Financial Rehabilitation and Insolvency Act

1. Rehabilitation - the entity or person engaged in business can still be restored. It can still 1. operate or 2.
become solvent
a) CONDITION OF INSOLVENCY

2. Liquidation - No possibility of recovering from insolvency

- Reducing assets in cash and discharging liabilities, dividing surplus and losses
a) CONDITION OF INSOLVENCY

3. Suspension - party petitioning for suspension would like to obtain suspension in the meantime because he
cannot pay offf obligations
a) NO CONDITION OF INSOLVENCY

Insolvency - liabilities are greater than assets

Rehabilitation has 4 kinds

1. VOLUNTARY
2. INVOLUNTARY
3. PRE-NEGOTIATED
4. OUT OF COURT / INFORMAL REHABILITATION

Liquidation has 2 kinds

1. VOLUNTARY
2. INVLUNTARY

Suspension applies only to individual debtors

DEBTORS POV CREDITORS POV

Why he wants to avail of RLS: To seek relief from Why he wants to avail of RLS: To seek satisfaction
creditors because 1.) he foresees that he cannot pay off of his claim; Either the debtor is already not capable to
the obligations when it falls due or 2.) liabilities are pay him (default) OR he can be proactive, if he can
greater than his assets foresee that debtor is not able to pay him

Who can be a debtor Defined: A national or a juridical person that has a

claim against the debtor. The claim arose on or before
 Sole proprietorship, partnerships, corporations and
the date of commencement of the Petition for
individuals
Rehabilitaion or Liquidation.
 ;Single proprietorships owned by 1 person

 Debtors can be considered as a GROUP.

Corporations financially related/ Partnerships
where ownership is owned by a single person

 RELATED ENTERPRISES Debtor - another

group of debtors; refers to entities owned or
controlled directly or indirectly by the same
interest; In a Related Enterprises Debtor, there is
no connection with each other. They are separate
entities but have the SAME OWNERSHIP

Example: Paying Corporation - PARENT

AFFILIATE
SUBSIDIARY
Entities EXCLUDED from being a debtor

 BANK
 INSURANCE COMPANY
 National or Local Government Units or Agencies

IMPORTANCE OF DISTINCTION: To know which

parties can avail of the law.

The abovementioned entities cannot file a Petition for

Rehabilitation, Liquidation or Insolvency despite
appearing to be debtors

REHABILITATION

Rehabilitation has 4 kinds

1. VOLUNTARY

Who may initiate:

1. Owner of single proprietorship
2. Majority of Partners
 3. Majority Vote of the Board and 2/3 vote of the OCS or Members
4. GROUP OF DEBTORS: May jointly file a petition for Rehabilitation if at least 1 member sees the
possibility of inability to pay debts when they fall due.

GROUND: Debtor’s Insolvency or inability to pay off obligations as they fall due.
The filing of the petition for voluntary rehabilitation is an ACT of INSOLVENCY

2. INVOLUNTARY

Initiated by any creditor or a group of creditors with a claim of or an aggregate of whose claims is AT
LEAST 1 MILLION or 25% of subscribed capital stock or partnership contribution of at least 1 MILLION or
25% of partnership contibutions WHICHEVER IS HIGHER (to determine threshhold).

GROUNDS:
Debtor’s insolvency or inability to pay off the obligations when they fall due.

INSOLVENCY is a matter of fact.

The following indicates insolvency:

GF
(a) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable
payments thereon have not been made for at least sixty (60) days or that the debtor has failed generally to meet
its liabilities as they fall due; (G D or F) or

(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will
prevent the debtor from paying its debts as they become due or will render it insolvent.

FILING

Within 5 working days from filing, if the court finds the petition sufficient in form and substance it will issue a:
COMMENCEMENT ORDER- (Rehabilitation proceedings have begun) If not, the court will allow a
reasonable time to amend or cure the deficiency.

Commencement Order Contents:

1. Statement of the legal effects of the commencement order
2. Declaration of Insolvency
3. Appointment of a receiver
4. Statement as to claims of creditors
5. prohibit the debtor's suppliers of goods or services from withholding the supply of goods and services in the
ordinary course of business for as long as the debtor makes payments for the services or goods supplied after
the issuance of the Commencement Order;
6. Stay or Suspension order

WHAT HAPPENS:
1. Rehabilitation receiver acts accordingly; Parties may agree as to who receiver would be; they may
recommend who it is to be BUT the Court may disregard their input and appoint one.
2. Receiver may prohibit and render null and void the RESULTS (which means even if filed before petition) of
any extra judicial activity to seize property, sell encumbered property or collect claim against the debtor;
3. Serve as the legal basis in rendering null and void any set off any debt owed by debtor to any creditor
AFTER the commencement date
4. Serve as the legal basis in rendering null and void the perfection of any lien over debtor’s property AFTER
the commencement date.
5. It will serve to consolidate all actions pending to collect against the debtor.

STAY or SUSPENSION Order

It suspends (covers) all cases; C-J-S-P

-all actions or proceedings for collection;
-enforce judgments, attachment or provisional remedies;
-debtor selling, transferring, disposing EXCEPT those in the ordinary course of trade or business
-make any payments as of commencement date except liabilities provided herein (example: TAX)

Stay or Suspension Order does not include: ASS-CBC-Crime

1. Any appeal pending in the SC, provided, any final and executory order will be referred to the
rehabilitation court;

2. To cases pending or before a specialized court or quasijudicial agency which upon determination of the
Rehabilitation court, can resolve the claim more quickly, efficiently and fairly.

3. Enforcement of claim against sureties and other solidarily liable to the debtor, third persons or
accomodation mortgagors.

Can a surety claim an exemption from enforcement because of the stay order?
NO! You cannot enforce the claim against the debtor, but you can claim it against sureties.

Accomodation Mortgage - can be enforced EXCEPT: If the property is ESSENTIAL to the

rehabilitation of debtor.
 4. Any action of clients engaged in market and sale of securities
The client can recover or if the client asks to sell, the client can recover the amount.

5. Actions of a licensed broker to sell securities

6. Actions of a clearing agency duly regulated by the BSP or SEC

7. Does not apply to Criminal Actions against debtor

REHABILITATION PLAN

At the initial hearing, the court will determine :

1. who may file the notice of claims
2. whether or not the receiver is qualified and the appointment of a new receiver if required
3. direct creditors to comment on the rehabilitation plan
4. Direct receiver to determine if plan is feasible

What happens to a creditor not listed in the plan and who fails to file or files a belated notice of claim?

HE IS NOT ENTITLED TO PARTICIPATE IN THE PROCEEDINGS, but, he is entitled to receive his share
in the distribution.

Rehabilitation Receiver must comment on whether:

 Rehabilitation plan is feasible and must be given due course despite the insolvency of the debtor
 Rehabilitation plan is NOT feasible, recommend that they transfer to liquidation
 Recommend that the petition be dismissed because it is not brought in the proper manner

IF GIVEN DUE COURSE, they need to subject the Rehabilitation plan to aprroval of each CLASS of creditor
holding MORE THAN 50% of claims (By class it is meant to be: Secured and Unsecured)

SECURED UNSECURED
Approve it by more than 50% of their claims Approve it by more than 50% of their claims

NOTE: We are talking about AMOUNT OF CLAIMS not number of claimants

Once approved, the court confirms the rehabilitation plan. All subsequent activities must be in accordance with
the plan.
In the implementation of the plan, there will be AVOIDANCE PROCEEDINGS

AVOIDANCE PROCEEDINGS - has for its object the rescission or nullification of transactions entered into
before the commencement date on the ground that it was entered into with intent to defraud the creditors.

(NOTE when avoidance proceedings can be commenced)

The claim of a Secured Creditor in the meantime is SUSPENDED,it is NOT DIMINISHED- BUT the Secured
creditor cannot enforce his liens.

When can a secured creditor enforce it?

Only upon motion or recommendation of the Rehabilitation receiver as long as property (or property subject of
the main condition) is not required for the rehabilitation of the debtor.

The secured creditors should wait.

3. PRE-NEGOTIATED REHABILITATION

The petition is instituted by an insolvent debtor or with any creditor asking the courts to approve it. The petition
must be approved by creditors holding AT LEAST 2/3 of the total liabilities including MORE THAN 50% of
the total liabilities of all SECURED and UNSECURED claims.

If approved, then the courts will declare the Rehabilitation. There will be publication and service. The creditors
may file objections and eventually if resolved, the court will issue a STAY or SUSPENSION order.

4.OUT OF COURT / INFORMAL REHABILITATION

A situation where the creditors and debtors agree that the debtor can be rehabilitated.
Conditions:
1. Debtor agrees with creditors
2. Approved by creditors (OMG ito na) 67% of SECURED creditors, 75% of UNSECURED creditors and
approved by 85% of total liabilities (67 siya, 75 you, 85 tayo)

CRAM DOWN EFFECT

Once the creditors agree and the precentages provided by law is complied with there will be a judicial
confirmation of the Rehabilitation plan.
Subsequently there will be a publication once a week for 3 weeks. It will take effect after the lapse of 15 days
from last publication.

When being negotiated - STANDSTILL PERIOD

- approval of 50% of total liabilities
-notice to creditors
-not more than 120 days
- during the negotiation of the Informal Rehabilitation plan.
Court intervention will come in later when it comes to enforcement.

LIQUIDATION

Voluntary - the debtor initiates it. When an individual initiates it, the insolvent debtor must not have properties
sufficient to cover his liabilities and owing debts exceeding 500 000.

INVOLUNTARY - Three or more creditors by petition with an aggregate claim of at least 1 MILLION or 25%
whichever is higher.
- The creditor or group of creditors must ALLEGE an ACT of INSOLVENCY. Examples:
Debtor departs or intends to depart from the PH, leaving with intent to defraud creditors. He has
confessed judgment, concealed properties.

Court will issue a Liquidation Order.

 In case of a juridical person, it issues an order dissolving it.
 The Sheriff will take control of all the properties of the debtor except those exempt.
 Publication- Once a week for 2 consecutive weeks directing payment to liquidator.
 Prohibit the transfer or payment made by debtor
 Liquidator gets all assets and pays all of the claims

EFFECTof Liquidation Proceedings on SECURED CREDITORS

General Rule: Liquidation does not affect the right of SECURED CREDITORS

Secured creditors can:

I. May waive the security in lien and prove in liquidation proceedings his claim. He can then claim
his share in the assets

II. Maintain his rights under his lien

a) Enforce the lien

 b) Value of the property may be fixed or agreed upon

If the value is less than the debt liquidator can sell property to creditor; then the creditor can
claim for the balance

III. Liquidator can sell the property and after selling he will pay the proceeds of the sale to the creditor.
(Note: In this step there is no right of redemption which is beneficial to the Creditor)

AVOIDANCE proceedings in Liquidation proceedings

-Moving to nullify transactions entered into prior to filing of the petition

LASTLY
SUSPENSION of PAYMENTS - initiated by individual debtors in court of the province or city where he has
resided for 6 months to prevent creditors from claiming payment of credits.

The courts must declare when the creditors and debtors are in a state of suspension of payments.

There is a need for creditors to approve it. 2/3 vote of his creditors holding 3/5ths of his liabilities.
Quorum is 3/5ths - 2/3 vote is TAO.

Meanwhile, pending approval, there is a 3 month period FOR APPROVAL. (meaning creditors cannot demand
payment, right?) If no declaration of suspension, then tha creditors are FREE to claim.

there is a 3 month period FOR APPROVAL - From the time the petition was instituted EXCEPT - labor,
expenses for the last illness, funeral… AND a SECURED CREDITOR CAN ALSO ENFORCE HIS CLAIMS.