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Liquidation of Insolvent Individual Debtors The rules on insolvency, also called bankruptcy in other countries, may apply to juridical

entities (e.g., registered corporation, partnership, sole proprietorship) and natural/individual persons. We previously discussed one option available to insolvent individual debtors under the the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 (see Suspension of Payments for Individual Debtors and Options for Entrepreneurs in Financial Distress). Let's discuss the other option, voluntary or involuntary liquidation, available to insolvent individual debtors or their creditors. Who may file a petition for voluntaryliquidation? An individual debtor whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five Hundred Thousand Pesos (PhP500,000), may apply to be discharged from his debts and liabilities by filing a petition for liquidation. He shall attach to his petition a schedule of debts and liabilities and an inventory of assets. The filing of such petition shall be an act of insolvency. If the court finds the petition sufficient in form and substance it shall, within five (5) working days, issue the Liquidation Order. Who may file a petition for involuntary liquidation? Any creditor or group of creditors with a claim of, or with claims aggregating at least Five Hundred Thousand Pesos (PhP500,000) may file a petition for liquidation of an insolvent debtor. The petition must allege at least one act of insolvency. What are the acts of insolvency? The following acts of the debtor shall be considered acts of insolvency: (a) That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors; (b) That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent; (c) That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors; (d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;

(e) That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors; (f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying the liquidation or of defrauding any creditors or claimant; (g) That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors; (h) That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors; (i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors; (j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits; (k) That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days; (l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary; and (m) That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment. What is a Liquidation Order? A Liquidation Order is issued by the court which shall include the following: (a) declare the debtor insolvent; (b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved; (c) order the sheriff to take possession and control of all the property of the debtor, except those that

may be exempt from execution; (d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; (e) direct payments of any claims and conveyance of any property due the debtor to the liquidator; (f) prohibit payments by the debtor and the transfer of any property by the debtor; (g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure; (h) authorize the payment of administrative expenses as they become due; (i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and (j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication. What are the effects of the Liquidation Order? Upon the issuance of the Liquidation Order: o Legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court; o All contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees; o No separate action for the collection of an unsecured claim shall be allowed. Such actions already pending will be transferred to the liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executory judgment therein for a claim against the debtor shall be filed and allowed in court; and o No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days. As previously noted, since insolvency presupposes that properties are lesser than the debts, not all creditors could receive the entire amount of the debt. In fact, it's entirely possible that some creditors

may be paid in full, while others will receive nothing, after applying the rules on concurrence and preference of credits. Another purpose of insolvency proceedings is to give the debtor a fresh start, to be discharged from his debts and to start his economic life anew.

The new Rehabilitation and Insolvency Act

After 101 years, the Philippines finally has a new law to address present-day rehabilitation and insolvency issues. Republic Act No. 10142 or The Financial Rehabilitation and Insolvency Act of 2010 (FRIA) took effect on August 31, 2010, replacing Act No. 1956 or the Insolvency Law which was enacted on May 20, 1909. The FRIA governs debtors that are generally unable to pay their liabilities as they are due in the ordinary course of business or have liabilities that are greater than their assets, but excludes banks, insurance companies, pre-need companies and national and local government agencies or units which shall be governed by other special laws. 'Debtors' under the FRIA are individuals who are citizens and residents of the Philippines as well as sole proprietorships, partnerships and corporations organised and authorised to do business under Philippine laws. The FRIA provides for the following processes:

Rehabilitation for sole proprietorships, partnerships and corporations Suspension of Payments for individuals Insolvency for all types of covered debtors

Rehabilitation Rehabilitation may be voluntary or involuntary and voluntary rehabilitation can take place under court supervision or undertaken out-of-court. Court-supervised voluntary rehabilitation is initiated upon the filing by a debtor of a petition for rehabilitation. Out-of-court rehabilitation or informal restructuring requires the agreement of the debtor and a requisite number of its creditors. Though an informal restructuring does not involve the courts, an agreed-upon restructuring or rehabilitation plan has the same cram-down effect as if approved by a court. Involuntary rehabilitation, on the other hand, can be initiated by a creditor or creditors with a single or aggregate claim of (i) at least P1 million (approximately $23,900 at time of writing) or (ii) at least 25% of the subscribed capital stock or partners' contribution of the debtor.

The FRIA also allows a hybrid of a voluntary and involuntary rehabilitation in the form of a prenegotiated Rehabilitation Plan. A debtor, by itself or with any of its creditors, may file a petition for approval of a pre-negotiated Rehabilitation Plan, which has been approved by a required number of its creditors. Stay order For court-supervised rehabilitations, the court has the power to issue a Suspension or Stay Order. A Stay Order suspends all actions for the enforcement of claims (with some exceptions) and of judgments or attachments against the debtor. It also prevents the debtor from selling, disposing or otherwise transferring any of its properties except in the ordinary course of business, and, unless provided in the Rehabilitation Plan, from paying any outstanding liabilities. The Stay Order can remain effective for the duration of the rehabilitation proceedings. The lien or security rights of secured creditors, however, remain intact although they cannot enforce their lien against the property of the debtor unless the property is not necessary for the latter's rehabilitation. Management A Rehabilitation Receiver is appointed by the court to determine claims and implement a creditorapproved or court-confirmed Rehabilitation Plan. Generally, management of the debtor remains with the existing management, but the court may direct the Rehabilitation Receiver to either take over the management of the debtor or constitute a management committee to assume such management. Existing contracts The Rehabilitation Plan can provide for a new interest rate to be charged, from the commencement of the proceedings, on all claims, whether secured or unsecured, thereby amending contractually agreed interest rates. Contracts of the debtor may also be considered terminated automatically if the counterparty does not confirm the contract upon its receipt of the debtor's request to confirm the contract. Damages arising from such termination shall form part of the claims existing prior to the commencement of the rehabilitation. Suspension of payments An individual debtor that has sufficient properties to cover all his debts but who cannot meet his liabilities as they fall due may avail itself of the process for Suspension of Payments by filing a verified petition in court with a proposed repayment plan. The court may issue an order similar to a Stay Order in a rehabilitation proceeding, which can remain in force for the duration of the proceedings. The repayment plan is subjected to a vote by the creditors and once approved by the required number of creditors, the court confirms such approval and the plan becomes binding on all creditors

whose claims are included in the plan. Of note is that secured creditors are not subject to any suspension order and those that did not vote on the repayment plan are not bound by it. Liquidation Liquidation may likewise be voluntary or involuntary. For liquidation of individual and juridical debtors, the voluntary process is similarly initiated, that is, by filing of a verified petition by the affected debtor. Involuntary liquidation for juridical debtors can be initiated by three or more creditors whose aggregate claims is at least P1 million or 25% of the capital of the debtor, whichever is higher. The petition need only to allege that there is no genuine issue on the existence of the debt, which is due and demandable but unpaid for at least 180 days. Creditors of individual debtors, on the other hand, who wish to initiate involuntary liquidation proceedings must allege the existence of at least one act of insolvency enumerated in the FRIA. Also, at any time during the pendency of a rehabilitation proceeding, the process can be converted into a liquidation proceeding. Once the court finds the petition meritorious, it shall issue a Liquidation Order and appoint a Liquidator. The rights of secured creditors are preserved and are not affected by the Liquidation Order. Right of set-off The FRIA allows parties that are mutually debtor-creditor to set-off each other's debts. Rules of procedure The rules of procedure for proceedings under the FRIA have been left for the Supreme Court to promulgate and, at time of writing, the Supreme Court has not issued such rules.