FRIA Law

On Oct. 22, 2013, the Financial Rehabilitation Rules of Procedure went into effect.
The FR rules were approved by the Supreme Court on Aug. 27, 2013, to implement the
provisions on rehabilitation contained in RA 10142, or The Financial Rehabilitation and
Insolvency Act of 2010 (FRIA).
The FR rules introduce drastic changes to the old rules on rehabilitation, one of which
relates to rehabilitation receivers.
A rehabilitation receiver is a person who assists the court in formulating and
implementing the rehabilitation plan of a financially distressed debtor undergoing
rehabilitation. While appointed at the instance of the debtor and/or creditors, a
rehabilitation receiver is, first and foremost, an officer of the court.
Unlike the old rules where only a natural person could be a rehabilitation receiver, both
the FRIA and FR rules expressly provide that a juridical person (like an accounting firm,
law firm, and other professional partnerships or even a corporate entity) may serve as a
rehabilitation receiver. However, a rehabilitation receiver which is a juridical entity must
designate, as its representative, a natural person who must possess all the
qualifications and none of the disqualifications provided for rehabilitation receivers.
Furthermore, a juridical entity and the representative are solidarily liable for all the
obligations and responsibilities of a rehabilitation receiver.
Conflict of interest
No person may be appointed as a rehabilitation receiver if he has a conflict of interest.
The rehabilitation receiver is deemed to have a conflict of interest if he is so situated as
to be materially influenced in the exercise of his judgment for or against any party to the
proceedings.
These are some examples of conflict of interest on the part of the rehabilitation receiver:
(a) he is a creditor, owner, partner or stockholder of the debtor; (b) he is engaged in a
line of business which competes with the debtor; (c) he is or was, within five years from
the filing of the petition, a director, officer, owner, partner, or employee or the auditor or
accountant of the debtor; (d) he is or was, within two years from the filing of the petition,
an underwriter of the outstanding securities of the debtor; or, (e) he is related by
consanguinity or affinity within the fourth civil degree to any individual creditor, owner/s
of a sole proprietorship-debtor, partners of a partnership-debtor, or to any stockholder,
director, officer, employee, or underwriter of the corporation-debtor.
A key change introduced by the FR rules is that no person may be engaged by the
rehabilitation receiver as part of his team if he has conflict of interest. In fact, the FR
rules expressly provide that a conflict of interest of an individual employed or contracted
by the rehabilitation receiver shall be deemed to be a conflict of interest of the
rehabilitation receiver.
Disclosure of conflict of interest

Another key change introduced by the FR rules is that conflict of interest shall be
disclosed to the court and the creditors at all times throughout the proceedings.
The FR rules require that disclosure of any conflict of interest be made: (a) by the
nominees for the position of rehabilitation receiver before their names are submitted for
appointment; (b) by the rehabilitation receiver and its designated representative in case
of juridical person, within 15 days from the appointment as rehabilitation receiver; and
(c) by the rehabilitation receiver and its designated representative in case of juridical
person, within 10 days from the time the rehabilitation receiver and/or its designated
representative learns of any fact giving rise to conflict of interest while the rehabilitation
proceedings are pending.
The rule on disclosure also applies to persons who assist the rehabilitation receiver as
professionals, experts or employees.
These persons shall file their disclosure within 10 days from the date they are
contracted or are employed by the rehabilitation receiver.
Compensation
Like the 2008 rules, the FRIA and FR rules allow a rehabilitation receiver and the latters
direct employees and independent contractors to charge reasonable fees and
expenses.
Such fees and expenses are considered administrative expenses. This means that the
debtor is obligated to pay them, notwithstanding the issuance of the commencement
order which, among others, suspends payment of all claims against the debtor.
Unlike the 2008 rules, however, the FRIA and FR rules expressly require that such fees
and expenses must be approved by the court after notice and hearing.
Before such hearing, the rehabilitation receiver is entitled to reasonable compensation
based on quantum meruit.
Like the old rules, the FR rules do not contain a table of fees for the rehabilitation
receiver. But unlike the old rules, they expressly provide factors that should be
considered by the court in determining the amount of reasonable compensation. The
factors include the following: (1) size of the debtor under rehabilitation; (2) time to be
spent on such services; (3) credentials, experience, skills and reputation of the receiver,
his direct employees or independent contractors; (4) benefits accruing to the debtor; (5)
complexity, importance, urgency, and nature of the problems, issues, or tasks
addressed; and (6) customary compensation charged by comparably skilled
practitioners in other rehabilitation cases.
Also, unlike the old rules, the FR rules expressly provide that if any substantial or
material change in the circumstances intervenes affecting the compensation fixed, the
court may, upon motion of the debtor, rehabilitation receiver, or the creditors, order a
review or revision of the compensation set by the court.
Disclosure of all forms of compensation
Not only is court approval necessary for the rehabilitation receivers fee, but more
importantly, the FR rules expressly require the rehabilitation receiver and his team to
disclose in writing, at the earliest opportunity, to the court, with notice to all the parties,
all forms of arrangements or agreements in the handling of the receivership.
Notably, the disclosure shall cover all forms of arrangements or agreements such as
but not limited to, commissions, fees, fee-sharing arrangements, and payments in
kind.
Failure to comply with this duty shall be a ground for removal from office of the person
concerned and forfeiture of the rehabilitation receivers bond.
The new rules are intended to minimize abuses (perceived or real) and to promote
transparency on the part of rehabilitation receiver. If it is any consolation at all to
rehabilitation receivers, most of the new requirements apply to members of the
management committee and their teams as well.

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On Oct. 22, 2013, the Financial Rehabilitation Rules of Procedure went into effect.

Disclosure of conflict of interest

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