BAR EXAM QUESTIONS

• Debtor Corporation and its principal stockholders filed with the SEC a petition for
rehabilitation and declaration of a state of suspension of payments under P.D. 902-A. The objective
was for SEC to take control of the corporation and all its assets and liabilities, earnings and
operations and rehabilitating the company for the benefit of investors and creditors.

• Generally, the unsecured creditors had manifested willingness to cooperate with Debtor
Corporation. The secured creditors, however, expressed serious objections and reservations.

• First Bank had already initiated judicial foreclosure proceedings on the mortgage constituted
on the factory of Debtor Corporation.

• Second Bank had already initiated foreclosure proceedings on a third-party mortgage

constituted on certain assets of the principal stockholders.

• Third Bank had already filed a suit against the principal stockholders who had held
themselves liable jointly and severally for the loans of Debtor Corporation with said Bank.

• After hearing, the SEC directed the appointment of a rehabilitation receiver and ordered the
suspension of all actions and claims against the Debtor Corporation as well as against the principal
stockholders.

A. Discuss the validity of the SEC order of suspension?

A. The SEC order of suspension of payment is valid with respect to the debtor corporation, but
not with respect to the principal stockholder. The SEC has jurisdiction to declare suspension of
payments with respect to corporations, partnership or associations, but not with respect to
individuals.

B. Discuss the effects of the SEC order of suspension on the judicial

foreclosure proceedings initiated by First Bank.

B. The SEC order of suspension of payment suspended the judicial proceedings initiated by First
Bank. According to the Supreme Court in a line of cases, the suspension order applies to secured
creditors and to the action to enforce the security against the corporation regardless of the stage
thereof.

NB same answer except that for the jurisdiction of the SEC which has been transferred to the RTC

C. Would the order of suspension have any legal effect on the foreclosure

proceedings initiated by Second Bank? Explain.

c) The order of suspension of payments suspended the foreclosure proceedings initiated by the
Second Bank. While the foreclosure is against the property of a third party, it is in reality an action to
collect the principal obligation owed by the corporation. During the time that the payment of the
principal obligation is suspended, the debtor corporation is considered to be not in default and,
therefore, even the right to enforce the security, whether owned by the debtor-corporation or of a
third party, has not yet arisen.
NB Under Section 18 of FRIA, the stay order shall not apply to the enforcement of claims against sure
ties and other persons solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of letter of credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the
court upon the recommendation of the rehabilitation receiver.

D. Would the order of suspension have any effect on the suit filed by Third Bank? Explain.

D) For the same reason as in (c), the order of suspension of payments suspended the suit filed by
Third Bank against the principal stockholders.

E. What are the legal consequences of a rehabilitation receivership?

E. ) Under PD 902-A, the appointment of a rehabilitation receiver will suspend all actions for
claims against the corporation and the corporation will be placed under rehabilitation in accordance
with a rehabilitation plan approved by the Commission.

NB the FRIA repealed PD 902-A insofar as it is now the RTC not the SEC that has authority to appoint
rehabilitation receiver

F. What measures may the receiver take to preserve the assets of Debtor Corporation?

F) To preserve the assets of the Debtor Corporation, the receiver may take custody of, and control
over, all the existing assets and property of the corporation; evaluate existing assets and liabilities,
earnings and operations of the corporation; and determine the best way to salvage and protect the
interest of the investors and creditors. (BAR 1999)

11. What do you understand by pre-negotiated rehabilitation plan?

• 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 prenegotiated 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 the pre-negotiated Rehabilitation Plan, including the names of at
least three (3) qualified nominees for rehabilitation receiver.

12. What are the requirements for an Out of Court or Informal

restructuring agreement or rehab plan?

a. The debtor must agree to the out-of-court or informal restructuring/workout agreement or

Rehabilitation Plan;

b. It must be approved by creditors representing at least sixty-seven (67%) of the secured

obligations of the debtor;

c. It must be approved by creditors representing at least seventy-five percent

(75%) of the unsecured obligations of the debtor; and

d. It must be approved by creditors holding at least eighty-five percent (85%) of the total
liabilities, secured and unsecured, of the debtor.
• It means that among the secured and unsecured creditors and total number of creditors,
there is a threshold percentage of liabilities. The approval is based on the amount of liabilities and
not based on number of creditors.

13. What do you mean by standstill agreement ?

• It is an agreement by the debtor and the creditors providing for a standstill period pending
negotiation and finalization of the out-of court or informal restructuring agreement which is
effective and enforceable not only against the contracting parties but also against other creditors.
Provided, That such agreement is approved by creditors representing more than 50% of the total
liabilities of the debtor; notice thereof is published in a newspaper of general circulation in the
Philippines once a week for two consecutive weeks; and the standstill period does not exceed 120
days from the date of effectivity. The notice must invite creditors to participate in the negotiation for
out- of- court rehabilitation or restructuring agreement and notify them that said agreement will be
binding on all creditors if the required majority votes are met.

14. When may an individual debtor file a petition for Suspension of Payments?

• An individual debtor who, possessing sufficient property to cover all his debts but foreseeing
the impossibility of meeting them when they respectively fall due, may file a verified petition that he
be declared in the state of suspension of payments by the court of the province or city in which he
has resided for six (6) months prior to the filing of his petition. He shall attach to his petition, as a
minimum: (a) a schedule of debts and liabilities; (b) an inventory of assess; and (c) a proposed
agreement with his creditors.

• If the court finds the petition sufficient in form and substance, it shall, within five (5) working
days from the filing of the petition, issue an Order, among others, calling a meeting of all the
creditors named in the schedule of debts and liabilities; directing such creditors to prepare and
present written evidence of their claims before the scheduled creditors' meeting and forbidding the
individual debtor from selling, transferring, encumbering or disposing in any manner of his property,
except those used in the ordinary operations of commerce or of industry and prohibiting the
individual debtor from making any payment outside of the necessary or legitimate expenses of his
business or industry, so long as the proceedings relative to the suspension of payments are pending;

• The suspension order shall lapse when three (3) months shall have passed without the
proposed agreement being accepted by the creditors or as soon as such agreement is denied.

15. Who are not covered by the court order and proceedings on suspension of payments?

a. those creditors having claims for personal labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the
filing of the petition; and

b. secured creditors

c. creditors whose claims are not listed in the petition.

16. What are the requisites for the approval of the petition by the court?

• The presence of creditors holding claims amounting to at least threefifths (3/5) of the
liabilities shall be necessary for holding a meeting.

• The creditors and individual debtor shall discuss the propositions in the proposed agreement
and put them to a vote;
• To form a majority, it is necessary:

1. that two-thirds (2/3) of the creditors voting unite upon the same proposition; and

2. that the claims represented by said majority vote amount to at least three-fifths (3/5) of the
total liabilities of the debtor mentioned in the petition; and

• If the decision of the majority of the creditors to approve the proposed agreement or any
amendment thereof made during the creditors' meeting is upheld by the court, or when no
opposition or objection to said decision has been presented, the court shall order that the
agreement be carried out and all parties bound thereby to comply with its terms.

17. Distinguish petition for liquidation from suspension of payment.

The distinctions are as follows :

• In liquidation, the liabilities of the debtor are more than his assets, while in suspension of
payments, assets of the debtor are more than his liabilities but that the debtor foresees the
impossibility of paying his debts as they fall due.

• In liquidation, the assets of the debtor are to be converted into cash for distribution among
his creditors, while in suspension of payments, the debtor is only asking for time within which to
convert his frozen assets into liquid cash with which to pay his obligations when the latter fall due.

The distinctions are as follows :

• There is discharge in voluntary liquidation of individual debtor but there is no discharge in

suspension of payment

• The court order in petition for suspension of payments does not include secured creditors
whereas in petition for liquidation, foreclosure proceedings shall not be allowed for a period of 180
days from issuance of the liquidation order.

b. Distinguish between voluntary liquidation and involuntary liquidation of individual debtors.

Answer:

• In voluntary liquidation, it is the debtor himself who files the petition for insolvency, while in
involuntary liquidation, a creditor or group of creditors are the ones who file the petition for
liquidation against the insolvent debtor.

• In voluntary liquidation, the assets of the debtor are less than his liabilities while involuntary
liquidation, the assets need not be less than liabilities

• In voluntary liquidation, the filing of the petition is by itself the act of insolvency whereas in
involuntary liquidation filed by creditor/s against the individual, the latter must have committed an
act of insolvency.

• The required amount of debt for the debtor to file the petition for voluntary liquidation
should exceed P 500,000 whereas in involuntary liquidation, the creditor/s claims should be at least
P 500,000.

c. What are the remedies of the secured creditor in liquidation proceeding ?

During liquidation proceedings, a secured creditor may waive its security or lien, prove its claim, and
share in the distribution of the assets of the debtor, in which case it will be admitted as an unsecured
creditor; or maintain its rights under the security or lien, in which case:

• 1. [T]he value of the property may be fixed in a manner agreed upon by the creditor and the
liquidator. When the value of the property is less than the claim . . . the [creditor] will be
admitted . . . as a creditor for the balance. If its value exceeds the claim . . . the liquidator may
convey the property to the creditor and waive the debtor’s right of redemption upon receiving the
excess from the creditor;

2. [T]he liquidator may sell the property and satisfy the secured creditor’s entire claim from the
proceeds of the sale; or3. [T]he secured creditor may enforce the lien or foreclose on the property
pursuant to applicable laws.

• It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien
during liquidation proceedings is retained. A secured creditor, however, is subject to the temporary
stay of foreclosure proceedings for a period of 180 days, upon the issuance by the court of the
Liquidation Order. Metropolitan Bank and Trust Company vs. S.F. Naguiat Enterprises,

G.R. No. 178407, 18 March 2015, J. Leonen

d. Distinguish the remedies of the secured creditors in rehabilitation proceedings, suspension of

payment and liquidation proceedings.

• In rehabilitation, the stay order suspends enforcement of the mortgage lien until termination of
the rehabilitation proceedings. The order of the court in suspension of payments does not cover
secured creditors while in liquidation, the secured creditor can only enforce his lien after 180 days
from issuance of the liquidation order.

18. What are the procedural remedies under FRIA?

a. Decisions of the Regional Trial Court on rehabilitation are immediately executory and shall
be appealable to the Court of Appeals under Rule 43 of the Rules of Court. Motion for
reconsideration of the decision is not allowed

b. A party may file a motion for reconsideration of a suspension of payment order or any order
issued by the court prior to its order confirming or disapproving the proposed agreement to suspend
payment, as well as any order of issued by the court prior to the issuance of the liquidation order.

No relief can be extended to the party aggrieved by the court’s order on the motion through a
special civil action for certiorari under Rule 65 of the Rules of Court.

c. The court’s dismissal of the petition for suspension of payment on the ground of
insufficiency in form and substance resulting in the non-issuance of the suspension order and its
order confirming or disapproving the proposed suspension of payment agreement, as well as the
liquidation order and the order approving or disapproving the liquidation plan can only be reviewed
through a petition for certiorari to the Court of Appeals under Rule 65 of the Rules of Court within 15
days from notice of the decision or order.