FINANCIAL REHABILITATION AND ORDINARY COURSE OF BUSINESS means the

INSOLVENCY ACT OF 2010 (FRIA) transactions in pursuit of the individual debtor’s

or debtor’s business operations prior to
 RA 10142 or “An Act providing for the rehabilitation or insolvency proceedings and on
Rehabilitation or Liquidation of Financially ordinary business terms.
Distressed Enterprises and Individuals.”
 Lapsed into law on JULY 18 2010. DEBTOR FOR PURPOSES OF FRIA
 It is now the governing law on corporate Debtor refers to
insolvency and rehabilitation procedures.
 It expressly repealed the old Insolvency  A sole proprietorship duly registered with
Law or Act No. 1956. DTI.
 A partnership duly registered with the SEC.
POLICIES  A corporation duly organized and existing
 It expresses the policy of the State to under the Philippine laws.
encourage debtors, both juridical and  An individual who has become insolvent.
natural persons and their creditors to NOT DEBTORS FOR PURPOSES OF FRIA
collectively resolve and adjust competing
claims and property rights (SEC. 2, FRIA) - Banks and Quasi-banks (that are potentially
 The State shall ensure a timely, fair, or actually subject to conservatorship,
transparent, effective, and efficient receivership, or liquidations proceedings
rehabilitation or liquidation of debtors (SEC. under the New Central Bank Act)
2, FRIA) - Insurance Companies
 When rehabilitation is not feasible, it is in - Pre-need companies
the interest of the State to facilitate a - National and local agencies or units
speedy and orderly liquidation of debtor’s CREDITOR FOR PURPOSES OF FRIA
assets and the settlement of their obligation
(SEC. 2, FRIA) Creditor refers to a natural or juridical person
which has a “claim” against the debtor which arose
NATURE OF INSOLVENCY PROCEEDINGS on or before the commencement date.
1. The insolvency proceedings under FRIA is in Commencement Date refers to the date on which
rem (binding to the whole world) the court issues the Commencement Order, which
This means upon publication of the shall be retroactive to the date of filing the petition
proceedings in any newspaper of general for voluntary or involuntary proceedings.
circulation, jurisdiction is acquired by the court over TYPES OF DEBTORS
all persons affected by the proceedings.
1. Individual debtor- a NATURAL person who is
2. The insolvency proceedings is also summary resident and citizen of the Philippines that has
and non-adversarial. become insolvent.
They do not include adjudication of claims that 2. Group od debtors- refers to and covers only:
require full trial on the merits. Any order of the
Court is immediately executory. a) Corporations that are financially related to
one another as parent corporations,
INSOLVENCY subsidiaries, or affiliates.
INSOLVENT refers to the financial condition b) Partnerships that are owned more than
of a debtor that is: 50% by the same person.
c) Single proprietorships that are owned by
1. generally unable to pay its or his liabilities as the same person.
they fall due in the ordinary course of business or
TYPES OF CREDITORS
2. has liabilities that are greater than its or his
assets. 1. General unsecured creditor- refers to creditor
whose claim or portion thereof is neither secured,
LIABILITIES refers to monetary claims against preferred nor subordinated under the FRIA.
debtor stockholder’s advances that have been
recorded in the debtor’s audited FS as advances 2. Unsecured creditor- refers to a creditor with a
for future subscriptions. secured claim.
Secured claim refers to a claim that is secured by - the number of creditors is
a lien. immaterial.
Lien refers to a statutory or contractual claim or Filing of Petition for Suspension of Payments
judicial charge on a real or personal property that
legally entities a creditor to resort to said property ONLY AN INDIVIDUAL DEBTOR MAY FILE A
for payments of the claim or debt secured by such PETITION FORSUSPENSION OF PAYMENTS
lien. The petition for suspension of payment is
PROCEEDINGS COVERED BY FRIA  file in the court
 Suspension of Payment Proceedings for  of the province or the city
 in which the individual debtor resides
Individual Debtors
for 6 months prior to the filing of the
 Court-Supervised Corporate
petition
Rehabilitation
1. Voluntary or Debtor-Initiated The court referred to is the Regional
Proceedings Trial Court
2. Involuntary or Creditor-Initiated
Proceedings Requirements for Filing a Petition for
 Pre-Negotiated Rehabilitation Suspension of Payments
 Out-of-Court Rehabilitation or Informal 1. The debtor is an individual debtor
Restructuring Agreements 2. The debtor has sufficient property to cover
 Liquidation of Insolvent Juridical his debts but foresees the impossibility of
Debtors meeting them when they fall due.
1. Voluntary Liquidation 3. The amount of indebtedness is not reduced
2. Involuntary Liquidation or discharged.
 Insolvency of Individual Debtors 4. The number of creditors is not material.
1. Voluntary Insolvency
2. Involuntary Insolvency Effects of Filing Petition for Suspension of
 Cross-Border Insolvency Proceedings Payments

REMEDIES AVAILABLE TO INSOLVENT The filling of petition for suspension of payment has
PERSON the following effects:

An insolvent person may avail the ff: 1. Properties held as security by secured
creditors shall not be subject to such
 Suspension of payments suspension order
 Rehabilitation 2. The suspension order shall lapse when 3
 Discharge of debts and months shall have passed without the
liabilities proposed agreement being accepted by the
creditors or as soon as such agreement is
Suspension of payments is an
denied.
o Order of the court 3. No creditor shall sue or institute
o Suspending payments of debt proceedings to collect his claim from the
o Upon petition of a debtor who, debtor from the time of payment of the filing
- Possessing sufficient property to of the petition for suspension of payments
cover his debts, and for as long proceedings remain
- Foresees the impossibility of pending
meeting them when they fall due. Creditors Not Affected by Filing of Petition for
PURPOSES OF SUSPENSION OF PAYMENTS Suspension of Payments

 To suspend or merely delay the payment 1. Those creditors having claims for personal
of debts/liabilities in some future time but labor, maintenance, expenses of last illness
not discharging or reducing its liabilities. and funeral of the wife or children of the
 To avoid great prejudice to the business debtor incurred in the 60 days
of the debtor as a result of using assets as immediately prior to the filing of the
payment of the liabilities. petition; and
2. Secured creditors.
 engaged, s long as the proceedings relative
to the suspension of payments are pending.
 Making any payment outside of the
Creditor’s Meeting necessary or legitimate expenses of his
business or industry, so long as the
Purpose proceedings relative to the suspension of
payments are pending.
For the debtor to present the proposed agreement
to the creditors as to the manner and time of REHABILITATION
payment of debts.
Refers to the restoration of the debtor to a
Quorum condition of successful operation and solvency,
The presence of the creditors holding claims  If it shown that its continuance of operation
amounting to at least 3/5 of the liabilities shall be is economically feasible.
necessary for holding the meeting or for the  Its creditors can recover by way of the
quorum. present value of payments projected in the
plan.
Proceedings
 More of the debtor continues as a going
During the meeting, the creditors will vote for the concern than if it is immediately liquidated
proposed manner of payment by the debtor.
Rehabilitation plan refers to a plan by which the
However, creditors who incurred his credit within 90
financial well-being and viability of an insolvent
days prior to the filing of the petition are not
debtor can be restored using various means
entitled to vote.
including, but not limited to:
DOUBLE MAJORITY RULE
 Debt forgiveness,
For the proposal of the debtor to be considered as  Debt rescheduling,
approved, the double majority rule applies.  Reorganization or quasi-reorganization,
 Dacion en pago,
This rule means:  Debt equity conversion, and
 Sale of the business or parts of it as a going
 2/3 of the creditors voting unite upon the
concern,
same proposition; and
 Or setting-up of new business entity,
 The claims represented by the said majority
 Or other similar arrangements as may be
vote amount to at least 3/5 of the total
approved by the court or creditors
liabilities of the debtor mentioned in the
petition. The Rehabilitation plan:
Rejection or Disapproval of the Proposed 1. May be approved by the creditors (50% of
Agreement the total claims)
2. Confirmed by the court after approval of
Proposed agreement deemed rejected or
the creditors or even without such approval
disapproved:
or even over the objection of the creditors
 If the number of creditors required for the
Cram Down Rule
holding of the meeting do not attend or
 If the 2 majorities are not met. The Rehabilitation Plan (including the pre-
negotiated plans) confirmed by the Court shall be
In such case, the suspension of payment
binding upon the debtor and all persons who
proceedings is terminated without recourse and
may be affected by it, including creditors, whether
the parties concerned are at liberty to enforce the
or not such persons have participated in the
rights which may correspond to them.
proceedings, opposed the Plan or whether or not
Prohibited Acts they have been scheduled.

 Selling, transferring, encumbering, or Rehabilitation receiver is

disposing in any manner of his property,  A person or persons,
except those used in the ordinary  Natural or juridical,
operations of commerce or of industry in  Appointed as such by the court and
which the petitioning individual debtor or is
  Who is entrusted with such powers and other members of the group, and/or the
duties as set forth by the law participation of the other member of the group is
essential.

Kinds of Rehabilitation
Filing of Petition for Involuntary Proceedings
1. Voluntary Rehabilitation – a rehabilitation
proceeding initiated by the debtor Any creditor or group of creditors
2. Involuntary Rehabilitation - a rehabilitation  With a claim of, or the aggregate of whose
proceeding initiated by the creditor. claim is, at least P1 000 000 or
 At least 25% of the subscribed capital stock
3. Pre-Negotiated Rehabilitation – a rehabilitation
or partners’ contributions, whichever is
proceeding initiated by the debtor, itself or jointly
higher,
with any of its creditors for the approval of the pre-
negotiated rehabilitation plan. May initiate involuntary proceeding against the
debtor by filing a petition for rehabilitation with the
Petition to Initiate Voluntary Proceedings by the
court.
Debtor and Grounds for Filing
Grounds for Involuntary Proceedings
With the required approval, the insolvent debtor
may initiate a voluntary proceeding by filing a 1. There is no genuine issue of fact or law
(verified) petition for rehabilitation with the court. on the claim/s of the petitioner/s, and that
the due and demandable payments thereon
The grounds for filing of the petition are:
have not been made for at least 60 days or
1. Insolvency of the debtor that the debtor has failed generally to
2. Viability of rehabilitation meet its liabilities as they fall due: or
2. A creditor, other that the petitioner/s, has
Approval Required before Filing of Petition initiated foreclosure proceedings against
The petition for voluntary proceedings of the the debtor that will prevent the debtor from
insolvent debtor must be approved by the ff: paying its debts as they become due or will
render it insolvent.
Sole Proprietorship Owner/Proprietor
Pre-Negotiated Rehabilitation
An insolvent debtor, by itself or jointly with any of its
creditor, may file a verified petition with the court for
Partnership Majority of the Partners the approval of a pre-negotiated Rehabilitation
Plan.
The plan must be:
Corporation Majority of the BOD or 1. Endorsed or approved by creditors
trustees and authorized 2. The creditor must be at least 2/3 of the
by SH rep. at least 2/3 total liabilities of the debtor
of OCS or 2/3 of its 3. The liabilities include secured creditors
members in case of holding more than 50% of the total secured
non-stock claims of the debtor and unsecured
creditors holding more than 50% of the
total unsecured claims of the debtor.
Filing of Petition for Voluntary Rehabilitation by
Group of Debtors Period for Approval of Rehabilitation Plan
A group of debtors may jointly file a petition for The court shall have a maximum period of one
rehabilitation when: 120 days from the date of the filing of the petition to
approve the Rehabilitation Plan.
1. One or more of its members foresee the
impossibility of meeting debts when they fall due. If the court fails to act within the said period, the
rehabilitation plan shall be deemed approved
2. The financial distress would likely adversely
affect the financial condition and/or operation if the Commencement of Proceedings
The rehabilitation proceeding is deemed If there is no substantial likelihood for the debtor to
commenced upon the issuance of the be successfully rehabilitated, the order may be
commencement order. lifted,
Only the court may lift the order it previously
issued.
Commencement Order
The commencement order is an order issued by the
court which shall:
1. Identify the debtor, its principal business or Court Action on Petition for Rehabilitation
activity/ies and its principal place of business:
Court Action Required Court Findings
2. Summarize the ground/s for initiating the a. Give DUE 1. The debtor is insolvent;
proceedings: COURSE to and
the petition 2. There is a substantial
3. State the relief sought and any requirement or
likelihood for the debtor
procedure particular to the relief sought:
to be successfully
4. State the legal effects of the Commencement rehabilitated.
Order: b. DISMISS 1. The debtor is NOT
the petition insolvent;
5. Declare that the debtor is under rehabilitation: 2. The petition is a sham
6. Direct the publication of the Commencement filing intended to delay
Order in a newspaper of general circulation in the the enforcement of the
Philippines: rights of the creditor/s or
of any group of creditors;
7. Includes Stay or Suspension Order 3. The petition, the
Rehabilitation Plan, and
Effects of Stay Order the attachments contain
The Commencement Order shall include a Stay any materially false or
Order which shall have the following effects: misleading statements;
or
 Suspend all the actions or proceedings in 4. The debtor has
court, or otherwise, for the enforcement of committed acts of
claim against the debtor; misrepresentation or in
 Suspend all actions to enforce any fraud of creditor/s or a
judgment, attachment, or other provisional group of creditors
remedies against the debtor; c. CONVERT 1. The debtor is insolvent;
 Prohibit the debtor from selling, the and
encumbering, transferring, or disposing in proceedings 2. There is no substantial
any manner any of its properties except in into likelihood for the debtor
the ordinary course of business; and LIQUIDATIO to be successfully
 Prohibit the debtor from making any N rehabilitated.
payment of its liabilities outstanding as of proceedings
the commencement date except as may be
provided herein.
Effects of Non-Filing of Notice of Claim
Effectivity and Duration of Commencement
Order A creditor:

The Commencement Order and consequently the  Whose claim is not listed in the schedule of
Stay Order shall be effective for the entire duration debts and liabilities; and
of the rehabilitation proceedings (sec. 21 FRIA) for  Who fails to file a notice of claim but
as long as there is a substantial likelihood that the subsequently files a belated claim
debtor will be successfully rehabilitated. Is not entitled to participate in the
rehabilitation proceedings but shall be entitled
to receive distributions arising therefrom.
Out-of-Court Rehabilitation need to be alleged and acts of insolvency
proved (debtor should have
Rehabilitation is not necessarily court supervised. committed it)
An out-of-court or informal restructuring agreement
The debt must exceed The aggregate amount
or rehabilitation plan that meets the minimum
500 000 of the debts must be at
requirements is reorganized under the FRIA
least 500 000
Minimum requirements The individual debtor A creditor or group of
files the petition creditors files the
a) Debtor must agree to the out-of-court petition
rehabilitation; The debtor is not Applies even in the
b) Approved by creditors representing 67% of absent as he files the case of absent debtor
the secured obligations of the debtor; petition
c) Approved by creditors representing at least Posting of bond by Posting of bond is
75% of the unsecured obligations of the creditors is not required required
debtor; and Liquidation Order is Liquidation order is
d) Approved by creditors holding at least 85% issued without trial issued AFTER trial
of the total liabilities, unsecured and
secured, of the debtor.
Involuntary Liquidation of Individual Debtors vs
Standstill Period Involuntary Liquidation of Business
An agreement on standstill period may be binding if Organizations
the following requisites are present; ILOID ILOBO
1. Agreement is approved by creditors representing At least 3 creditors There can be 1 or
more than 50% of the total liabilities of the debtor; more creditors
The debts must be at The debt or aggregate
2. Notice thereof is published in a newspaper of least 500 000 of the debts must be at
general circulation in the Philippines once a week least 1 000 000 or
for 2 consecutive weeks; and equivalent to 25% of
3. The standstill period does not exceed 120 days the subscribed capital
from the date of effectivity. or partners’
contribution, whichever
Liquidation this is the proceeding where the claims is higher
are filed, and the assets of the insolvent debtor are The individual can The business
disposed, and the proceeds are divided among the continue the organization will be
creditors. business dissolved
There must be an act of Act of insolvency is
These rules apply to individual debtors, sole insolvency NOT required
proprietorships, partnerships, and corporation.
Kinds of Liquidation
Liquidation Order
Insolvency of Individuals Debtors
The court that has jurisdiction over the liquidation
1. Voluntary Liquidation in Insolvency proceedings shall, in proper cases, issue a
2. Involuntary Liquidation in Insolvency Liquidation Order which includes, among others:

Liquidation of Insolvent Juridical Debtors 1. Declaring that the debtor is insolvent;

2. Ordering the liquidation of the debtor;
1. Voluntary Liquidation/ Debtor-Initiated 3. In case of juridical person, declaring it as
Liquidation Proceedings dissolved;
2. Involuntary Liquidation/ Creditor-Initiated 4. Prohibiting payments and/or transfer of
property by the debtor; and
Liquidation of Individual Debtors
5. Directing all claims to be filed with the
Voluntary Liquidation Involuntary liquidator.
of Ind. Debtor Liquidation of Ind.
Effects of Liquidation Order
Debtor
debtor is insolvent debtor is insolvent
Acts of insolvency Creditors must prove
  The juridical debtor shall be deemed none of the disqualifications as its
dissolved and its corporate or juridical representative.
existence terminated;  In such case, the juridical entity and the
 Legal title to and control of all the assets of representative are solidarily liable for all
the debtor, except those that may be obligations and responsibilities of the
exempt from execution, shall be deemed rehabilitation receiver.
vested in the liquidator or, pending his
Qualifications of a Rehabilitation Receiver
election or appointment, with the court
 All contracts of the debtor shall be deemed The rehabilitation receiver must have the following
terminated and/or breached, unless the minimum qualifications:
liquidator, within 90 days from the date of
his assumption of office, declares otherwise 1. A citizen of the Philippines or a resident in the 6
and the contracting parties agree thereto months immediately preceding his nominations;
 No separate action for the collection of an 2. Of good moral character and with acknowledged
unsecured claim shall be allowed; integrity, impartiality and independence;
 No foreclosure proceedings shall be allowed
for a period of 180 days. 3. Has the requisite knowledge of insolvency and
other relevant commercial laws, rules, and
Rights of the Secured Creditors procedure; and
The Liquidation order shall not affect the right of a 4. Has no conflict of interest.
secured creditor to enforce his lien in accordance
with the applicable law or contract. Removal of the Rehabilitation Receiver

He may waive his right under the security or lien The rehabilitation receiver may be removed at any
OR maintain his rights under the security or lien. time:

Distribution of Assets  By the court either motu proprio or

 Upon motion by any creditor/s holding more
The assets of the insolvent debtor shall be divided than 50% of the total obligations of the
among the creditors in accordance with the debtor.
Liquidation Plan submitted by the Liquidator and
approved by the Court. The rules on concurrence There are 8 grounds under the law.
and preference of credits under the New Civil Code
 Incompetence, gross negligence, failure
and other relevant laws shall be observed in the
to perform or failure to exercise the
Liquidation Plan
proper degree of care in the
 Preference as to Specific Movable or performance of his duties and powers;
Personal Properties  Lack of a particular or specialized
 Preference with respect to Specific competency required by the specific
Immovable or Real Property case;
 Order of preference with respect to other  Illegal acts or conduct in the
properties performance of his duties and powers;
 Lack of qualification or presence of
Rehabilitation Receiver Management Committee disqualification;
Creditors’ Committee Cross-Border Insolvency  Conflict of interest that arises after his
appointment; and
 Manifest lack of independence that is
Rehabilitation Receiver detrimental to the general body of the
stakeholders.
 Is a person or persons, natural or juridical,
appointed as such by the court which is The Management Committee
entrusted with such powers and duties as
It is the court-appointed committee that will take the
set forth in FRIA.
place of the management and the governing body
 Any qualified natural or juridical person may
of the debtor and assume their rights and
serve as a rehabilitation receiver.
responsibilities.
 If the rehabilitation receiver is a juridical
entity, it must designate a natural person
who possesses all the qualifications and
The court will appoint a management committee
upon clear and convincing evidence of any of the
following circumstances:
 Actual or imminent danger or dissipation,
loss, wastage or destruction of the debtor’s
assets or other properties;
 Paralyzation of the business operations of
the debt; or
 Gross mismanagement of the debtor or
fraud or other wrongful conduct on the part
of, or gross or willful violation of FRIA by
existing management of the debtor or the
owner, partner, director, officer or
representative/s in management of the
debtor.
Creditor’s Committee
Refers to the committee formally organized
by creditors belonging to the same class.
Roles:
 Will assist the rehabilitation receiver in
communicating with the creditors
 Will be the primary liaison between the
rehabilitation receiver and the creditors.
Cross-Border Insolvency
FRIA adopted the Model Law on Cross-Border
Insolvency of the United Nations Center for
International Trade and Development as part
thereof
If there is a rehabilitation proceeding filed by
a foreign entity in another jurisdiction, a petition
may be filed by the latter’s representative and court
may issue orders:
a) Suspending any action to enforce claims:
b) Requiring the surrender of property of the
foreign entity to the foreign representative;
c) Providing other necessary relief.