Insolvency of Individual Debtor

A) Suspension of Payments
- Conditions: Individual debtor has assets > liabilities but will be unable to pay debts as they fall
due
1. Debtor files verified petition to be declared in a state of suspension of payments. Petition
includes:
a. Schedule of debts and liabilities
b. Inventory of assets
c. Proposed agreement with creditors
2. Court issues order:
a. Set time of debtor/creditor meeting
b. Ask creditors to prepare evidence of their claims
c. Direct publication of order in a newspaper (2 weeks)
d. Direct clerk to mail copies of order to creditors named in schedule
e. Forbid debtor from disposing of property, except in the ordinary course of business
f. Forbid debtor from making payments, except in the ordinary course of business
g. Appoint a commissioner to preside over the creditors’ meeting
- Actions suspended: any pending execution against the debtor
o Secured creditors NOT affected
o Suspension lapses if agreement is not accepted after 3 months or is denied
o No NEW proceedings against debtor (from time of filing of petition) except a) personal
labor, maintenance, funeral, etc. incurred w/in 60 days immediately prior to filing of
petition or b) secured creditors
- Suspension can be annulled by objection
- If debtor fails to perform agreement: suspension ends

B) Voluntary Liquidation
- Conditions: Individual debtor, assets < liabilities, debts exceed Php 500k
- File petition, which includes: schedule of debts and liabilities, inventory of assets
- The filing of this petition is considered an “act of insolvency”
- Court will issue a Liquidation Order

C) Involuntary Liquidation
- Conditions: A creditor/group of creditors with claims of at least Php 500k
- File petition alleging at least one “act of insolvency”
- Court will issue a Liquidation Order
Liquidation Order
- Content of liquidation order:
o Declare debtor insolvent
o Order liquidation of debtor; if corporation, also declared dissolved
o Order sheriff to take possession & control of debtor’s property (except those exempt
from execution)
o Publish petition/motion in newspaper (2 weeks)
o Claims & property due to the debtor directed to liquidator
o Prohibit debtor from making payments and transferring property
o Direct creditors to file their claims with the liquidator
o Authorize payment of administrative expenses
o The debtor and creditors who are not petitioners may nominate liquidators
o Set date of case

- Effects of the liquidation order:

o If corporation, deemed dissolved
o Legal title & control of debtor’s assets go to liquidator, or to court if liquidator is still to
be elected (excludes assets exempt from execution)
o Contracts with debtor are deemed terminated or breached, unless liquidator declares
otherwise w/ agreement of creditor
o No separate actions for the collection of unsecured claims
 Actions already pending go to liquidator to settle or contest
o No foreclosure proceeding shall be allowed for 180 days

- Rights of secured creditors:

o Liquidation order does NOT affect secured creditors
o Secured creditor may:
 Waive his right under security/lien, prove his claim in the liquidation
proceedings, then share in the distribution of assets
 Maintain his rights under security/lien
o If the secured creditor maintains his rights:
 Creditor can agree with liquidator about value of property: if value is less than
claim, creditor can share in liquidation proceedings for balance. If value is
greater than claim, creditor gets property and returns excess (debtor will no
longer be able to redeem property). OR
 Liquidator sells property and applies proceeds to claim
 The secured creditor may enforce the lien or foreclose on the property
Rehabilitation
Court-Supervised Rehabilitation
(Voluntary)
- File a petition: owner (sole proprietorship), majority of partners (partnership), majority vote of
BoD + 2/3 voting stock (corporation)
- Include rehabilitation plan, schedule of debts, assets, statement of insolvency

(Involuntary)
- File a petition: creditor(s) with claims of at least Php 1 Million or 25% of subscribed capital stock
or partners’ contributions, whichever is higher.
o No “issue of fact on law” on the claims of the petitioners; debtor in default for at least
60 days or debtor has generally failed to meet his liabilities as they fall due. OR
o A creditor, other than one of the petitioners, has initiated foreclosure proceedings
against the debtors that will render him insolvent
- Petition includes rehabilitation plan,

Action on Petition
- Court issues a Commencement Order within 5 days from filing of petition.
o If petition was deficient in form or substance, court may give the petitioners reasonable
time to amend/send necessary additional documents.
- The Commencement Order shall:
o Identify the debtor, its principal business, place of business
o Summarize the grounds for initiating the proceedings
o Etc…
o Include a Stay or Suspension Order which shall:
 Suspend all actions or proceedings, for the enforcement of claims against the
debtor
 Suspend all actions to enforce any judgment, attachment, or other provisional
remedies against the debtor
 Prohibit the debtor from selling/encumbering/transferring/disposing property
except in the ordinary course of business
 Prohibit the debtor from making payment of liabilities outstanding as of the
commencement date except as provided by this law
- Effects of the Commencement Order:
o Vest “the rehabilitation” with all the powers and functions provided for in this Act,
subject to approval by the court and performance bond filed by rehabilitation receiver
o Prohibit/render void the results of any extrajudicial activity attempt collection or
enforce a claim against the debtor
o Render void any setoff after commencement date of any debt owed to the debtor by
any of the debtor’s creditors
o Render void the perfection of any lien against the debtor’s property after the
commencement date
o Consolidate the resolution of all legal proceedings by and against the debtor to the
court
 - Treatment of secured creditors
o “No diminution of Secured Creditor Rights:” Commencement Order, Suspension or Stay
order do not impair the security or lien of a secured creditor
o The right to enforce the security or lien may be suspended during the Stay Order
o The court, upon recommendation of the rehabilitation receiver, may allow a secured
creditor to enforce his security/lien or foreclose on the property of the debtor
 If property is “not necessary for the rehabilitation of the debtor”
o A secured creditor shall be admitted to the rehabilitation proceedings for the balance of
his claim.
- Rehabilitation Plan
- Effect of confirmation of the rehabilitation plan
o Rehabilitation plan is binding on debtor and creditors, EVEN those who did not
participate in the proceedings/opposed the Rehabilitation plan/whose claims were not
scheduled
o The debtor shall comply with the Rehabilitation Plan and take all actions necessary to
carry out the Plan
o Payments shall be made to creditors in accordance with the provisions of the Plan
o Contracts between debtor and its creditors shall continue to apply to the extent they do
not conflict with the Plan
o Any compromises on amounts or rescheduling of timing of payments by the debtor shall
be binding on creditors regardless of whether the Plan is successfully implemented
o Claims arising after approval of the Plan that are otherwise not treated by the Plan are
not subject to any suspension order

Pre-negotiated rehabilitation
- File a petition: debtor, or debtor with any of his creditors.
- Petition is for the court to approve a pre-negotiated Rehabilitation Plan that has been approved
by:
o Creditors holding at least 2/3 of the debtor’s liabilities INCLUDING
o Secured creditors holding more than 50% of the total secured claims AND
o Unsecured creditors holding more than 50% of the total unsecured claims
- Petition shall include:
o Schedule of debts and liabilities
o Inventory of debtor’s assets
o The pre-negotiated Rehabilitation plan + 3 nominees for rehabilitation receiver
o Summary of disputed claims against debtor

- Court shall issue order:

o Identify debtor, his principal business, place of business
o Declare that debtor is under rehabilitation
o Summarize grounds for filing of petition
 o Publish order in newspaper for 2 weeks
o Deliver copies of the petition to each creditor who is not a petitioner holding at least
10% of the total liabilities of the debtor
o State that copies of the petition and Rehabilitation Plan are available for examination
and copying by any interested party
o State that creditors & other parties opposing the petition/Rehab Plan may file their
objections w/in 20 days of 2nd week of newspaper
o Appoint a rehabilitation receiver, if provided for in the plan
o Include a Suspension or Stay order

- Court shall approve plan in 10 days unless there is an objection:

- File objections within 8 days of second publication:
o Allegations in petition or Rehabilitation plan are false/misleading
o 50%+ of any class of creditors do not actually support the plan
o Rehabilitation plan fails to accurately account for a claim
o The support of any creditor was induced by fraud
- At hearing between 20-30 days of second publication:
o Court finds no merit in objection -> Plan approved
o Court finds merit -> ask debtor to cure defect; if not possible to cure or debtor/creditors
supporting the plan acted in bad faith -> convert proceedings to liquidation

- Court should approve Rehabilitation Plan within 120 days of filing of petition. Failure to approve
after the term is deemed approval.
- Effect of approval is same as under court-supervised rehabilitation.

Liquidation of Insolvent Juridical Debtors

1. Voluntary Liquidation: Insolvent debtor files petition for liquidation
a. Schedule of debts & liabilities w/ list of creditors
b. Inventory of assets, including receivables
c. 3 nominees for liquidator
- Debtor can initiate liquidation during rehabilitation proceedings

2. Involuntary Liquidation: 3 or more creditors with aggregate claims of at least Php 1M OR at least
25% of the subscribed capital/partner contributions (whichever is higher) file petition
- Petition may be filed during rehabilitation proceedings
o Petition shall show that
 No issue of fact/law on the petitioners’ claims
 Debtor has not made due payments for 180 days or has generally failed to meet
liabilities as they fall due
 There is no substantial likelihood that the debtor may be rehabilitated