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Prior to the enactment of the FRIA, rules and procedures on suspension of payments,
corporate rehabilitation, insolvency and liquidation were scattered and embodied in
different laws and Supreme Court issuances.
The FRIA effectively repealed the provisions found in the Insolvency Law, PD 902-A, as
amended, the Interim Rules, and the Rules of Procedure on Corporate Rehabilitation. In
addition, the FRIA codified the procedures and requirements for court-supervised, prenegotiated and out-of-court rehabilitation and liquidation proceedings to enable
businesses to continue operating and creditors to recover their investments faster and
more efficiently.
B. SALIENT FEATURES
The FRIA is not merely a collaboration and codification of existing laws and issuance on
insolvency. It introduced several innovations and has a forward-looking structure to put
our countrys insolvency law at par with international standards.
The following are some of its salient features:
1. Broadened Definition of Insolvency Under the FRIA, insolvency does not only
refer to a situation where the debtors liabilities are greater than its assets (a concept
under the Insolvency Law). Consistent with modern day trend, insolvency now includes a
state of inability to pay liabilities as they fall due in the ordinary course of business.
2. Broadened Definition of Debtor Consistent with the pro business stance of the
FRIA, individuals who conduct business under a single proprietorship, which is duly
registered with the Department of Trade and Industry, may now petition for rehabilitation.
3. Global Filing Recognizing the emergence of business conglomerates, the FRIA
allows the filing of a petition by a group of debtors which is defined as:
(1) corporations that are financially related to one another as parent
corporations, subsidiaries or affiliates;
(2) partnerships that are by the same person to the extent of owned
more than fifty percent (50%); and (3) single proprietorships that are
owned by the same person.
4. Commencement Date The FRIA introduces the concept of a Commencement Date
and specifies in detail its consequences. It occurs upon the issuance of a Commencement
Order by the court and retroacts to the filing of the petition. The Commencement Order
serves as legal basis for:
(a) exception or waiver of all taxes and fees including penalties,
interests and charges;
(b) rendering null and void the results of any extrajudicial activity or
process to seize property, sell encumbered property, or otherwise
attempt to collection or enforce a claim against the debtor after the
Commencement Date;
(c) rendering null and void any set-off after the Commencement
Date of any debt owed to the debtor by any of the debtors
creditors;
(d) rendering null and void the perfection of any lien against the
debtor's property after the Commencement Date;
(e) rendering 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
which are not in the ordinary course of the business of the debtor;
(f) declaring claims of separation pay for months worked prior to
the Commencement Date as pre-commencement claim;
(g) reckoning the 90-day period to confirm existing contracts; and,
(h) declaring null and void transactions, occurring prior to
Commencement Date, entered into by the debtor or involving its
funds or assets, which were executed with intent to defraud the
creditor/s or which constitute undue preference of creditors.
5. Exchange Debt for Equity The FRIA recognizes that banks are usually the big
creditors of businesses. To enable them to help rehabilitate their debtors, the FRIA allows
banks to acquire and hold an equity interest or investment in a debtor or its subsidiaries
when conveyed to such bank in satisfaction of debts pursuant to a rehabilitation or
liquidation plan, notwithstanding any provision of law to the contrary.
6. Pre-Negotiated Rehabilitation Consistent with its objective to provide a quick
resolution of an insolvency situation, the FRIA expressly allows pre-negotiated
rehabilitation plan. The plan must be endorsed or approved by creditors holding at least
two thirds (2/3) of the total liabilities of the debtors, including secured creditors holding
more than fifty percent (50%) of the total secured claims and unsecured creditors holding
more than fifty percent (50%) of the total unsecured claims of the debtor.
The approval of a pre-negotiated rehabilitation plan will have the same legal effect as the
confirmation of a court-supervised rehabilitation plan.
7. Out-of-Court Rehabilitation To accommodate preference for informal workouts and
protect the debtor and its creditors from the tyranny of the minority, the FRIA introduces
a key innovation by formally adopting out-ofcourt rehabilitation as part of our legal
system. This remedy may be availed of where the debtor/s, and creditors representing at
least 85% of the debtor's total liabilities (composed of at least 67% of the debtors
secured obligations and 75% of the debtors unsecured obligations), agree on a
restructuring or rehabilitation plan. 58 This is essentially an out-of-court proceeding, but
the FRIA expressly allows the insolvent debtor and/or creditor to seek court assistance for
the execution or implementation of their rehabilitation plan.
8. Exemption from Taxes In furtherance of its policy objectives, the FRIA grants
certain relief from the imposition of all taxes and fees including penalties, interests and
charges due the national government or local government units upon issuance of the
Commencement Order. In addition, the FRIA provides that the amount of any
indebtedness or obligation, reduced or forgiven in connection with a rehabilitation plans
approval, shall not be subject to any tax.
9. Additional Exceptions to Stay or Suspension Order To help put an end to neverending disputes on the coverage of the stay or suspension order, the FRIA enumerates
the exceptions to its suspensive effect. For example, the order does not apply to cases
pending in the Supreme Court and specialized bodies and some financial market-related
transactions (i.e., clearing of checks, settlement of securities in the stock market, etc.).
10. Post-commencement Loans and Obligations To encourage third parties to
extend financial and other forms of assistance to the distressed debtor, the FRIA allows
the debtor, with the approval of the court and upon the recommendation of the
rehabilitation receiver, to enter into credit arrangements or incur other obligations as
may be essential for its rehabilitation. The payment of these post-commencement loans
and obligations is considered an administrative expense, which means that they can be
paid by the debtor notwithstanding the stay or suspension order.
11. Personal Liability of Directors and Officers In line with trends on good
corporate governance, the FRIA imposes personal liability on directors and officers if they
are found to have willfully disposed or caused the disposal of any property in fraud of
creditors or in a manner grossly disadvantageous to the debtor, or have concealed or
approved the concealment from the creditors of, or embezzles or misappropriates, any
property of the debtor.
12. Juridical Person as Rehabilitation Receiver A juridical person may now serve as
a rehabilitation receiver. It must, however, designate a natural person who possesses all
the qualifications and none of the disqualifications of a rehabilitation receiver as its
representative.
13. Creditors Committee To facilitate the rehabilitation of the debtor, the FRIA
expressly authorizes the creditors belonging to a class to formally organize themselves
into a committee. The creditors may, as a group, form one committee composed of:
(a) secured creditors; (b) unsecured creditors; (c) trade creditors and suppliers; and, (d)
employees of the debtor.
14. Confirmation of Contracts The FRIA requires the debtor, with the consent of the
rehabilitation receiver, to notify each contractual counter-party whether it is confirming a
particular contract. Contractual obligations of the debtor arising or performed during this
period, and afterwards (for confirmed contracts), shall be considered as administrative
expenses. Contracts not confirmed within the required deadline shall be considered
terminated.
15. Protection of Secured Creditors Interest Consistent with international best
practices, the issuance of a commencement order or a suspension or stay order does not
diminish or impair the security or lien of a secured creditor, or the value of his/its lien or
security, except that his right to enforce it is suspended during the term of a stay order. If
the property secured is not necessary for the rehabilitation of the debtor, however, the
secured creditor is allowed to enforce his security or lien, or foreclose upon the property
of the debtor securing his/its claim under certain conditions.
16. Conversion into Liquidation In a court-supervised rehabilitation, a rehabilitation
plan must be approved by the court not later than one (1) year from the filing of a
petition. If no rehabilitation plan is approved within such period, the court may, on its own
or upon motion of a party, order the conversion of the rehabilitation proceeding into
liquidation.
17. Faster Voluntary Liquidation In cases of voluntary liquidation, the FRIA mandates
the issuance of a liquidation order within five (5) working days if the court finds the
petition sufficient in form and substance. 72 In addition, the FRIA, in contrast to the old
Insolvency Law, no longer requires the posting of a bond with at least two (2) sureties.
IV.
UNCITRAL CROSS-BORDER INSOLVENCY MODEL LAW
In order to better prepare for globalization of businesses, the FRIA formally adopted the
Model Law on Cross-Border Insolvency of the United Nations Commission on International
Trade Law (Model Law). The Model Law is aimed at improving cooperation of courts
and administrators in international insolvency proceedings, with the goal of maximizing
the value of the debtors worldwide assets, protecting the rights of the debtors and
creditors and furthering the just administration of the proceedings.
Notably, in the Association of Southeast Asian Nations (ASEAN), the Philippines is first to
recognize and adopt the Model Law in its insolvency system. The Model Law reflects
cross-border insolvency practices which are characteristic of modern and efficient
insolvency systems. The Model Law, however, respects different national procedural laws
and does not impose a substantive unification of insolvency laws. Instead, the Model Law
offers solutions which help in modest, but significant, ways.
These include:
1. Providing foreign representatives the right to access courts of the enacting State. This,
in turn, provides relief or a temporary breathing space to foreign representatives and
allows the court to determine coordination among various jurisdictions or grant such
other relief warranted for optimal disposition of the insolvency proceeding;
2. Determining when a foreign insolvency proceeding should be accorded recognition and
the consequences of the same;
3. Providing a transparent regime in furtherance of the right of foreign creditors to
commence or participate in an insolvency proceeding in the enacting State;
4. Permitting courts in the enacting State to cooperate effectively with other courts and
representatives, in a foreign insolvency proceeding;
5. Authorizing courts in the enacting State and other persons administering insolvency
proceedings therein to seek assistance abroad;
6. Establishing rules for coordination in cases where an insolvency proceeding in the
enacting State proceeds concurrently with an insolvency proceeding in another State;
and,
7. Establishing rules for coordination of the relief granted in the enacted State, in cases
where two or more insolvency proceedings involving the same debtor take place in
multiple States.
The Model Law may be applied to a number of cross-border insolvency situations,
including the following: (a) inward-bound requests for recognition of a foreign proceeding;
(b) outward-bound requests from a court or administrator in the enacting State for
recognition of an insolvency proceeding commenced under the laws of the enacting
State; (c) coordination of concurrent proceedings in two or more States; and, (d)
participation of foreign creditors in insolvency proceedings taking place in the enacting
State.
The salient features of the Model Law are the following:
1. Cross-border Cooperation There is a widespread limitation on cooperation and
coordination among judges from different jurisdictions in cases of cross-border insolvency.
This limitation is derived from uncertainty in, or lack of a legislative framework regarding,
the scope of legislative authority to pursue cooperation with foreign courts. The Model
Law expressly empowers courts to extend cooperation in the areas covered by the Model
Law. This includes authorizing cooperation between a court in the enacting State and a
foreign representative, and between a person administering the insolvency proceeding in
the enacting State and a foreign court or representative.
2. Coordination of Concurrent Proceedings The Model Law deals with coordination
between a local proceeding and a foreign proceeding concerning the same debtor78 and
facilitates coordination between two or more foreign proceedings involving the same
debtor. 79 The objective is to foster coordinated decisions that would best achieve the
objectives of both proceedings (e.g., maximizing the value of the debtors assets and
determining the most advantageous restructuring of the enterprise). In order to achieve
satisfactory coordination and adapt relief to changing circumstances, the Model Law
directs the court, in all situations covered by the Model Law (including those that limit the
effects of foreign proceedings in the face of local proceedings), to cooperate with foreign
courts and representatives to the maximum extent possible.
3. Foreign Assistance for Insolvency Proceeding Taking Place in the Enacting
State The Model Law authorizes courts of the enacting State to seek assistance from
other jurisdictions on behalf of an insolvency proceeding taking place therein. Without
such legislative authorization, courts are deterred from seeking such assistance abroad.
This, in turn, creates potential obstacles to a coordinated international response in case
of cross-border insolvency.
4. Foreign Representatives Access to Courts of the Enacting State An important
objective of the Model Law is to provide foreign representatives expeditious and direct
access to courts of the enacting State. The Model Law avoids the need to rely on
cumbersome and time-consuming letters rogatory or other diplomatic or consular
VI.
Proceedings under the FRIA
The law provides for three (3) types of rehabilitation proceedings: (1) court-supervised,
(2) pre -negotiated, and (3) out-of-court or informal. The practical approach to business
recovery may already be seen from this attempt to allow flexibility in the manner by
which debtors and creditors may finally want to settle their claims. The proceedings,
being summary and non-adversarial, are more efficient and thus responsive to fast-paced
business transactions.
holding at least two thirds (2/3) of the total liabilities of the debtor which include creditors
holding more than Fifty Percent (50%) of the total secured claims and creditors holding
more than Fifty Percent (50%) of the total unsecured claims. Again, if the petition is
sufficient in form and substance, the court will issue an Order that directs the
appointment of a rehabilitation receiver, if provided for in the rehabilitation plan, orders
creditors and other interested parties to file their comments to the petition, and issues a
Stay or Suspension Order. Within a maximum period of One Hundred Twenty (120) days
from the filing date, the court must act on the petition. Failure to do so will automatically
consider the submitted rehabilitation plan as approved. Out-of-court and informal
agreements must also comply with minimum requirements. There must be approval by
the debtor and Eighty-Five Percent (85%) of the total creditors, Sixty-Seven Percent (67%)
of which must represent secured creditors and Seventy-Five Percent (75%), unsecured
creditors.
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:
(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for
rehabilitation receiver; and
(d) 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.
REFERENCES:
1.) A paper submitted for the 9 th Metrobank Foundation Professorial Chair
2.) Sun Life Assurance Co. of Canada v. Ingersoll, G.R. No. 16475, 8 November 1921, 42
Phil. 331 and Mitsui Bussan Kaisha (Ltd.) v. Hongkong & Shanghai Banking Corporation,
G.R. No. 11079, 12 January 1917, 36 Phil. 27. 38 Pres. Decree No. 902-A, as amended by
Pres. Decree No. 1799, Sec. 6. 39 Rep. Act No. 8799 (2000),
3.) Sec. 5.2. 40 A.M. No. 00-8-10-SC, 21 November 2000
4.) A.M. No. 00-8-10-SC, 2 December 2008. 42 Rep. Act No. 10142 (2010) [FRIA], Sec. 2.
5.) https://prezi.com/sdm2ni4aebal/court-supervised-rehabilitation/