or character against the debtor or its property
a. determination of claims:
Liquidation order will direct all creditors to file their claims with the liquidator
Registry of claims
Right of set-off
Opposition or challenge to claims (undisputed and disputed claims)
b. treatment of claims
1. secured creditor claims:
a. Upon the issuance of the Liquidation order a secured creditor is subject to the TEMPORARY STAY of
forclosure proceedings for 180 days
b. Liquidation plan shall ensure that the concurrence and preference of credits are observed (unless
preferred creditor waives right)
c. Secured creditor options (during proceedings)
1. waive its security or lien, prove its claim and share in the distribution of the assets of the debtors
(will be admitted as an unsecured creditor)
2. maintain its rights under the security or lien
a. value of property may be fixed in a manner agreed upon by creditor and liquidator
b. liquidator may sell the property and satisfy the creditors entire claim from the proceeds
c. secured creditor may enforce the lien or forclose the property
d. unsecured creditor claims: no separate action for collection of an unsecured lcaim shall be allowed.
Pending actions will be transferred to liquidator.
4. TREATMENT OF CONTRACTS
1. termination or breach of contracts: Sec. 113
General rule: all contracts of debtor shall be deemed terminated or breached
Exception: unless the liquidator within 90 days from the date of his assumption in office, declares otherwise
and the contracting party agrees
2. avoidance proceedings: permits certain transactions to be rescinded or nullified and an asset
transferred pursuant to the transaction or its value to be recovered for the benefit of the creditors
WHAT WILL BE RESCINDED OR NULLFIIED?
1. entered into by the debtor or involves debtors assets
2. prior to issuance of liquidation or prior to commencement date of the rehab proceeding (if
converted to liquidation) and are
3. executed in fraud of creditors or constitutes an undue preference of creditors
4. Generally: all fraudulent conveyances or transfers of property made by debtor with little or no
consideration made for purpose of hindering or delaying creditors or putting funds or assets beyond
reach of crediotrs and
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5. All preferential transfers or transfers made by the insolvent debtor to or for the benefit of a
creditor thereby allowing creditor to receive more than his disproportionate share may be rescinded
or nullified
6. Sec. 58: DISPUTABLE presumptions! Indicia gives rise to DP that the transaction was in fraud of
creditors or was an undue preference
5. LIQUIDATION PLAN
GOAL: Primary goal of the liquidation proceedings/primary role of the liquidator/primary purpose of
liquidation plan
sell the assets of the insolvent debtor
Convert the same into money for payment of creditors

LIQUIDATOR: Sec. 4w- Liquidator shall refer to the natural person or juridical entity appointed as such by
the court and entrusted with such powers and duties as set forth in the Act. He is appointed by
c. election of creditors
d. by appointment of the court

Sec. 129: Within 3 months from his assumption of office, the Liquidator shall submit a LIQUIDATION PLAN
to the court. The liquidation plan shall as a minimum, enumerate:
1. all the assets of the debtor
2. all the claims against the debtor and
3. a schedule of liquidation of the assets and payment of the claims
Sec. 130: EXEMPT PROPERTY TO BE SET APART-
Rules of Court Rule 39(13): lettered gravestones, ordinary tools and implements used by him in his
trade, necessary clothing and articles for daily use
Family Code Art. 155/205: family home and right to support
Sec. 118 of the Public Land Act
It shall be the duty of the court, upon petition and hearing, to exempt and set apart (for the use and benefit of
the insolvent)
a. such real and personal property as is by law exempt from execution and
b. also a homestead
But no such petition shall be heard until it is first proved that NOTICE AND HEARING of the application has
been duly given by the clerk, causing such NOTICE to be posted in atleast 3 public places in the province or
city at least 10 days prior to the time of hearing

Notice shall set forth
a. the name of the insolvent debtor
b. Time and place appointed for the hearing of such application
c. Briefly indicate
the homestead sought to be exempted
Or property sought to be set aside
Decree must show such proof was made to the satisfaction of the court-
And shall be conclusive evidence of fact

Sec. 131 SALE OF ASSETS IN LIQUIDATION
GENERAL RULE: Liquidator may sell the unencumbered assets of the debtor and convert the same to
money, sale shall be made at a public auction

EXCEPTION: A private sale may be allowed with the approval of the court if:
a. the goods to be sold are of a perishable nature, or
are liable to quickly deteriorate in value or
are disproportionately expensive to keep or maintain
b. private sale is for the best interest of the debtor and his creditors

EXCEPTION TO THE EXCEPTION: With the approval of the court, unencumbered property of the debtor
may also be conveyed to a creditor in satisfaction of his claim or part thereof

Sec. 132: MANNER OF IMPLEMENTING THE PLAN
Liquidator shall implement the Liquidation plan as approved by the Court.
Payments shall be made to the creditors only in accordance with the provisions of the plan

Sec. 133: CONCURRENCE AND PREFERENCE OF CREDITS
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General rule: The liquidation plan and its implementation shall ensure that the concurrence and preference
of credits as enumerated in the Civil Code of the Phil. And other relevant laws shall be observed
Exception: unless a preferred creditor voluntarily waives his preferred right

6. TERMINATION OF PROCEEDINGS

Sec. 121 REPORTING REQUIREMENTS
Liquidator shall
a. Quarterly reports (available to all interest parties)
b. Submit reports as may be required by the court from time to time as well as
c. Final report at the end of the liquidation proceedings

Sec. 135 TERMINATION OF PROCEEDINGS for JURIDICAL DEBTORS
Upon receipt of evidence showing that the debtor has been removed from the registry of legal entities
from the SEC
Court shall issue an order terminating the proceedings

TERMINATION OF PROCEEDINGS for INDIVIDUAL DEBTORS
Upon a determination that liquidation has been completed

E. ANCILLARY PROCEEDINGS
1. SECURITIES MARKET PARTICIPANT: broker, dealer, underwriter, transfer agent or other juridical
persons transacting securities in the capital market

Sec. 136: Provisions shall be w/o prejudice to the power of a regulatory agency or self-regulatory
organization to liquidate trade-related claims of clients or customers of a securities market participant which
(for purposes of investor protection) are deemed to have absolute priority over all other claims of whatever
nature or kind in so far as trade related assets are concerned
Trade related assets: include cash, securities, trading right and other assets owned and used by the
securities market participant in the ordinary course of business

Special preferred credit in favor of trade related claims of client upon the trade related assets
(cash/securities/and trading rights) of a securities market participant. This special preferred credit enjoys
absolute priority over all other claims.

Special preferred credit: Listed in Art. 2241 and 2242 NCC/ and now Sec. 136 of FRIA- shall be
considered as mortgages or pledges of real or personal property or liens (2243) and not included in the
insolvent debtors assets.

2. BANKS AND OTHER FINANCIAL INSTITUTIONS UNDER REHAB RECEIVERSHIP PURSUANT TO
A STATE-FUNDED OR STATE-MANDATED INSURANCE SYSTEM

Sec. 137: PROVISION OF ASSISTANCE
The court shall issue orders, adjudicate claims and provide for other relief necessary to assist in the
liquidation of a financial institution
under rehabilitation receivership established by a state funded or state mandated insurance system.

Sec. 138 APPLICATION OF RELEVANT LEGISLATION (Act is suppletory)
Liquidation of banks, financial institutions, insurance companies and pre-need companies shall be
determined by relevant legislation.
Provisions in this Act shall apply in a suppletory manner.


3. CROSS-BORDER INSOLVENCY PROCEEDINGS
Cross-border insolvency: occurs when a an insolvent debtor has assets in and creditors from several
States
Giving rise to the possibility that insolvency proceedings may be commenced in several jurisdictions
The Model on cross border insolvency of the UN Commission on International Trade Law
(UNCITRAL) focuses on the legislative framework needed to facilitate cooperation and coordination in
cross-border insolvency proceedings- specifically
a. cooperation between courts and other competent authorities of the State and foreign states involved
b. greater legal certainty in trade and investment
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c. fair and efficient administration of the proceedings that protect the interest of all creditors and other
interest persons (including the debtor)
d. protection and maximization of the value of the debtors assets
e. facilitation of the rescue of financially troubled businesses
f. thereby PROTECTING INVESTMENT and PRESERVING EMPLOYMENT

Sec. 139: ADOPTION OF UNCITRAL Model of Cross Border Insolvency
The model on cross-border insolvency of the UN Commission on International Trade Law is adopted
as part of the Act
Subject to the provisions of Sec. 136 (liquidation of securities market participant), and the rules of
procedure that may be adopted by the SC.

Sec. 140: INITIATION OF PROCEEDINGS
Upon the submission of a petition by the representative of the foreign entity that is the subject of the
foreign proceeding
Court shall set a hearing in connection with an insolvency or rehabilitation proceeding taking place in a
foreign jurisdiction

Sec. 141: PROVISION OF RELIEF: The court may issue orders
a. suspending any action to enforce claims against the entity or otherwise seize or forclose property of the
foreign entity located in the Philippines
b. requiring the surrender of property of the foreign entity to the foreign representative or
c. other necessary relief
Sec. 142: FACTORS IN GRANTING RELIEF: In determining whether relief should be granted the court
shall consider
a. protection of creditors in the Philippines and the inconvenience in pursuing their claims in a foreign
proceedings
b. just treatment of all creditors through resort to a unified insolvency or rehabilitation proceeding
c. whether other jurisdictions have given recognition to the foreign proceeding
d. 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 Act and
e. extent that the foreign proceeding has recognized and shown deference to proceedings under this
Act