CHAPTER 19 o To establish a more systematic framework for
FINANCIAL REHABILITATION AND INSOLVENCY ACT insolvency proceedings
OF 2010 o To provide equitable treatment to all parties involved in a financial reconstructing or o R.A. 10142 promulgated on July 18, 2010. rehabilitation o To maximize the changes for the survival of 1. PROCEEDINGS UNDER FRIA the company concerned by providing an a. REHABILITATION PROCEEDINGS ailing enterprise four different remedies: (1) (1) Voluntary Rehabilitation1 Fast-track rehabilitation; (2) Court-supervised (2) Involuntary Rehabilitation2 rehabilitation; (3) Negotiated rehabilitation; (3) Petition for Approval of Pre-Negotiated (4) Dissolution-liquidation Rehabilitation.3 3. PERSONS INVOLVED b. PETITION FOR SUSPENSION OF PAYMENT OF o DEBTOR- Refers to a sole proprietorship duly INDIVIDUAL DEBTOR registered with DTI, a partnership duly c. VOLUNTARY LIQUIDATION OF SOLE registered with SEC, a corporation existing PROPRIETORSHIP, PARTNERSHIP OR under PH laws, an individual who has become CORPORATION4 insolvent d. INVOLUNTARY LIQUIDATION OF SOLE INDIVIDUAL DEBTOR a natural PROPRIETORSHIP, PARTNERSHIP OR person who is a resident and citizen of CORPORATION5 the Philippines that has become e. VOLUNTARY LIQUIDATION FOR INDIVIDUAL insolvent DEBTOR GROUP OF DEBTORS- (1) f. INVOLUNTARY LIQUIDATION OF INDIVIDUAL Corporations that are financially DEBTOR related to one another as parent o NATURE OF PROCEEDINGS corporations, subsidiaries or affiliates; Under Section 3 of FRIA, proceedings are (2) Partnerships that are owned more judicial in nature that are classified as than 50% by same person; (3) Single proceedings in rem. proprietorships that are owned by same person. 2. RATIONALE AND STATE POLICIES When a petition covers a group of debtors, all reference under 1 these rules to debtor shall 2 include and apply to the group 3 of debtors. 4 A group of debtors may jointly file a voluntary rehabilitation 5 under FRIA and the Provided, finally, That nothing in this section participation of other members shall prevent the court from joining other of the group is essential under entities affiliated with the debtor as parties the terms and conditions under pursuant to the rules of procedure as may be the Rehabilitation Plan. promulgated by the Supreme Court EXCLUDED DEBTORS (1) Banks; (2) Pre-Need Companies; (3) Insurance o INSOLVENT DEBTOR Companies; (4) National and Local Insolvent shall refer to the financial Government Units. condition of a debtor that is generally o JURIDICAL ENTITIES AND RELATED unable to pay its or his liabilities as ENTERPRISE the fall due in the ordinary course of Each juridical entity shall be considered as a business or has liabilities that are separate entity under the proceedings in this greater than his assets. Act. Under these proceedings, the assets and Liabilities shall refer to monetary liabilities of a debtor may not be commingled claims against the debtor or aggregated with those of another, unless Ordinary course of business shall refer the latter is a related enterprise that is to transactions in pursuit of the owned or controlled directly or indirectly by individual debtors business operation the same interests: Provided, however, That prior to rehabilitation or insolvency the commingling or aggregation of assets and proceedings. liabilities of the debtor with those of a related Insolvency shall refer to the financial enterprise may only be allowed where: (a) incapacity of the debtors to pay their there was commingling in fact of assets and liabilities as they fall due in the liabilities of the debtor and the related ordinary course of business or enterprise prior to the commencement of the whenever their liabilities is greater proceedings;(b) the debtor and the related than their assets. enterprise have common creditors and it will o CREDITOR- shall refer to a natural or be more convenient to treat them together juridical person which has a claim against rather than separately; (c) the related the debtor on or before the Commencement enterprise voluntarily accedes to join the Date debtor as party petitioner and to commingle Commencement Date- date on which its assets and liabilities with the debtor's; the court issues the Commencement and(d) The consolidation of assets and Order which shall be retroactive to liabilities of the debtor and the related the date of filing of the petition for enterprise is beneficial to all concerned and voluntary or involuntary promotes the objectives of rehabilitation. proceedings General Unsecured Creditor- shall debtor continues as a going concern than if refer to a creditor whose claims is it is immediately liquidated neither secured, preferred nor o In BPI v Sarabia Mano Hotel Corporation, subordinated under FRIA the SC explained that rehabilitation shall be Secured Creditor-shall refer to a taken when it is shown that the creditor with Secured Claim Secured Claim- A claim that is secured by a Lien Lien- a statutory or contractual claim or judicial charge on real or personal property that entitles a creditor to resort to said property for payment of the claim or debt secured by such lien. .4. LIABILITY FOR UNLAWFUL DISPOSITION OF ASSETS o Under Section 10, Individual Debtors, Partners, Owner and Director and Officers are made liable for double the property sold or transaction involved, which is higher to be recovered for the benefit of the creditor and debtor if having notice of the proceeding or anticipation thereof willfully commit the ff acts: (1)Dispose the property of the debtor in a grossly disadvantageous manner to the creditor/debtor; (2) Conceal from creditors or embezzles or misappropriates the property of the debtor. 5.REHABILITATION o 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 TYPE OF TYPE OF WHO WILL ORGANIZATION REHABILITATION APPROVE/FILE OR BUSINESS PROCEEDING PETITION 1. Sole Voluntary Owner/Proprietor Proprietorship Rehabilitation 2. Partnership Voluntary Majority of Partners Rehabilitation 3. Corporation Voluntary (1) Majority of Rehabilitation the Directors o continued or Trustees operation of (2) Stockholders the representing corporation is 2/3 of the economically Outstanding more feasible Capital and its 4. Sole Involuntary Whichever is Higher: Proprietorship, Rehabilitation Creditor or Group of creditors can Partnership and Creditors with a claim recover, by Corporation of: way of (a) Agreggate o present value claim of P1M of payments (b) At least 25% projected in of the the plan, more subscribed if the debtors capital stock continue the or partners going share concerns than 5 Sole Pre- Negotiated The insolvent debtor if liquidated. Proprietorship, Rehablitation and the Rehabilitation It enables the Partnership and (Petition for Plan is endorsed or company to Corporation Approval of Pre- approved by creditors gain a new Negotiated holding atleast 2/3 of Rehabilitation) the total liabilities of lease on life the debtor including and thereby secured creditors allows the holding 50% of the creditors to be total secured claim paid their and unsecured claims from creditors holding its earnings. more than 50% of unsecured claims 5.01 KINDS OF 6. Sole Voluntary Insolvent Debtor Proprietorship, Liquidation REHABILITATION Partnership and a. VOLUNTARY Corporation REHABILITATIO 7. Sole Involuntary a. Three or more N- Established Proprietorship, Liquidation creditors in a verified Partnership and Corporation b. The aggregate claim is at least 1M or at least 25% of the subscribed capital stock or partners Petition filed by the Debtor Corporation: (1) 5.02 REHABILITATION PLAN The insolvency of the debtor; (2) Viability of o Should be in the prescribed form of the law. its Rehabilitation. o REHABILITATION PLAN- a plan by which the b. INVOLUNTARY REHABILITATION- A creditor financial well-being and the viability of an insolvent or groups of creditors may initiate debtor can be restored using various means involuntary proceedings against the debtor including, but not limited to, debt forgiveness, debt by filing a petition for rehabilitation with the rescheduling, re-organization, dacion en pago, debt court if: equity conversion and sale of the businesses as (1) There is no genuine issue of fact or going concern or setting up of a new business entity law on the claims of the petitioners or other similar arrangements as may be approved and that the due and demandable by the courts or the creditors payments have not been made for at o The rehabilitation plan once approved is binding least 60 days or the debtor has failed upon the debtor and all persons who may be generally to meet its liabilities as affected by it, including the creditors, whether or they fall due. not such persons have participated in the (2) A creditor, other than the proceedings or opposed to it. petitioner/s has initiated foreclosure o CIRCUMSTANCES THAT MISGHT DEMONSTRATE proceedings against the debtor and IN A CONVINCING AND COMPELLING MANNER prevent the debtor from paying its THAT THE DEBTOR COULD BE REHABILITATED debt as the become due or will (1) The business fortunes of the debtor render it insolvent. has improved since the petition was filed (2) There is a forecast or support the likelihood that the debtors business could be revived (3) Debtor improved its operating efficiency (4) The debtor has successfully addressed risks that will be a hindrance in its rehabilitation (5) The majority of the secured and unsecured creditors are willing to compromise on their claims (6) The debtors shareholders expressed c. REHABILITATION PROCEEDINGS AND a willingness to dilute their equity in PERSONS WHO WILL FILE AND/OR connection with debt equity swap APPROVE o The Rehabilitation Plan: any manner any of its properties except in (1) Must be approved by crediotrs (50% of the total the ordinary course of business. claim) (4) Prohibit the debtor from making any (2) Confirmed by the court after approval of the payment of the liabilities outstanding as of creditors or even without such approval or even the commencement date except as may be over the objection of the Courts provided herein o A Rehabilitation Plan may be(1) Pre-Negotiated SUSPENSION OF CLAIMS Rehabilitation Plan; (2) An out-of court informal o Claims- shall refer to all claims or rehabilitation demands of whatever nature or o CRAM DOWN RULE: character against the debtor or its The Rehabilitation Plan confirmed by the property, whether for money or Court shall be binding upon the debtor and otherwise all persons who may be affected by it (1) All claims of the government. including, creditors, whether or not they have (2) Claims against directors and participated on the proceedings or opposed officers of the debtor arising the Plan or whether or not their claims have from acts done in the discharge been scheduled. of their functions falling within The Cram Down Rule is necessary to curb the the scope of their authority majority of the creditors natural tendency to o The creditors are all in equal footing. dictate their own terms and conditions to the Neither one of them is given rehabilitation, absent due regard to the preference greater long-term benefit of all stockholders. (1) To enable the rehabilitation receiver to o STAY ORDER: effectively exercise its power unburdened Included in the Commencement Order issued by any judicial or extrajudicial by the Court having jurisdiction of the interference that may unduly hinder or Rehabilitation prevent the rescue of the debtor company (2) To enable the management committee or Pre-supposes a prospective application. the rehabilitation receiver to substitute (1) Suspend all action or proceedings, in the defendant in any pending action court or otherwise, for the enforcement of against it. claims against the debtors SECURED CREDITORS AND (2)Suspend all action to enforce judgment, FORECLOSURE attachment or all provisional remedies The Order will stay all actions for claims against the debtor against the debtor including claims by (3) Prohibit the debtor from selling, secured and unsecured creditors. encumbering, transferring or disposing in (1) Foreclosure of mortgage is likewise (3) To the enforcement of claims against suspended according to Section 6 of sureties and other persons solidarily FRIA liable with the debtor and 3rd party or (2) The preferred status of creditors are accommodation mortgagors as well as suspended. However, if the rehabilitation issuers of letters of credit, unless the is no longer feasible, and the claims property subject of the 3rd party or against the distressed corporation would accommodation mortgage is necessary for eventually have to be settled, the secured the rehabilitation of the debtor as creditors shall enjoy preference over the determined by the court upon unsecured creditors. recommendation by the rehabilitation STAGE OF SUSPENDED ACTIONS receiver GENERAL RULE: All actions for claims (4) To any form of action of customers or against a corporation pending before any clients of a securities market participant court, tribunal or board shall ipso jure be to recover or otherwise claim moneys and suspended in whatever stage such actions securities entrusted to the latter in the may be found upon the appointment of SEC ordinary course of the latters business as of a management committee or rehabilitation well as any action of such securities receiver. market participant or the appropriate regulatory agency to pay or settle such EXCEPTIONS: claims or liabilities (1) To cases already pending appeal in the SC (5) To the actions of a licensed broker or as of commencement date. Any final and dealer to sell pledged securities of a executor judgment arising from such debtor pursuant to margin agreement for appeal shall be referred to the the settlement of securities transaction in rehabilitation court for appropriate action accordance with the provisions of the (2) Subject to the discretion of the Court, to Securities Regulation Code cases pending or filed at a specialized (6) The clearing and settlement of financial court or quasi-judicial agency which, upon transactions through the facilities of determination by the court is capable of clearing agency or similar entities like resolving the claim more quickly, fairly an BSP and the SEC as well as any form of efficiently than the court. Any final and actions of such agencies to reimburse executor judgment of such court or themselves for any transactions settled agency shall be referred to the for the debtor rehabilitation court and shall be treated (7) Any criminal action against individual as non-disputed claim debtor or owner, partner, director or other officer of a debtor shall not be affected by any proceeding under FRIA o However, if the Court already DISPOSITION OF THE CASE: The Court awarded indemnification (ex. BP 22 may take any of the ff alternative actions in a cases), only to this extent can the rehabilitation proceeding order of suspension be obligatory (1) Give due course to the Petition upon upon any court. Suspension is only finding that: possible if it is the corporation who a. The debtor is insolvent commits a crime through its officers b. That there is a substantial likelihood that or agents or when there is vicarious the debtor can be successfully liability on the part of the rehabilitated corporation. (2) Dismiss the Petition upon finding that: MANAGEMENT a. The debtor is not insolvent o Generally, the existing Board and/ or b. The petition is a sham-only to delay Management of the debtor shall the enforcement of the rights of the continue to function while Petition for creditors Rehabilitation is pending. c. The petition, Rehabilitation Plan or o However, upon Motion, the court may any materials therein are materially appoint either a Rehabilitation false or misleading Receiver or Management Committee d. The debtor has committed acts of in the ff cases: (1) Actual or Imminent misrepresentation or in fraud of Danger of loss or destruction of the creditors debtors assets or properties; (2) (3) Convert the Proceedings to Liquidation Paralyzation of the business operation Proceedings upon finding that: of the debtor; (3) Gross a. The debtor is insolvent mismanagement of the debtor or b. There is no substantial likelihood that other wrongful conduct or violations the debtor can be successfully of the provisions of FRIA by the liquidated. existing management of the debtor, OUT OF COURT REHABILITATION owner, partner, director, officer etc. Advantages; The control and management (1) Expeditious and the parties enjoy of the corporation must be flexibility transferred pende lite to an (2) Economical because it avoids the independent party to ensure superstructure of reorganization preservation of the corporates (3) More sensible because it contemplates assets. participation of the parties in interest in ADMINISTRATIVE EXPENSES shall be good faith, conciliation paid even if there is a Stay Order (e.g. rents) REQUIREMENTS corporation. It can also be a result (1) The debtor must agree to the out-of-court from a rehabilitation proceeding that Rehabilitation Plan was converted by the court to a (2) Approved by creditors representing at liquidation proceeding least 67% of the secured obligations of the DISTRIBUTION OF ASSETS debtor o The assets of the insolvent debtor (3) It must be approved by creditors shall be divided among the creditors representing at least 75% of the unsecured in accordance with the Liquidation obligations of the debtor Plan (4) It must be approved by creditors holding o The rules on concurrence and at least 85% of total liabilities, secured or preference of credits under the NCC unsecured. and Article 110 of the Labor Code does not apply in rehabilitation A. STANDSTILL PERIOD proceedings. Only if the rehabilitation o An agreement to a standstill period may proceedings is no longer feasible and be binding under Section 85 of FRIA the assets of the corporation are provided: finally liquidated the rules on (a) Agreement is approved by concurrence and preference of credit creditors representing more than applies. This happens if the court 50% of the total liabilities of the converts rehabilitation proceedings to debtor a liquidation proceedings. (b) Notice thereof is published in a newspaper of general circulation 6. PETITION FOR SUSPENSION OF PAYMENTS in the PH once a week for 2 o A petition for suspension of payment is a consecutive weeks petition that can be filed by an individual (c) The standstill period does not debtor who has sufficient properties to cover exceed 120 days from the date of all his debts but he foresees the impossibility effectivity of meeting his debts when they respectively B. CRAM DOWN RULE fall due for the purpose of asking the court to o Same effect as that of court Rehabilitation order the suspension or delay of payment of Proceeding his indebtness. o REQUIREMENTS LIQUIDATION PROCESS (1) The petitioner should be an individual o The liquidation of a corporation can debtor result by virtue of direct petition for (2) The debtor has sufficient properties to liquidation of an insolvent cover his debts (3) The debtor foresees the impossibility of Applies only to individual May be availed of by juridical meeting his debts when they respectively debtor debtors and individual fall due debtors (4) The purpose of the petition is to suspend Filed by the debtor May be initiated by the debtor or delay payments or by the creditors o The amount of indebtness and the number of No minimum requirement The claims of the aggregate creditors are immaterial for the amount of claims claims against the debtor is at 6.01 DISTINCTIONS least P1M or 25% of the SUSPENSION OF LIQUIDATION subscribed capital stock or PAYMENTS share whichever is higher. Debtor is solvent Debtor is insolvent Payment of obligation is The obligations are 6.02. SUSPENSION ORDER stayed discharged Applies only to individual Juridical and Individual GENERAL RULE: The Court may issue an debtor debtors order suspending any pending execution May be filed by the debor May be filed by the debtor or against the individual debtor the creditors (1) Properties held as security by secured There is no minimum The debt of the individual creditors shall not be subject of such amounts of liabilities debtor must be at least 500k suspension order prescribed (2) The suspension order shall lapse when 3 The rules on preference and The rules on preference and months have passed without the concurrence of credits does concurrence of credits under proposed agreements being accepted by not apply 2236 and 2251 of the NCC he creditors or as soon as such applies agreement is denied (3) No creditor shall sue or institute proceedings to collect his claims from the debtor from the time of the filing of the SUSPENSION OF REHABILITATION petition for suspension of payments and PAYMENTS for as long as proceedings remain Applies to individual Applies to Business pending. debtor Organizations The debtor has sufficient The debtor is insolvent EXCEPTIONS: assets to cover his (1) Those creditors having personal claims liabilities for personal labor, maintenance, expense Secured debtors are not Secured debtors are affected of last illness and funeral of the wife or affected by Stay Order children of the debtor incurred in the 60 days immediately prior to the filing of the o EFFECT OF DISAPPROVAL OF petition CREDITORS (2) Secured creditors. If there is disapproval of the double o These excepted creditors are not majority, the suspension of payment affected by the proposed agreement proceedings will be terminated and the with the debtor unless the same creditors shall be at liberty to enforce creditors participated and voted in the their rights that correspond to them creditors meetings. 6.03 PROHIBITED ACTS a. Selling, transferring, encumbering or disposing in 7. LIQUIDATION: INDIVIDUAL DEBTORS any manner of his properties except those used in the ordinary course of business in which the VOLUNTARY LIQUIDATION INVOLUNTARY petitioning individual debtor is engaged sol long as OF INDIVIDUAL DEBTOR LIQUIDATION OF the proceedings relative to the suspension of INDIVIDUAL DEBTOR payments are pending Debtor is insolvent Debtor is insolvent b. Making any payment outside of the necessary or Acts of insolvency need not Creditors must prove act of legitimate expenses of his business to be proved insolvency The debts must be at least The debts must be at least 6.04. CREDITORS MEETINGS P500K 500k o The proposed agreement shall be The individual debtor files Creditor or group of approved or rejected in the Creditors petition creditors filed the petition Meeting. The presence of creditors The debtor is not absent as Applies even in the case of claims holding at least 3/5 of the he files Petition Absent Debtor liabilities of the debtor is necessary for Posing of Bond by creditors Posting of Bond by crditrs is the meeting is not required required o A creditor has no right to vote if he Liquidation Order is issued Liquidation Order is issued incurred credit within 90 days prior to without trial after Trial the filing of suspension of payment o DOUBLE MAJORITY INVOLUNTARY INVOLUNTARY (1) 2/3 of the creditors voting unite LIQUIDATION OF LIQUIDATION upon the same proposition INDIVIDUAL DEBTOR BUSINESS (2)The claims represented by ORGANIZATIONS said majority vote amount to at At least 3 creditors is There can be one or least 3/5 of the total liabilities of required more creditors the debtor mentioned in the The debt must be at The claims of the petition. least 500k aggregate claims against TYPE OF BUSINESS NATURE OF the WHO debtor is at WILL FILE OR least (3) In case of juridical person, ordering it dissolved ORGANIZATION PETITION APPROVE P1M or 25% THE of the (4) Prohibiting payments and/or transfer of property FILING subscribed capital stock by the debtor Sole Proprietorship, Voluntary orInsolvent share Debtor whichever is (5) Directing all claims to be filed with the liquidator Partnership and Liquidation higher. 8.02 EFFECTS OF LIQUIDATION ORDER Corporation The individual can The business or (1) The juridical debtor shall be deemed dissolved and its Sole Proprietorship, Involuntary There are 3 or more Partnership continue his business and Liquidation organization creditors and willhe be corporate or juridical existence terminated Corporation dissolved aggregate claims (2) Legal title and control of all assets of the debtor except against the debtor is those that may be exempt from execution shall be deemed at least P1M or 25% vested in the liquidator of the subscribed (3) All contracts of the debtor shall be deemed terminated capital stock or and/or breached, unless the liquidator, within 90 days from share whichever is the date of his assumption of office, declares otherwise and higher. the contracting party agrees Individual Debtor Suspension of Individual Debtor (4) No separate action for collection of an unsecured claim Payment shall be allowed (actions already pending shall be Individual Debtor Voluntary An individual debtor Liquidation who have at least transferred to the Liquidator) 500k debt and does (5) No foreclosure proceeding shall be allowed for the not have sufficient period of 180 days. assets to cover liabilities 8.03 RIGHTS OF SECURED CREDITORS Individual Debtor Involuntary Any creditor or o Section 114 of FRIA expresses the rule that the Liquidation group of creditors Liquidation Order shall not affect the rights of a with a claim of at secured creditor to enforce his lien in accordance least 500k with the applicable contract or law 7.01 WHO CAN FILE o Although there is a Suspension or Stay Order, the court upon motion, may allow a secured creditor to enforce his security or lien, or foreclose upon the 8. LIQUIDATION PROCESS property of the debtor securing his claim, if the o This is the proceeding where claims are filed and the property is not necessary for the rehabilitation of his assets of the insolvent debtor are disposed and the debtor. The secured creditor shall be admitted to the proceeds are divided among the creditors. rehabilitation proceedings only for the balance, if 8.01. LIQUIDATION ORDER any, of his claim. o The Court that has jurisdiction over the liquidation (1) Waive his right under the security or lien, prove his proceeding shall issue a Liquidation Order: claim in the liquidation proceedings and share in the (1) Declaring that the debtor is insolvent distribution of assets of the debtor (2) Ordering the Liquidation of the debtor (2) Maintain his rights under the security or lien a. The value of the property may be fixed in the 9. DISTRIBUTION OF ASSETS manner agreed upon by the creditor and o The assets of the insolvent debtor shall be distributed liquidator according to the Liquidation Plan approved by the When the property is less than the Court claim it secures, the liquidator may o The rules on preference and concurrence of credit convey the property to the secured shall be applied under the Liquidation Plan creditor and the latter will be admitted in the liquidation proceeding as the 10. CROSS-BORDER INSOLVENCY creditor form the balance. o The FRIA adopted the Model Law on Cross-Border If the value of the property exceeds the Insolvency of UN Center for International Trade and claim secured, the liquidator may Development convey the property to the creditor and o If there is a rehabilitation proceeding filed by a waive the debtors right to redemption foreign entity in another jurisdiction, a petition may upon receiving the excess from the be filed by the latters representative creditor
b. The liquidator may sell the property and
satisfy the secured creditors entire claim from the proceeds of the sale c. The secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws