Financial Rehabilitation and Insolvency Act of 2010

(R.A. No.10142)
Dean Nilo T. Divina
Faculty of Civil Law
University of Santo Tomas
____________________________________________________________________________________

or has liabilities that are greater than its

1. Debt reliefs or remedies available to or his assets
a juridical insolvent debtor under
FRIA Previous ruling (New Frontier vs
Equitable Bank case (2007), that an
i. Rehabilitation insolvent debtor cannot file petition for
rehabilitation no longer holds.
a. Court supervised
rehabilitation NB The term debtor does not include
i. Voluntary banks, insurance companies, pre-need
ii. Involuntary companies, and national and local
government agencies or units
b. Pre-negotiated
rehabilitation 4. What is the objective of
rehabilitation?
c. Out of court or informal
restructuring agreement or Corporate rehabilitation contemplates a
Rehabilitation Plan continuance of corporate life and
i. Petition for activities in an effort to restore and
liquidation reinstate the corporation to its former
ii. Voluntary position of successful operation and
iii. Involuntary solvency, the purpose being to enable the
company to gain a new lease on life and
2. Reliefs or remedies available to OR allow its creditors to be paid their claims
AGAINST individual debtor out of its earnings. Thus, the basic issues
i. Suspension of payments in rehabilitation proceedings concern the
ii. Voluntary liquidation viability and desirability of continuing the
iii. Involuntary Liquidation business operations of the distressed
corporation, all with a view of effectively
3. What do you mean by insolvent restoring it to a state of solvency or to its
debtor? former healthy financial condition
through the adoption of a rehabilitation
Insolvent shall refer to the financial plan. Philippine Asset Growth Two,
condition of a debtor that is generally Inc. and Planters Development Bank
unable to pay its or his liabilities as they vs. Fastech Synergy Philippines Inc., et
fall due in the ordinary course of business al. G.R. No. 206528, 28 June 2016
 2

Given the various stakeholders of the debtor and equitably distribute the
insolvent debtor- shareholders, creditors, debtor’s properties to the creditors based
the state, it is better to rehabilitate the on the rules on concurrence and
debtor than to carry out its liquidation. Is preference of credit
the present value recovery better than
if the debtor is to go under liquidation 7. What is the objective of suspension
within 120 days from filing of the of payments for individual debtor?
petition?
Unlike in liquidation, the individual
In the recent case of Viva Shipping Lines, debtor does not ask for discharge. He only
Inc. v. Keppel Philippines Mining, Inc., wants deferment of payments to give him
the Court took note of the characteristics time to be back on his feet.
of an economically feasible rehabilitation
plan. 8. What is the objective of voluntary
liquidation of an individual debtor?
a. The debtor has assets that can
generate more cash if used in its The objective is to be discharged from his
daily operations than if sold. obligations and to start afresh
b. Liquidity issues can be addressed
by a practicable business plan that 9. How do we distinguish voluntary
will generate enough cash to from involuntary liquidation of
sustain daily operations. individual debtors?
c. The debtor has a definite source of
financing for the proper and full Voluntary liquidation is filed by the
implementation of a debtor whose assets are less than
Rehabilitation Plan that is liabilities. Involuntary liquidation is filed
anchored on realistic assumptions by a creditor or group of creditors whose
and goals. aggregate claim is at least 500,000 if the
debtor commits an act of insolvency
5. How is this objective attained? (basically fraudulent act to defeat the
rights of creditor/creditors)
During the pendency of the
rehabilitation, enforcement of claims 10. Who can file petition for
against the debtor are generally rehabilitation?
suspended- to give time to the debtor and
the rehabilitation receiver to rehabilitate a. sole proprietorship
the company undistracted by court suits. b. Partnership when the filing is
approved by at least a majority of the
Likewise, the rehabilitation plan is partners
binding on the debtor and all creditors c. Corporation when approved by at
affected by the proceedings even to those least majority vote of the board of
who did not take part or opposed the directors or trustees and authorized
rehabilitation plan under the cram down by the vote of the stockholders
effect of the plan. representing at least two-thirds (2/3)
of the outstanding capital stock, or in
National and local taxes are waived until case of nonstock corporation, by the
approval of the rehabilitation plan or its vote of at least two-thirds (2/3) of the
termination. members, in a stockholder's or
member's meeting duly called for the
6. What is the objective of liquidation purpose.
of juridical debtors?
11. What is the procedure for debtor
To resolve and adjust competing claims initiated rehabilitation
and property rights of the creditors and
the debtor, maximize asset recovery of the The procedure is as follows:
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court; criminal action against the

i. File a petition for rehabilitation in debtor.SSQSIAC
the RTC of the city where the
debtor has principal office. It shall iv. At the hearing, court will direct
be verified to establish the creditors to give their comments to
insolvency of the debtor and the the petition and rehab plan and the
viability of its rehabilitation. It shall rehab receiver to submit report to
include, among others, a the court on whether debtor can be
rehabilitation plan and names of at rehabilitated.
least three nominees to the position
of rehabilitation receiver ( who will v. Receiver submits report to the court
implement the rehabilitation plan). on whether debtor can be
rehabilitated.
ii. If the court finds the petition to be
sufficient in form and substance, it vi. Within ten days from submission of
shall issue within five working days the report, the court may give due
a commencement order. course to the petition or convert the
Otherwise, the court, at its proceedings into one for liquidation
discretion, give petitioner time to (if debtor is insolvent and no
amend the petition to make it substantial likelihood for
sufficient in form and substance. rehabilitation.

iii. The rehabilitation proceedings vii. If the petition is given due course,
shall commence upon issuance of the court shall direct receiver to
the commencement order. The review, revise and/or recommend
commencement order, among action on the rehab plan.
others, appoints the rehabilitation
receiver and sets the case for initial viii. Receiver consults with debtor and
hearing. It shall also include a stay creditors.
order which shall suspend all
actions or proceedings for the ix. Receiver submits rehab plan to the
enforcement of claims against the court.
debtor, as well as actions to enforce
any judgment or attachment or x. Court directs creditors to give
provisional remedy against the comments to the rehab plan.
debtor; prohibits disposition or
encumbrance of property except in xi. Court approves rehab plan upon
the ordinary course of business and recommendation of receiver and
prohibit debtor from making any even over the objection of creditors
payment except when authorized if objection is manifestly
by the rules. CJAPDEP unreasonable.

The stay order does not include, xii. The court has one year from filing
among others, cases on appeal with of petition to approve rehabilitation
the sc, cases falling with a plan.
specialized court or quasi-judicial
agency, enforcement of claims xiii. Proceedings terminated by order of
against surety and other persons the court declaring successful
solidarily liable with the debtor and implementation of the rehab plan
third party or accommodation or a failure of rehabilitation.
mortgagors as well as issuers of
letter of credit, unless the property There is failure of rehabilitation in the
subject of third party mortgage is following cases:
necessary for the rehabilitation of
the debtor as determined by the
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A. Dismissal of the petition by the from judicial or extrajudicial interference

court; that might unduly hinder or prevent the
B. The debtor fails to submit a “rescue” of the distressed company, rather
rehabilitation plan; than to waste its/his time, effort and
C. Under the rehabilitation plan resources in defending claims against the
submitted by the debtor, there is corporation. (BAR 2006)
no substantial likelihood that the
debtor can be rehabilitated within NB The stay order is now referred to
a reasonable period; under FRIA as commencement order. The
D. In the implementation of the commencement order includes a stay
rehabilitation plan, the debtor fails order
to perform its obligations
thereunder or there is failure to PA Assurance (PA) was incorporated
realize the objectives, targets or in 1980 to engage in the sale of pre-
goals set forth therein, including need educational plans. It sold open-
the timeliness and conditions for ended educational plans which
the settlement of the obligations guaranteed the payment of tuition
due to the creditors and other and other fees to planholders
claimants; irrespective of the cost at the time of
E. The Commission of fraud in availment. It also engaged in the sale
securing the rehabilitation plan or of fixed value plans which guaranteed
its amendment; and the payment of a pre-determined
F. Other analogous circumstances as amount to planholders. In 1982, PA
may be defined by the rules of was among the country’s top
procedure. corporations. However, it
subsequently suffered financial
Upon failure of the rehabilitation, the difficulties.
Court may issue an order converting the
proceedings to a liquidation. On September 8, 2005, PA filed a
Petition for Corporate Rehabilitation
The Blue Star Corporation filed with before the RTC of Makati City. On
the RTC a petition for rehabilitation October 17, 2005, 10 plan holders filed
on the ground that it foresaw the an Opposition and Motion to Exclude
impossibility of paying its obligations Planholders from Stay Order on the
as they fall due. Finding the petition ground that planholders are not
sufficient in form and substance, the creditors as they (planholders) have a
court issued an Order appointing a trust relationship with PA. Are the
rehabilitation receiver and staying the planholders correct?
enforcement of all claims against the
corporation. Answer:
No. The planholders is not correct. On
What is the rationale for the Stay November 21, 2000, the Court approved
Order? the Interim Rules of Procedure on
Corporate Rehabilitation of 2000 (Interim
Answer: Rules), which took effect on December 15,
The stay order is a recognition that all 2000. The Interim Rules apply to petitions
assets of a corporation under for rehabilitation filed by corporations,
rehabilitation are held in trust for the partnerships, and associations pursuant
equal benefit of all creditors under the to PD 902-A, as amended. Under the
doctrine of “equality is equity”. As all the Interim Rules, “claim” shall include “all
creditors ought to stand on equal footing, claims or demands of whatever nature or
not any one of them should be paid ahead character against the debtor or its
of others. Furthermore, the stay order will property, whether for money or
enable the the rehabilitation receiver to otherwise.” “Creditor” shall mean “any
effectively exercise its or his powers free holder of a claim.” Hence, the claim of the
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 5

planholders from PA is included in the c. The court not bound by the report
definition of “claims” under the Interim of the receiver
Rules. (BAR 2014)
The CA's reliance on the expertise of the
IMPORTANT POINTS court-appointed Rehabilitation Receiver,
who opined that respondents'
a. Stay order covers claims of rehabilitation is viable, in order to justify
pecuniary nature its finding that the financial statements
submitted were reliable, overlooks the
b. It does not cover surety, issuers of fact that the determination of the validity
l/c and third party mortgagors and the approval of the rehabilitation
except if property of latter needed plan is not the responsibility of the
for rehab of the debtor rehabilitation receiver, but remains the
function of the court. The rehabilitation
Under the FRIA, the Stay Order may now receiver's duty prior to the court's
cover third-party or accommodation approval of the plan is to study the best
mortgages, in which the "mortgage is way to rehabilitate the debtor, and to
necessary for the rehabilitation of the ensure that the value of the debtor's
debtor as determined by the court upon properties is reasonably maintained; and
recommendation by the rehabilitation after approval, to implement the
receiver." The FRIA likewise provides that rehabilitation plan. Notwithstanding the
its provisions may be applicable to further credentials of the court-appointed
proceedings in pending cases, except to rehabilitation receiver, the duty to
the extent that, in the opinion of the determine the feasibility of the
court, their application would not be rehabilitation of the debtor rests with the
feasible or would work injustice. court. While the court may consider the
receiver's report favorably recommending
Sec. 146 of the FRIA, which makes it the debtor's rehabilitation, it is not bound
applicable to "all further proceedings in thereby if, in its judgment, the debtor's
insolvency, suspension of payments and rehabilitation is not feasible. Philippine
rehabilitation cases x x x except to the Asset Growth Two, Inc. and Planters
extent that in the opinion of the court Development Bank vs. Fastech
their application would not be feasible or Synergy Philippines Inc., et al. G.R.
would work injustice," still presupposes a No. 206528, 28 June 2016, J. Perlas-
prospective application. The wording of Bernabe
the law clearly shows that it is applicable
to all further proceedings. In no way could d. The court may terminate rehab if
it be made retrospectively applicable to there is no material financial
the Stay Order issued by the commitment of the debtor to make
rehabilitation court back in 2002. Situs it work
Dev. Corporation et al., vs. AsiaTrust
Bank et al., G.R. No. 180036, 16 January The Regional Trial Court correctly
2013, C.J. Sereno dismissed petitioner's rehabilitation plan.
It found that petitioner's assets are non-
The rules in effect at the time the performing. Petitioner admitted this in its
rehabilitation petition was filed were the Amended Petition when it stated that its
Interim Rules. The Interim Rules took vessels were no longer
effect on December 15, 2000, and did not serviceable. In Wonder Book Corporation
allow the joint or consolidated filing of v. Philippine Bank of Communications, a
rehabilitation petitions. MERVIC rehabilitation plan is infeasible if the
REALTY, INC. AND VICCY REALTY, assets are nearly fully or fully depreciated.
INC., Petitioners, v. CHINA BANKING This reduces the probability that
CORPORATION, Respondent. G.R. No. rehabilitation may restore and reinstate
193748, February 03, 2016 petitioner to its former position of
successful operation and solvency.
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 6

creditors holding a majority of the

The plan of selling properties of corporation’s total liabilities if there is a
petitioner's sister company to generate showing that rehabilitation is feasible and
cash flow cannot be a basis for the the opposition of the creditors is
approval of the rehabilitation plan. As manifestly unreasonable. Also known as
pointed out by the Regional Trial Court, the "cram-down" clause, this provision,
this plan requires conformity from the which is currently incorporated in the
sister company. Even if the two FRIA, is necessary to curb the majority
companies have the same directorship creditors’ natural tendency to dictate
and ownership, they are still two separate their own terms and conditions to the
juridical entities. VIVA SHIPPING rehabilitation, absent due regard to the
LINES, INC., Petitioner, v. KEPPEL greater long-term benefit of all
PHILIPPINES MINING, INC., stakeholders. Otherwise stated, it forces
METROPOLITAN BANK & TRUST the creditors to accept the terms and
COMPANY, PILIPINAS SHELL conditions of the rehabilitation plan,
PETROLEUM CORPORATION, CITY preferring long-term viability over
OF BATANGAS, CITY OF LUCENA, immediate but incomplete recovery.
PROVINCE OF QUEZON, ALEJANDRO Bank of the Philippine Islands v.
OLIT, NIDA MONTILLA, PIO Sarabia Manor Hotel Corporation,
HERNANDEZ, EUGENIO BACULO, G.R. No. 175844, 29 July 2013, J. Perlas-
AND HARLAN Bernabe
BACALTOS, Respondents. G.R. No.
177382, February 17, 2016, LEONEN, J.
BAR EXAM QUESTIONS
e. Equality is equity principle
Debtor Corporation and its principal
All assets of a corporation under stockholders filed with the SEC a
rehabilitation receivership are held in trust petition for rehabilitation and
for the equal benefit of all creditors, declaration of a state of suspension of
precluding one from obtaining an payments under P.D. 902-A. The
advantage or preference over another by objective was for SEC to take control of
the expediency of attachment, execution the corporation and all its assets and
or otherwise. Once the corporation is liabilities, earnings and operations
taken over by a receiver, all the creditors and rehabilitating the company for
stand on equal footing and no one may be the benefit of investors and creditors.
paid ahead of the others. This is precisely
the reason for suspending all pending Generally, the unsecured creditors
claims against the corporation under had manifested willingness to
receivership. This is called the “pari passu cooperate with Debtor Corporation.
principle”. (BAR 2008) The secured creditors, however,
expressed serious objections and
f. Mortgagee and pledgee cannot reservations.
foreclose
First Bank had already initiated
g. Commencement order retroacts to judicial foreclosure proceedings on
date of petition the mortgage constituted on the
factory of Debtor Corporation.
h. Affects even objecting creditors
Second Bank had already initiated
Among other rules that foster the foreclosure proceedings on a third-
foregoing policies, Section 23, Rule 4 of party mortgage constituted on certain
the Interim Rules of Procedure on assets of the principal stockholders.
Corporate Rehabilitation (Interim Rules)
states that a rehabilitation plan may be Third Bank had already filed a suit
approved even over the opposition of the against the principal stockholders
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 7

who had held themselves liable jointly NB same answer except that for the
and severally for the loans of Debtor jurisdiction of the SEC which has been
Corporation with said Bank. transferred to the RTC

After hearing, the SEC directed the c) The order of suspension of

appointment of a rehabilitation payments suspended the foreclosure
receiver and ordered the suspension proceedings initiated by the Second
of all actions and claims against the Bank. While the foreclosure is against
Debtor Corporation as well as against the property of a third party, it is in
the principal stockholders. reality an action to collect the
principal obligation owed by the
a) Discuss the validity of the SEC corporation. During the time that the
order of suspension? payment of the principal obligation is
b) Discuss the effects of the SEC suspended, the debtor corporation is
order of suspension on the considered to be not in default and,
judicial foreclosure proceedings therefore, even the right to enforce the
initiated by First Bank. security, whether owned by the
c) Would the order of suspension debtor-corporation or of a third party,
have any legal effect on the has not yet arisen.
foreclosure proceedings
initiated by Second Bank? NB Under Section 18 of FRIA, the stay
Explain. order shall not apply to the
d) Would the order of suspension enforcement of claims against sure
have any effect on the suit filed by ties and other persons solidarily liable
Third Bank? Explain. with the debtor, and third party or
e) What are the legal consequences accommodation mortgagors as well as
of a rehabilitation receivership? issuers of letter of credit, unless the
f) What measures may the receiver property subject of the third party or
take to preserve the assets of accommodation mortgage is
Debtor Corporation? necessary for the rehabilitation of the
debtor as determined by the court
Answer: upon the recommendation of the
rehabilitation receiver.
a) The SEC order of suspension of
payment is valid with respect to the d) For the same reason as in (c), the
debtor corporation, but not with order of suspension of payments
respect to the principal stockholder. suspended the suit filed by Third Bank
The SEC has jurisdiction to declare against the principal stockholders.
suspension of payments with respect
to corporations, partnership or e) Under PD 902-A, the appointment
associations, but not with respect to of a rehabilitation receiver will
individuals. suspend all actions for claims against
the corporation and the corporation
b) The SEC order of suspension of will be placed under rehabilitation in
payment suspended the judicial accordance with a rehabilitation plan
proceedings initiated by First Bank. approved by the Commission.
According to the Supreme Court in a
line of cases, the suspension order NB the FRIA repealed PD 902-A
applies to secured creditors and to the insofar as it is now the RTC not the
action to enforce the security against SEC that has authority to appoint
the corporation regardless of the stage rehabilitation receiver
thereof.
f) To preserve the assets of the
Debtor Corporation, the receiver may
take custody of, and control over, all
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 8

the existing assets and property of the

corporation; evaluate existing assets Example. 180 million liabilities to five
and liabilities, earnings and creditors – a, b, c, d and e. The
operations of the corporation; and obligations due to a, b, and c amount to
determine the best way to salvage and 120 million but all of them are secured.
protect the interest of the investors The obligations due to d and e
and creditors. (BAR 1999) amounting to 60 million are
unsecured.
12. When may creditor/s commence
involuntary Proceedings? The plan has to be approved by the
creditors holding at least 120m
Any creditor or group of creditors with liabilities. Of the secured creditors who
a claim of, or the aggregate of whose gave the approval, they should hold at
claims is, at least One Million Pesos least 60 million and one peso and of the
(Php1,000,000.00) or at least twenty- unsecured creditors who gave the
five percent (25%) of the subscribed approval, they should hold at least 30
capital stock or partners' contributions, million and one peso.
whichever is higher, may initiate
involuntary proceedings against the 14. What are the requirements for an
debtor by filing a petition for Out of Court or Informal
rehabilitation with the court if: (a) restructuring agreement or rehab
there is no genuine issue of fact on law plan?
on the claim/s of the petitioner/s, and
that the due and demandable a. The debtor must agree to the out-
payments thereon have not been made of-court or informal
for at least sixty (60) days or that the restructuring/workout agreement
debtor has failed generally to meet its or Rehabilitation Plan;
liabilities as they fall due; or (b) a b. It must be approved by creditors
creditor, other than the petitioner/s, representing at least sixty-seven
has initiated foreclosure proceedings (67%) of the secured obligations of
against the debtor that will prevent the the debtor;
debtor from paying its debts as they c. It must be approved by creditors
become due or will render it insolvent. representing at least seventy-five
percent (75%) of the unsecured
13. What do you understand by pre- obligations of the debtor; and
negotiated rehabilitation plan? d. It must be approved by creditors
holding at least eighty-five percent
An insolvent debtor, by itself or jointly (85%) of the total liabilities,
with any of its creditors, may file a secured and unsecured, of the
verified petition with the court for the debtor.
approval of a pre-negotiated
Rehabilitation Plan which has been It means that among the secured
endorsed or approved by creditors and unsecured creditors and total
holding at least two-thirds (2/3) of the number of creditors, there is a
total liabilities of the debtor, including threshold percentage of liabilities.
secured creditors holding more than The approval is based on the
fifty percent (50%) of the total secured amount of liabilities and not based
claims of the debtor and unsecured on number of creditors.
creditors holding more than fifty
percent (50%) of the total unsecured 15. What do you mean by standstill
claims of the debtor. The petition shall agreement?
include the pre-negotiated
Rehabilitation Plan, including the It is an agreement by the debtor and
names of at least three (3) qualified the creditors providing for a standstill
nominees for rehabilitation receiver. period pending negotiation and
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 9

finalization of the out-of court or liabilities, the court must adjudicate

informal restructuring agreement the insolvency. (BAR 1991)
which is effective and enforceable not
only against the contracting parties but 17. Who may file petition for
also against other creditors. Provided, involuntary liquidation?
That such agreement is approved by
creditors representing more than 50% Three (3) or more creditors the aggregate
of the total liabilities of the debtor; of whose claims is at least either One
notice thereof is published in a million pesos (Php1,000,000,00) or at
newspaper of general circulation in the least twenty-five percent (25%0 of the
Philippines once a week for two subscribed capital stock or partner's
consecutive weeks; and the standstill contributions of the debtor, whichever is
period does not exceed 120 days from higher, may apply for and seek the
the date of effectivity. The notice must liquidation of an insolvent debtor by filing
invite creditors to participate in the a petition for liquidation of the debtor
negotiation for out- of- court with the court if (a) there is no genuine
rehabilitation or restructuring issue of fact or law on the claims/s of the
agreement and notify them that said petitioner/s, and that the due and
agreement will be binding on all demandable payments thereon have not
creditors if the required majority votes been made for at least one hundred eighty
are met. (180) days or that the debtor has failed
generally to meet its liabilities as they fall
16. When may an insolvent juridical due; and (b) there is no substantial
debtor file a petition for voluntary likelihood that the debtor may be
liquidation? rehabilitated.

An insolvent debtor may apply for If the petition is sufficient in form and
liquidation by filing a petition for substance, the court shall issue an Order:
liquidation with the court. The petition (1) directing the publication of the
shall be verified, shall establish the petition or motion in a newspaper of
insolvency of the debtor and shall general circulation once a week for two
contain (a) a schedule of the debtor's (2) consecutive weeks; and (2) directing
debts and liabilities including a list of the debtor and all creditors who are not
creditors with their addresses, amounts the petitioners to file their comment on
of claims and collaterals, or securities, the petition or motion within fifteen (15)
if any; (b) an inventory of all its assets days from the date of last publication.
including receivables and claims
against third parties; and (c) the names If, after considering the comments filed,
of at least three (3) nominees to the the court determines that the petition or
position of liquidator. motion is meritorious, it shall issue the
Liquidation Order.
If the petition is sufficient in form and
substance, the court shall issue a Bar exam questions
Liquidation Order.
a. Can a distressed corporation
Is the issuance of an order, file a petition for corporate
declaring a petitioner in a rehabilitation after the
Voluntary liquidation proceeding dismissal of its earlier petition
insolvent, mandatory upon the for liquidation ? Why?
court? b. Can the corporation file a
petition for rehabilitation first,
Assuming that the petition was in due and after it is dismissed file a
form and substance and that the assets petition for liquidation ? Why?
of the petitioner are less than his
Answer:
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making any payment outside of the

a) Yes, the dismissal of a petition for necessary or legitimate expenses of his
insolvency does not preclude the business or industry, so long as the
distressed corporation from filing a proceedings relative to the suspension of
petition for corporate rehabilitation. payments are pending;
The dismissal of the petition for
insolvency only means that the The suspension order shall lapse when
corporation may still be restored to three (3) months shall have passed without
solvency. the proposed agreement being accepted by
the creditors or as soon as such agreement
NB same is denied.

b) Yes, the dismissal of a petition for 19. Who are not covered by the court
rehabilitation means that the order and proceedings on
corporation can no longer be restored suspension of payments?
to solvency. Hence, it can file a
petition for insolvency. The court may a. those creditors having claims for
also convert the petition for personal labor, maintenance,
rehabilitation to liquidation expense of last illness and funeral
proceedings if the court finds that the of the wife or children of the
debtor cannot be rehabilitated. debtor incurred in the sixty (60)
days immediately prior to the filing
18. When may an individual debtor file of the petition; and
a petition for Suspension of b. secured creditors
Payments? c. creditors whose claims are not
listed in the petition.
An individual debtor who, possessing
sufficient property to cover all his debts 20. What are the requisites for the
but foreseeing the impossibility of meeting approval of the petition by the
them when they respectively fall due, may court?
file a verified petition that he be declared
in the state of suspension of payments by The presence of creditors holding claims
the court of the province or city in which amounting to at least three-fifths (3/5) of
he has resided for six (6) months prior to the liabilities shall be necessary for
the filing of his petition. He shall attach to holding a meeting.
his petition, as a minimum: (a) a schedule
of debts and liabilities; (b) an inventory of The creditors and individual debtor shall
assess; and (c) a proposed agreement with discuss the propositions in the proposed
his creditors. agreement and put them to a vote;

If the court finds the petition sufficient in To form a majority, it is necessary:

form and substance, it shall, within five (5)
working days from the filing of the 1. that two-thirds (2/3) of the
petition, issue an Order, among others, creditors voting unite upon the
calling a meeting of all the creditors named same proposition; and
in the schedule of debts and liabilities; 2. that the claims represented by said
directing such creditors to prepare and majority vote amount to at least
present written evidence of their claims three-fifths (3/5) of the total
before the scheduled creditors' meeting liabilities of the debtor mentioned
and forbidding the individual debtor from in the petition; and
selling, transferring, encumbering or
disposing in any manner of his property, If the decision of the majority of the
except those used in the ordinary creditors to approve the proposed
operations of commerce or of industry and agreement or any amendment thereof
prohibiting the individual debtor from made during the creditors' meeting is
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upheld by the court, or when no The distinctions are as follows :

opposition or objection to said decision
has been presented, the court shall order In liquidation, the liabilities of the debtor
that the agreement be carried out and all are more than his assets, while in
parties bound thereby to comply with its suspension of payments, assets of the
terms. debtor are more than his liabilities but
that the debtor foresees the impossibility
NB for petition for suspension of of paying his debts as they fall due.
payments, the number of creditors is
important. In liquidation, the assets of the debtor are
to be converted into cash for distribution
The total amount of liabilities owing to 6 among his creditors, while in suspension
creditors, a, b, c, d, e and f is 25o million. of payments, the debtor is only asking for
The amount due to each of a, b and c is time within which to convert his frozen
150 million. In the creditors meeting, the assets into liquid cash with which to pay
three agreed to the petition but not the his obligations when the latter fall due.
remaining creditors. The petition cannot
be approved by the court because a, b and There is discharge in voluntary
c while representing at least 3/5 of total liquidation of individual debtor but there
liabilities do not represent at least 2/3s of is no discharge in suspension of payment
number of creditors.
The court order in petition for suspension
One day jerry haw, doing business of payments does not include secured
under the name Starlight Enterprises, a creditors whereas in petition for
sole proprietorship, finds himself liquidation, foreclosure proceedings shall
short on cash and unable to pay his not be allowed for a period of 180 days
debts as they fall due although he has from issuance of the liquidation order.
sufficient property to cover such debts.
He asks you, as his retained counsel, 22. When may an individual debtor file
for advice on the following queries: a petition for liquidation?

Should he file a petition with the SEC to An individual debtor whose properties are
be declared in a state of suspension of not sufficient to cover his liabilities, and
payments in view of the said financial owing debts exceeding Five hundred
condition he faces? Explain your answer. thousand pesos (Php500,000.00), may
apply to be discharged from his debts and
Answer: liabilities by filing a verified petition with
I would counsel Jerry Haw to file the the court of the province or city in which
Petition for Suspension of Payment with he has resided for six (6) months prior to
the ordinary courts, rather than the SEC. the filing of such petition. He shall attach
SEC’s jurisdiction over such cases is to his petition a schedule of debts and
confined only to petitions filed by liabilities and an inventory of assets. The
corporations and partnerships under its filing of such petition shall be an act of
regulatory powers. insolvency.
If the court finds the petition sufficient in
NB Jurisdiction of SEC over petition for form and substance it shall, within five (5)
rehabilitation transferred to the RTC. working days issue the Liquidation Order.
Suspension of payments as a remedy is part
of the commencement order in a petition 23. A debtor who has been adjudged
for rehabilitation insofar as juridical insolvent is given his discharge by
persons are concerned. Natural persons the court after his properties have
may file petition for suspension of paymen been applied to his debts. A year
later, with those debts still not fully
21. Distinguish petition for liquidation paid, he wins in the sweepstakes
from suspension of payment.
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 12

and comes into a large fortune. His latter must have committed an act of
creditors sue him for the balance. insolvency.

Would the suit prosper? Reasons. The required amount of debt for the
debtor to file the petition for voluntary
The suit will not prosper on debts that liquidation should exceed P 500,000
are properly discharged in insolvency. whereas in involuntary liquidation, the
Those that are not discharged, creditor/s claims should be at least P
assuming that a discharge can be 500,000.
obtained, include:
1. Taxes and assessments due the 25. May the following be declared
government, national or local; insolvent assuming that the
2. Obligation arising from petition for liquidation is sufficient
embezzlement or fraud; in form and substance?
3. Obligations of any person liable
to the insolvent debtor for the (1) Married woman;
same debt; (2) Partnership;
4. Alimony or claim for support; (3) Insane person
5. In general, debts that are not
provable against the estate of Explain your answer.
the insolvent or not listed in the
schedule submitted by the Answer:
insolvent debtor. (BAR 1988) 1. Yes, a married woman may be
declared insolvent in respect to her
24. When may creditor/s file a petition own debts.
for involuntary liquidation against 2. Under FRIA, a partnership may be
an individual debtor? declared insolvent, either in a
voluntary or involuntary
Any creditor or group of creditors with a liquidation proceeding.
claim of, or with claims aggregating at 3. An insane person cannot file a
least Five hundred thousand pesos petition for voluntary liquidation
(Php500, 000.00) may file a verified because he lacks legal capacity to act.
petition for liquidation with the court of
the province or city in which the 26. What are considered acts of
individual debtor resides alleging that the insolvency under FRIA?
debtor committed an act of insolvency.
The following shall be considered acts of
Distinguish between voluntary insolvency. DAC2 SC DPAC MFE
liquidation and involuntary
liquidation of individual debtors. a. That such person ( debtor) is about
to depart or has departed from the
Answer: Republic of the Philippines, with
In voluntary liquidation, it is the debtor intent to defraud his creditors;
himself who files the petition for b. That being absent from the Republic
insolvency, while in involuntary of the Philippines, with intent to
liquidation, a creditor or group of defraud his creditors, he remains
creditors are the ones who file the absent;
petition for liquidation against the c. That he conceals himself to avoid
insolvent debtor. the service of legal process for the
purpose of hindering or delaying the
In voluntary liquidation, the filing of the liquidation or of defrauding his
petition is by itself the act of insolvency creditors;
whereas in involuntary liquidation filed d. That he conceals, or is removing, any
by creditor/s against the individual, the of his property to avoid its being
attached or taken on legal process;
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 13

e. That he has suffered his property to totaling P100,000, her assets, however,
remain under attachment or legal are worth P120,000.
process for three (3) days for the
purpose of hindering or delaying the (a) May “X” be declared an
liquidation or of defrauding his insolvent? Reason.
creditors;
f. That he has confessed or offered to Answer:
allow judgment in favor of any (a) Yes, X may be declared insolvent.
creditor or claimant for the purpose Under FRIA, although the debtor has
of hindering or delaying the more than sufficient property to pay
liquidation or of defrauding any all his creditors, yet if she would
creditors or claimant; commit any act of insolvency, she
g. That he has willfully suffered should be declared insolvent thru a
judgment to be taken against him by petition for involuntary liquidation.
default for the purpose of hindering One of the acts of insolvency out of the
or delaying the liquidation or of 13 enumerated by the Insolvency Law,
defrauding his creditors; is: that being absent from the
h. That he has suffered or procured his Philippines, with intent to defraud
property to be taken on legal process his/her creditors, he/she remains
with intent to give a preference to absent.
one or more of his creditors and
thereby hinder or delay the Juan opened a coffee shop using
liquidation or defraud any one of his money borrowed from financial
creditors; institutions. After
i. That he has made any assignment, 3 months, Juan left for the USA with
gift, sale, conveyance or transfer of the intent of defrauding his
his estate, property, rights or credits creditors. While
with intent to hinder or delay the his liabilities are P1.2 M, his assets,
liquidation or defraud his creditors; however are worth P1.5. M. May Juan
j. That he has, in contemplation of be declared
insolvency, made any payment, gift, insolvent?
grant, sale, conveyance or transfer of
his estate, property, rights or credits; No. Juan may not be declared insolvent if
k. That being a merchant or he was the one who filed the petition for
tradesman, he has generally liquidation because his assets worth P1.5
defaulted in the payment of his M are more than his liabilities worth P1.2
current obligations for a period of M. However, his creditors may file a
thirty (30) days; petition for involuntary liquidation since
l. That for a period of thirty (30) days, he committed an act of insolvency (BAR
he has failed, after demand, to pay 1998)
any moneys deposited with him or
received by him in a fiduciary; and 27. What does the Liquidation Order
m. That an execution having been contain ?
issued against him on final judgment
for money, he shall have been found The Liquidation Order shall:
to be without sufficient property
subject to execution to satisfy the 1. declare the debtor insolvent;
judgment. 2. order the liquidation of the debtor
and, in the case of a juridical debtor,
“X”, owner of a general merchandise declare it as dissolved;
store, departed from the Philippines 3. order the sheriff to take possession
with intent to defraud her creditors and control of all the property of the
and has remained absent from the debtor, except those that may be
country. While she has liabilities exempt from execution;

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 14

4. order the publication of the petition transferred to the Liquidator for

or motion in a newspaper of general him to accept and settle or
circulation once a week for two (2) contest. If the liquidator contests
consecutive weeks; or disputes the claim, the court
5. direct payments of any claims and shall allow, hear and resolve such
conveyance of any property due the contest except when the case is
debtor to the liquidator; already on appeal. In such a case,
6. prohibit payments by the debtor and the suit may proceed to judgment,
the transfer of any property by the and any final and executor
debtor; judgment therein for a claim
7. direct all creditors to file their claims against the debtor shall be filed
with the liquidator within the period and allowed in court; and
set by the rules of procedure; (e) no foreclosure proceeding shall be
8. authorize the payment of allowed for a period of one
administrative expenses as they hundred eighty (180) days.
become due;
9. state that the debtor and creditors 29. What are the remedies of the
who are not petitioner/s may submit secured creditor in liquidation
the names of other nominees to the proceeding ?
position of liquidator; and
10. set the case for hearing for the During liquidation proceedings, a secured
election and appointment of the creditor may waive its security or lien,
liquidator, which date shall not be prove its claim, and share in the
less than thirty (30) days nor more distribution of the assets of the debtor, in
than forty-five (45) days from the which case it will be admitted as an
date of the last publication. unsecured creditor; or maintain its rights
under the security or lien, in which case:
28. What are the effects of the
Liquidation Order 1. [T]he value of the property may be fixed
in a manner agreed upon by the creditor
Upon the issuance of the Liquidation and the liquidator. When the value of the
Order: property is less than the claim . . . the
[creditor] will be admitted . . . as a creditor
(a) the juridical debtor shall be for the balance. If its value exceeds the
deemed dissolved and its claim . . . the liquidator may convey the
corporate or juridical existence property to the creditor and waive the
terminated; debtor’s right of redemption upon
(b) legal title to and control of all the receiving the excess from the creditor;
assets of the debtor, except those
that may be exempt from 2. [T]he liquidator may sell the property
execution, shall be deemed vested and satisfy the secured creditor’s entire
in the liquidator or, pending his claim from the proceeds of the sale; or
election or appointment, with the
court; 3. [T]he secured creditor may enforce the
(c) all contracts of the debtor shall be lien or foreclose on the property pursuant
deemed terminated and/or to applicable laws.
breached, unless the liquidator,
within ninety (90) days from the It is worth mentioning that under
date of his assumption of office, Republic Act No. 10142, otherwise known
declares otherwise and the as the Financial Rehabilitation and
contracting party agrees; Insolvency Act (FRIA) of 2010, the right of
(d) no separate action for the a secured creditor to enforce his lien
collection of an unsecured claim during liquidation proceedings is
shall be allowed. Such actions retained. A secured creditor, however, is
already pending will be subject to the temporary stay of
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 15

foreclosure proceedings for a period of 180 No relief can be extended to the party
days, upon the issuance by the court of aggrieved by the court’s order on the
the Liquidation Order. Metropolitan motion through a special civil action
Bank and Trust Company vs. S.F. for certiorari under Rule 65 of the Rules
Naguiat Enterprises, G.R. No. 178407, of Court.
18 March 2015, J. Leonen
C. The court’s dismissal of the petition for
Distinguish the remedies of the suspension of payment on the ground
secured creditors in rehabilitation of insufficiency in form and substance
proceedings, suspension of payment resulting in the non-issuance of the
and liquidation proceedings. suspension order and its order
confirming or disapproving the
In rehabilitation, the stay order suspends proposed suspension of payment
enforcement of the mortgage lien until agreement, as well as the liquidation
termination of the rehabilitation order and the order approving or
proceedings. The order of the court in disapproving the liquidation plan can
suspension of payments does not cover only be reviewed through a petition for
secured creditors while in liquidation, the certiorari to the Court of Appeals under
secured creditor can only enforce his lien Rule 65 of the Rules of Court within 15
after 180 days from issuance of the days from notice of the decision or
liquidation order. order.

What will guide the liquidator in

carrying the liquidation of the
insolvent debtor?

The Liquidator shall submit to the court a

Liquidation Plan. The Plan shall take into
account the rules on concurrence and
preference of credit unless a preferred
creditor voluntarily waives his preferred
right. Once approved, the Plan shall be
carried out to settle the claims against the
debtor.

30. 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.

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