RA No.

10142: Financial Rehabilitation and Insolvency Act of 2010

The proceedings under this Act shall be in rem. Jurisdiction over all persons affected by the proceedings
shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any
newspaper of general circulation in the Philippines. The proceedings shall be conducted in a summary and non-
adversarial manner.

Debtors under the FRIA includes:

1. Sole proprietorship registered with DTI;
2. Partnership registered with SEC;
3. Corporation duly registered and existing under Philippine laws; or
4. Individual debtor, who is a natural person that is a resident citizen that has become insolvent.

Excludes:
1. Banks
2. Insurance companies
3. Pre-need companies
4. National and local government agencies or units

*Individual debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a
debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount
of the transaction involved, whichever is higher to be recovered for benefit of the debtor and the creditors, if
they, having notice of the commencement of the proceedings, or having reason to believe that proceedings are
about to be commenced, or in contemplation of the proceedings, willfully commit the following acts:
a. Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of
business or authorize or approve any transaction in fraud of creditors or in a manner grossly
disadvantageous to the debtor and/or creditors; or
b. Conceal or authorize or approve the concealment, from the creditors, or embezzles or misappropriates,
any property of the debtor.

Insolvency refers to the financial condition of a debtor that is:

1. Generally unable to pay liabilities as they fall due on the ordinary course of business (hence illiquid); or
2. Has liabilities that are greater than its or his assets (balance sheet insolvent).

A. Insolvency of Individual Debtor

Suspension of Payments – a remedy where 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. It is a judicial insolvency proceeding by which
an individual debtor submits, for approval by his debtors, a proposed agreement, containing propositions
delaying or extending the time of payment of his debts.

He shall attach to his petition, as a minimum:

1. a schedule of debts and liabilities;
2. an inventory of assess; and
3. a proposed agreement with his creditors.

Who Can Avail – an illiquid debtor

An individual debtor (natural person) who, possesses sufficient property to cover all his debts but
foresees the impossibility of meeting them when they respectively fall due.

Purpose:
Debt moratorium- to delay or extend the time of payment of one’s debts. Allows distressed debtor to
defer payment of his debts by presenting a plan.
a. Must relate to a schedule of payments
b. No haircut (reduction of debts), only a grace period to pay the debts

How initiated:
Illiquid debtor files a duly verified petition that he be declared in the state of suspension of payments by
the court of the province/city in which he has resided for 6 months prior to the filing of the petition. The
minimum requirements for petition are:
a. Schedule of debts and liabilities
b. Inventory of assets
c. Proposed agreement with his creditors

Suspension of Payments Order

When issued:
Within 5 working days if the court finds the petition sufficient in form and substance. It remains effective
from the time of the filing of the petition until the termination of the proceedings.

Most Important Elements

1. Automatic Stay- no creditor except those exempt shall institute proceedings to collect its claim from the
time of filing until the termination of the proceedings
 Exempt from stay order:
a. Claims for personal labor,
b. Expense of last illness and funeral,
c. Secured creditors
2. Injunction against debtor- the individual debtor is subjected to an injunction against:
a. Disposing of his property except those used in the ordinary operations of commerce or industry in which
he is engaged
b. Making any payment outside of the necessary or legitimate expenses of his business

Approval of Proposed Agreement

Once a majority vote is reached in the creditors meeting, the court shall issue an Order that the
agreement be carried out and all parties bound thereby with its terms. The order shall be binding upon all
creditors whose claims are included in the schedule of debts and liabilities submitted by the individual debtor,
and who were properly summoned.

The presence of creditors holding claims amounting to at least three-fifths (3/5) of the liabilities shall be
necessary for holding a meeting. To form a majority, it is necessary:
a. that two-thirds (2/3) of the creditors voting unite upon the same proposition; and
b. 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.

The proposed agreement shall be deemed rejected if the numbers of creditors required for holding a
meeting do not attend thereat, or if the two (2) majorities mentioned above are not in favor thereof. In such
instances, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to
enforce the rights which may correspond to them.

B. Insolvency of Sole Proprietorship, Partnership, and Corporation

Rehabilitation- refers to the restoration of the debtor to a condition of successful operation and solvency, if it
is shown that:
a. Its continuance of operation is economically feasible; and
b. Its creditors can recover more, by way of the present value of payments projected in the plan, if the
debtor continues as a going concern than if it is immediately liquidated.

Types of Rehabilitation Proceedings

1. Court-Supervised- a judicial proceeding; may be voluntary or involuntary.
2. Pre-Negotiated- an insolvency proceeding involving negotiation of terms between the debtor and the
creditor(s). It commences as an extrajudicial proceeding but terminates as a judicial proceeding.
3. Out-of-Court- an insolvency proceeding involving a consensual contract between the debtor and the
creditor(s). Unlike pre-negotiation rehabilitation, no petitions are filed with the court.

Court–Supervised
1. Voluntary- refer to proceedings initiated by the debtor, which may be:
a. Sole Proprietorship: When approved by the owner;
b. Partnership: When approved by a majority of the partners;
c. Stock Corporation: When approved by a majority vote of the BOD or trustees, and authorized by the
stockholders representing 2/3 of the outstanding capital stock in a meeting called for the purpose;
d. Non-Stock Corporation: When approved by 2/3 of the members in a meeting called for the purpose.

A group of debtors may file a petition for rehabilitation when:

a. One of more of its members foresee the impossibility of meeting debts when they respectively fall due;
and
b. The financial distress would likely adversely affect the financial condition and/or operations of the other
members of the group, and/or the participation of the other members of the group is essential under the
terms and conditions of the Rehabilitation Plan.

The debtor must file a verified petition for rehabilitation with the court, to establish:
a. The insolvency of the debtor; and
b. The viability of the rehabilitation.

2. Involuntary- refers to proceedings initiated by the creditor(s) by filing a petition for rehabilitation.

Value Requirement for Creditors

The claim(s), or aggregate thereof, must amount to at least P1 million or at least 25% of the subscribed
capital stock or partners’ contributions, whichever is higher.

Circumstances for Involuntary Rehabilitation

There is no genuine issue of fact or law on the claims of the creditors; and:
a. That the due and demandable payments have not been made for at least 60 days; or
b. The debtor has failed generally to meet its liabilities as they fall due (illiquidity); or
c. At least one creditor, other than the petitoner(s), has initiated foreclosure proceedings against the
debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.
Action on the Petition
If the petition for rehabilitation is deficient in form and substance, the court may give a reasonable
period to amend or supplement the petition. If such deficiency is not complied with, the court may dismiss the
petition. However, if the rehabilitation is sufficient in form and substance, it shall issue a Commencement Order
within five (5) working days from the filing of the petition. The rehabilitation proceedings shall commence upon
the issuance of the Commencement Order.

Contents of the Commencement Order

1. Identifies the debtor, its principal business and principal place of business;
2. Summarize the grounds for initiating proceedings;
3. States the legal effects of the Order;
4. Declares the debtor is under rehabilitation;
5. Directs the publication of the Commencement Order;
6. Directs service by personal delivery of a copy of the petition to the creditor or to the debtor (not the
petitioner);
7. Appoints a rehabilitation receiver;
8. Summarizes the requirements and deadlines for creditors to establish their claims against the debtor;
9. Directs the BIR to file and serve its comment or opposition;
10. Prohibits the debtor’s suppliers from withholding the supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for services/goods supplied after issuance of the Order;
11. Authorizes the payment of administrative expenses;
12. Sets the case for initial hearing;
13. Makes available copies of the petition and Rehabilitation Plan for examination and copying by any interested
party;
14. Indicates the location(s) at which documents may be reviewed and copied;
15. States that any creditor or debtor, not the petitioner, may submit the name or nominate any other qualified
person to the position of rehabilitation receiver;
16. Includes a Stay or Suspension Order.
a. suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the
debtor;
b. suspend all actions to enforce any judgment, attachment or other provisional remedies against the
debtor;
c. prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its
properties except in the ordinary course of business; and
d. prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date
except as may be provided herein.

Effects of the Commencement Order

In addition to the effects of a Stay or Suspension Order:
a. Vests the rehabilitation receiver with all the powers and functions provided for this Act, subject to the
approval by the court of the performance bond filed by the rehabilitation receiver;
b. Prohibits or otherwise serves as the legal basis rendering null and void the results of any attempt to
collect or enforce a claim against the debtor after the commencement date, unless otherwise allowed
under the FRIA;
c. Serves as the legal basis for rendering null and void any set-off after the commencement date of any
debt owed to the debtor by any of the debtor's creditors;
d. Serves as the legal basis for rendering null and void the perfection of any lien against the debtor's
property, after the commencement date; and
e. Consolidates the resolution of all legal proceedings by and against the debtor to the court; however, the
court may allow the continuation of cases on other courts where the debtor had initiated the suit.

Exceptions to the Stay or Suspension Order

The Stay or Suspension Order shall not apply:
a. to cases already pending appeal in the Supreme Court as of commencement date;
b. to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the
SC is capable of resolving the claim more quickly, fairly and efficiently than the SC;
c. to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and
third party or accommodation mortgagors as well as issuers of letters of credit;
d. to any form of action of customers or clients of a securities market participant to recover or otherwise
claim moneys and securities entrusted to the latter in the ordinary course of the latter's business;
e. to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities
pledge or margin agreement for the settlement of securities transactions;
f. the clearing and settlement of financial transactions through the facilities of a clearing agency or similar
entities duly authorized, registered and/or recognized by the appropriate regulatory agency; and
g. any criminal action against individual debtor or owner, partner, director or officer of a debtor.

Effectivity and Duration of the Commencement Order

Unless lifted by the court, the Commencement Order shall be effective for the duration of the
rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully
rehabilitated.
Minimum Requirements for Substantial Likelihood
1. The proposed Rehabilitation Plan complies with the minimum contents prescribed by the FRIA;
2. There is sufficient monitoring by the rehabilitation receiver of the debtor's business for the protection of
creditors;
3. The debtor has met with its creditors to the extent reasonably possible in attempts to reach consensus on
the proposed Rehabilitation Plan;
4. The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the underlying
assumptions and the goals stated in the petitioner's Rehabilitation Plan are realistic, feasible and reasonable
or if not, there is, in any case, a substantial likelihood for the debtor to be successfully rehabilitated
because, among others:
a. There are sufficient assets with/which to rehabilitate the debtor;
b. There is sufficient cash flow to maintain the operations of the debtor;
c. The debtor's, partners, stockholders, directors and officers have been acting in good faith and which due
diligence;
d. The petition is not a sham filing intended only to delay the enforcement of the rights of the creditor's or
of any group of creditors; and
e. The debtor would likely be able to pursue a viable Rehabilitation Plan;
5. The petition, the Rehabilitation Plan, and the attachments thereto do not contain any materially false or
misleading statement;
6. If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least three-fourths
(3/4) of its total obligations to the extent reasonably possible and made a good faith effort to reach a
consensus on the proposed Rehabilitation Plan; or if the petitioner/s is/are a creditor or group of creditors,
that/ the petitioner/s has/have met with the debtor and made a good faith effort to reach a consensus on
the proposed Rehabilitation Plan; and
7. The debtor has not committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors.

Effect of Failure to File Notice of Claim

A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a notice of
claim in accordance with the Commencement Order but subsequently files a belated claim shall not be entitled
to participate in the rehabilitation proceedings but shall be entitled to receive distributions arising therefrom.

*If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise and/or
recommend action on the Rehabilitation Plan and submit the same or a new one to the court within a period of
not more than ninety (90) days.
* If the petition is dismissed, then the court may, in its discretion, order the petitioner to pay damages to any
creditor or to the debtor, as the case may be, who may have been injured by the filing of the petition, to the
extent of any such injury.

The Rehabilitation Receiver, Management Committee and Creditors' Committee

Rehabilitation receiver- any qualified person, natural or juridical, may serve as a receiver. If the receiver is a
juridical entity, he must designate a natural person as a representative. Such representative must possess all
the qualifications and none of the disqualifications.

Qualifications
a. Citizen or resident of the Philippines for at least six (6) months immediately prior to nomination;
b. Of good moral character and with acknowledged integrity, impartiality and independence;
c. Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as
well as the relevant training and/or experience that may be necessary to enable him to properly
discharge the duties and obligations of a receiver; and
d. Has no conflict of interest.

Conflicts of Interest
No person may be appointed as a rehabilitation receiver, member of a management committee, or be
employed by the rehabilitation receiver or the management committee if he has a conflict of interest.
Test: An individual 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. An individual may have a conflict of
interest if:
a. He is a creditor, owner, partner or stockholder of the debtor;
b. He is engaged in a line of business which competes with that of the debtor;
c. He is, or was, within five (5) years from the filing of the petition, a director, officer, owner, partner or
employee of the debtor or any of the creditors, or the auditor or accountant of the debtor;
d. He is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding
securities of the debtor;
e. He is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners
of a sale proprietorship-debtor, partners of a partnership- debtor or to any stockholder, director, officer,
employee or underwriter of a corporation-debtor; or f. He has any other direct or indirect material
interest in the debtor or any of the creditors.

Principal Duties
a. Preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings;
b. Determining the viability of the rehabilitation of the debtor;
c. Preparing and recommending a Rehabilitation Plan; and
d. Implementing the approved Rehabilitation Plan
Management of the Debtor’s Business
Unless otherwise provided, the management of the debtor remains with the existing management,
subject to laws and agreements, if any, on election or appointment of directors, managers, or managing
partner. The debtor retains control of its business and properties, subject only to monitoring by the receiver.
This is referred to as the principle of debtor–in–possession or debtor–in–place.
Exception: The following are subject to the approval of the receiver or the court:
a. Disbursements affecting title or interest in the property;
b. Payments affecting title or interest in property;
c. Sale, disposal, assignment, transfer or encumbrance of property; or
d. Any other act affecting title or interest in property.

Immunity from Suit

The receiver, the management committee, and all persons they engage are not subject to any action,
claim or demand for any act or omission in good faith in the exercise of their powers and
functions.

Report of the Receiver

Within 40 days from the initial hearing, the receiver shall submit a report to the court on whether:
a. The debtor is insolvent, and if so, the causes thereof; and
b. There is any unlawful or irregular act(s) committed by the management of the debtor in contemplation
of the insolvency or which may have contributed to the insolvency;
c. The assumptions, goals and procedures of the Rehabilitation Plan are realistic, feasible and reasonable;
d. There is a substantial likelihood of successful rehabilitation;
e. The petition should be dismissed; and
f. The debtor should be dissolved and/or liquidated.

Removal of the Rehabilitation Receiver

The rehabilitation receiver may be removed at any time by the court either motu proprio or upon motion
by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds
as the rules of procedure may provide which shall include, but are not limited to, the following:
a. Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the
performance of his duties and powers;
b. Lack of a particular or specialized competency required by the specific case;
c. Illegal acts or conduct in the performance of his duties and powers;
d. Lack of qualification or presence of any disqualification;
e. Conflict of interest that arises after his appointment; and
f. Manifest lack of independence that is detrimental to the general body of the stakeholders.

The Implementing Rules add the following grounds for removal:

a. Failure, without just cause, to perform any of the powers and functions under the Rules; or
b. Any of the grounds for removing a trustee under the general principles for trusts

Management Committee- upon motion of any interested party, the court may appoint either (1) the
rehabilitation receiver or (2) a management committee to assume the management of the debtor.

Grounds
There must be clear and convincing evidence of any of the following circumstances:
a. Actual or imminent danger of dissipation, loss, waste or destruction of the debtor’s assets or other
properties;
b. Paralyzation of the business operations of the debtor; or
c. Gross mismanagement of the debtor, or fraud or other wrongful conduct, or gross or willful violation of
the FRIA.

Composition of the Committee

Three qualified members appointed as follows:
a. The first member shall be appointed by the debtor;
b. The second member shall be appointed by the creditor(s) holding more than 50% of the total obligations
of the debtor; and
c. The third member shall be appointed by the first and second members within 10 from the appointment.
In case of failure to nominate, the court shall appoint the member(s) concerned. In case the decision to appoint
a management committee is due to the third ground (mismanagement, etc.), the court shall appoint the first
member.

Rehabilitation Plan- refers to a plan by which the financial wellbeing and viability of an insolvent debtor can
restored using various means including, but not limited to:
a. Debt Forgiveness: Condoning and/or waiving the claims;
b. Debt Rescheduling: Extending the time to pay the claim;
c. Reorganization or Quasi-Reorganization: Changing the equity, corporate or operating structure of the
debtor;
d. Dacion en Pago: Assigning property and assets as payment for certain claims;
e. Debt to Equity Conversion: The issuance of equity and/or ownership interests as payment for certain
claims;
f. Sale of the Business (or parts of it) as a going concern;
g. Setting up of new business entities; or
 h. Other similar arrangements as may be approved by the court or the creditors.

Important Requirements of a Rehabilitation Plan

a. Concept of Feasibility
b. It must comply with the required contents under FRIA and FR Rules. This includes, among others:
 Material Financial Commitments- this commitment may include the voluntary undertakings of the
stockholders or the would-be investors of the debtor-corporation indicating their readiness,
willingness and ability to contribute funds or property to guarantee the continued successful
operation of the debtor corporation during the period of rehabilitation.
 Liquidation Analysis- sets out for each creditor or each class of creditor, as applicable, the amounts
they expect to receive under the Rehabilitation Plan and those that they will receive if liquidation
ensues within one hundred twenty (120) days after the filing of the petition.

Approval of the Rehabilitation Plan

The receiver shall notify the stakeholders that the Plan is ready for examination. Within 20 days from
notification, the receiver shall convene the creditors to vote on the Plan. The Plan must be approved by all
classes of creditors whose rights are adversely modified or affected. Otherwise, it is deemed rejected. The Plan
is approved by a class of creditors if members of the said class holding more than 50% of the total claims of the
class vote in favor of the Plan. If the Plan is approved, the receiver shall submit the same to the court for
confirmation.

Objections to Rehabilitation Plan

The creditor may file an objection to the Plan with 20 days from receipt of notice that it has been
submitted for confirmation. Objections are limited to the following:
a. The creditors’ support was induced by fraud;
b. The documents or data relied upon in the Plan are materially false or misleading;
c. The Plan is in fact not supported by the voting creditors.
If upon hearing, the court finds merit in the objections, it should order the curing of the defect. If the court
determines the debtor acted in bad faith, or that it is not possible to cure the defect, the court shall convert the
proceedings into one for liquidation.

Confirmation of the Rehabilitation Plan

The court has a maximum period of one (1) year from the date of filing to confirm a Rehabilitation Plan.
If no Rehabilitation Plan is confirmed, the proceedings may be converted into one for liquidation.

Confirmation has the following effects:

a. The Plan and its provisions shall be binding upon the debtor and all persons who may be affected by it;
b. The debtor shall comply with the provisions of the Plan and shall take all actions necessary to carry out
the Plan;
c. Payments shall be made to the creditors in accordance with the provisions of the Plan;
d. Contracts and other arrangements between the debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do not conflict with the provisions of the Rehabilitation Plan;
e. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on
creditors regardless of whether the Plan is successfully implemented; and
f. Claims arising after approval of the Plan that are otherwise not treated by the Plan are not subject to
any Suspension Order.

Cram Down Effect- notwithstanding the rejection of the creditors of the Rehabilitation Plan, the court may
nonetheless confirm the Rehabilitation Plan in what is known as a cram down. The effect of the cram down is to
bind the debtor and all persons who may be affected, whether or not they participated in the proceedings or
opposed the plan. A cram down is permitted only if all of the following circumstances are present:
a. The Rehabilitation Plan complies with the requirements specified in the FRIA;
b. The receiver recommends confirmation of the Rehabilitation Plan;
c. The shareholders, owners or partners of the debtor lost at least their controlling interest as a result of
the Rehabilitation Plan; and
d. The Rehabilitation Plan would likely provide the objecting class or creditors with compensation which has
a net present value greater than that which they would have received if the debtor were under
liquidation.

Pre-Negotiated Rehabilitation- an insolvency proceeding involving a pre-negotiated Rehabilitation Plan

between the debtor and the creditor(s). It commences as an extrajudicial proceeding but terminates as a
judicial proceeding.

Requirements for Petition

An insolvent debtor, either by itself or jointly with any of its creditors, may file a verified petition for
approval of the Pre-Negotiated Rehabilitation Plan that complies with the following:
a. Approval of creditors holding at least 2/3 of the total liabilities of the debtor,
b. Secured creditors holding more than 50% of the total secured claims; and
c. Unsecured creditors holding more than 50% of the total unsecured claims.
Issuance of Order
Within five working days, and after determination that the petition is sufficient in form and substance,
the court shall issue an Order which shall:
a. identify the debtor, its principal business of activity/ies and its principal place of business;
b. declare that the debtor is under rehabilitation;
c. summarize the ground/s for the filling of the petition;
d. direct the publication of the Order in a newspaper of general circulation in the Philippines once a week
for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from
the time of its issuance;
e. direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner
holding at least ten percent (10%) of the total liabilities of the debtor, as determined in the schedule
attached to the petition, within three (3) days;
f. state that copies of the petition and the Rehabilitation Plan are available for examination and copying by
any interested party;
g. state that creditors and other interested parties opposing the petition or Rehabilitation Plan may file
their objections or comments thereto within a period of not later than twenty (20) days from the second
publication of the Order;
h. appoint a rehabilitation receiver, if provided for in the Plan; and
i. include a Suspension or Stay Order as described in this Act.

Objections to the Petition or Rehabilitation Plan

Any creditor or other interested party may submit a verified objection to the petition or the
Rehabilitation Plan. The objections shall be limited to the following:
a. The allegations in the petition or the Rehabilitation Plan, or the attachments thereto, are materially false
or misleading;
b. The majority of any class of creditors do not in fact support the Rehabilitation Plan;
c. The Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim is not
categorically declared as a contested claim; or
d. The support of the creditors, or any of them, was induced by fraud.

Approval of the Plan

Within 10 days from the date of the second publication of the Order, the court shall approve the
Rehabilitation Plan unless an objection is submitted. The court has a maximum period of 120 days from the
date of the filing of the petition to approve the Rehabilitation Plan. If the court fails to act within the same
period, the Plan shall be deemed approved.

Effect of Approval
Approval of a Plan has the same legal effect as confirmation of a Plan in Court Supervised Rehabilitation.
It also results in a cram down, as it binds not only the debtor but also all persons affected by it.

Out-of-Court Rehabilitation- an extrajudicial insolvency proceeding of an Out-of-Court or Informal

Restructuring Agreement (OCRA), or a restructuring of the claims negotiated between the debtor and the
creditor(s). No petitions are filed with the court, though the debtor and/or the creditor may seek court
assistance in implementation. Pending negotiation and finalization of the OCRA, there may be a standstill period
that allows the debtor not to pay liabilities as they fall due and prevents creditors from enforcing their claims.

Requirements for OCRA

a. The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation
Plan;
b. It must be approved by creditor representing at least 67% of the secured obligations;
c. It must be approved by creditors representing at least 75% of the unsecured obligations;
d. It must be approved by creditors holding at least 85% of the total liabilities, secured or unsecured, of
the debtor.

Standstill Period/Agreement
This refers to the period agreed upon by the debtor and its creditors to enable them to negotiate and
enter into an out-of-court or informal restructuring/workout agreement or rehabilitation plan. It may include
provisions identical with or similar to the legal effects of a commencement order. The standstill
period/agreement is effective and enforceable not only against contracting parties but also against other
creditors, provided that:
a. Such agreement is approved by creditors representing more than 50% of the total liabilities of the
debtor;
b. Notice of the standstill agreement is published in a newspaper of general circulation in the Philippines
once a week for two consecutive weeks;
c. The standstill period does not exceed 120 days from the date of effectivity.
The notice must invite creditors to participate in the negotiation for the OCRA and inform them that the
agreement would bind all creditors if the minimum vote requirements were met.

Effects of the OCRA

a. Results in a cram down, binding not only the debtor but also all persons affected;
b. Any proceedings arising or relating to the OCRA shall not stay its implementation, unless the relevant
party secures a TRO or injunctive relief from the Court of Appeals.
Annulment of the OCRA/Standstill Agreement
The debtor or creditor may file a petition to annul based only on the following grounds:
a. Non-compliance with the requirements for a standstill agreement or an OCRA under the FRIA or the
implementing rules; or
b. Vitiation of consent due to fraud, intimidation or violence if committed against such number of creditors
required to approve the OCRA or the standstill agreement.

Liquidation is a judicial insolvency proceeding by which the debtor’s assets are reduced and converted to cash
in order to discharge the claims against the debtor. The concept of liquidation is thus diametrically opposed to
that of rehabilitation, and both cannot be undertaken at the same time.

Types of Liquidation
1. Voluntary- instituted by the debtor; or
2. Involuntary- instituted by a creditor or a group of creditors; or
3. Conversion- when the court-supervised or pre-negotiated rehabilitation proceeding is converted by the court
into liquidation proceedings

Liquidation of Individual Debtor

1. Voluntary liquidation- an individual debtor whose properties are not sufficient to cover his liabilities, and
owing debts exceeding five hundred thousand pesos (P500,000.00), may apply to be discharged from his
debts and liabilities by filing a verified petition with the court of the province or city in which he has resided
for six (6) months prior to the filing of such petition.
2. Involuntary Liquidation- any creditor or group of creditors with a claim of, or with claims aggregating at
least five hundred thousand pesos (P500, 000.00) may file a verified petition for liquidation with the court of
the province or city in which the individual debtor resides.

*If the court finds the petition sufficient in form and substance it shall, within five (5) working days issue the
Liquidation Order.

Insolvent of Sole Proprietorship, Partnership, and Corporation

1. Voluntary liquidation- an insolvent debtor may apply for liquidation by filing a petition for liquidation with
the court. The petition shall be verified, shall establish the insolvency of the debtor and shall contain,
whether as an attachment or as part of the body of the petition:
a. a schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts
of claims and collaterals, or securities, if any;
b. an inventory of all its assets including receivables and claims against third parties; and
c. the names of at least three (3) nominees to the position of liquidator.
2. Involuntary liquidation- three (3) or more creditors the aggregate of whose claims is at least either One
million pesos (Php1,000,000,00) or at least twenty-five percent (25%0 of the subscribed capital stock or
partner's contributions of the debtor, whichever is higher, may apply for and seek the liquidation of an
insolvent debtor by filing a petition for liquidation of the debtor with the court.

*If the petition or motion is sufficient in form and substance, the court shall issue an Order:
a. directing the publication of the petition or motion in a newspaper of general circulation once a week for
two (2) consecutive weeks; and
b. directing the debtor and all creditors who are not the petitioners to file their comment on the petition or
motion within fifteen (15) days from the date of last publication.

Conversion of rehabilitation to liquidation proceedings

Under the FRIA, court-supervised or pre-negotiated rehabilitation proceedings may be converted in the
following instances:
1. Within 10 days from receipt of the receiver’s report, a court finding that the debtor is insolvent and there is
no substantial likelihood of substantial rehabilitation;
2. If no Rehabilitation Plan is confirmed within 1 year from filing the petition to confirm the Plan;
3. If termination is due to failure or rehabilitation or dismissal of the petition for reasons other than technical
grounds; or Motion filed by the insolvent debtor for conversion into liquidation proceedings.

Liquidation Order- such order results in the dissolution of a juridical debtor, however, the individual debtor is
only discharged upon termination of the proceedings.

Liquidation Order shall:

a. Declare the debtor insolvent;
b. Order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
c. Order the sheriff to take possession and control of all the property of the debtor, except those that may
be exempt from execution;
d. Order the publication of the petition or motion in a newspaper of general circulation once a week for two
(2) consecutive weeks;
e. Direct payments of any claims and conveyance of any property due the debtor to the liquidator;
f. Prohibit payments by the debtor and the transfer of any property by the debtor;
g. Direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;
h. Authorize the payment of administrative expenses as they become due;
i. State that the debtor and creditors who are not petitioner/s may submit the names of other nominees to
the position of liquidator; and
 j. Set the case for hearing for the election and appointment of the liquidator, which date shall not be less
than thirty (30) days nor more than forty-five (45) days from the date of the last publication.

Effects of the Liquidation Order:

a. The juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;
b. Legal title to and control of all the assets of the debtor, except those that may be exempt from
execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the
court;
c. All contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within
ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party
agrees;
d. No separate action for the collection of an unsecured claim shall be allowed. Such actions already
pending will be transferred to the Liquidator for him to accept and settle or contest. If the liquidator
contests or disputes the claim, the court shall allow, hear and resolve such contest except when the case
is already on appeal. In such a case, the suit may proceed to judgment, and any final and executor
judgment therein for a claim against the debtor shall be filed and allowed in court; and
e. No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

Rights of secured creditors

Creditor- refers to natural or juridical persons which have claims against the debtor that arose on or before the
commencement date.

General Unsecured Creditor- refers to a creditor whose claim or a portion thereof is neither secured,
preferred nor subordinated under the FRIA.

Secured Creditor- refers to a claim secured by a lien, which is a statutory or contractual claim or juridical
charge on real or personal property that legally entitles a creditor to resort to said property for payment of the
debt or claim secured.

General Rule: Upon issuance of the Liquidation Order, no foreclosure proceeding shall be allowed for 180 days.
Exception: However, the Liquidation Order shall not affect the right of a secured creditor to enforce his lien.
During the proceedings, a secured creditor may:
a. Waive his right under the security or lien, prove his claim in the liquidation proceedings and share in the
distribution of the assets of the debtor; or
b. Maintain his rights under the security or lien.

If the secured creditor maintains his rights under the security or lien:
a. The value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. If
the value of the property is less than the claim, the liquidator may convey the property to the secured
creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance. If its
value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the
debtor's right of redemption upon receiving the excess from the creditor.
b. The liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds of
the sale; or
c. The secure creditor may enforce the lien or foreclose on the property pursuant to applicable laws.

Rights of Unsecured Creditors

General Rule: No separate action for the collection of an unsecured claim shall be allowed. Actions already
pending will be transferred to the liquidator.
Exception: When the action is already on appeal, the suit may proceed to judgment, and any final and
executory judgment shall be filed and allowed.

Liquidator- shall refer to the natural person or juridical entity appointed as such by the court and entrusted
with such powers and duties as set forth in this Act. If the liquidator is a juridical entity, it must designate a
natural person who possesses all the qualifications and none of the disqualifications as its representative, it
being understood that the juridical entity and the representative are solidarity liable for all obligations and
responsibilities of the liquidator.

Qualifications
The liquidator shall have the same qualifications as that of rehabilitator, thus:
a. Citizen or resident for at least six (6) months immediately prior to nomination;
b. Of good moral character and with acknowledged integrity, impartiality and independence;
c. Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as
well as the relevant training and/or experience that may be necessary to enable him to properly
discharge the duties and obligations of a receiver; and
d. Has no conflict of interest, which may be waived by a party who may be prejudiced.

Election of Liquidator
Only creditors who have filed their claims within the period set by the court, and whose claims are not
barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor
will not be allowed to vote, unless: (a) he waives his security or lien; or (b) has the value of the property
subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his
claim.

Court-Appointed Liquidator
The court may appoint the liquidator if:
a. on the date set for the election of the liquidator, the creditors do not attend;
b. the creditors who attend, fail or refuse to elect a liquidator;
c. after being elected, the liquidator fails to qualify; or
d. a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the court may instead
set another hearing of the election of the liquidator.

Powers, Duties and Responsibilities

The principal duty of the liquidator is to preserve and maximize the value and recover the assets of the
debtor, with the end of liquidating them and discharging all the claims against the debtor. The powers, duties
and responsibilities include:
a. To sue and recover all the assets, debts and claims, belonging or due to the debtor;
b. To take possession of all the property of the debtor except property exempt by law from execution;
c. To sell, with the approval of the court, any property of the debtor which has come into his possession or
control;
d. To redeem all mortgages and pledges, and so satisfy any judgement which may be an encumbrance on
any property sold by him;
e. To settle all accounts between the debtor and his creditors, subject to the approval of the court;
f. To recover any property or its value, fraudulently conveyed by the debtor;
g. To recommend to the court the creation of a creditors' committee which will assist him in the discharge
of the functions and which shall have powers as the court deems just, reasonable and necessary; and
h. Upon approval of the court, to engage such professional as may be necessary and reasonable to assist
him in the discharge of his duties.

Determination of Claims
The rules on the determination of claims are as follows:
a. Within 20 days from assuming office, the liquidator shall prepare a preliminary registry of claims.
b. Secured creditors who have waived their security or have fixed the value of the property subject of the
security shall be considered unsecured.
c. The registry shall be available for public inspection and publication notice shall be provided to
stakeholders.
d. The debtor and the creditor have the right to set off their debts against each other; only the balance, if
any, shall be allowed in the proceedings.
e. Within 30 days from expiration of the period for filing of applications for recognition of claims, interested
parties may challenge claims to the court.
f. Upon the expiration of the 30-day period, the liquidator shall submit the registry of claims containing the
claims not subject to challenge. Such claims shall become final upon filing of the register.
g. Claims that have become final may be set aside only on grounds of fraud, accident, mistake or
inexcusable neglect.
h. The liquidator shall submit disputed claims to court for final approval.

Liquidation Plan- within three (3) months from assuming office, the liquidator shall submit a Liquidation Plan
enumerating the assets, claims and a schedule of liquidation and payment. Properties exempted by law shall be
set apart from liquidation for the use and benefit of the insolvent. The Plan and its implementation shall
observe the concurrence and preference of credits under the Civil Code.

Sale of Assets in Liquidation

The liquidator may sell the unencumbered assets of the debtor and convert the same into money.

General Rule: The sale shall be made at public auction.

Exception: A private sale may be allowed with the approval of the court if:
a. The goods are of perishable nature;
b. The goods are likely to quickly deteriorate in value;
c. The goods are disproportionately expensive to keep or maintain; or
d. The private sale is for the best interest of the debtor and creditors.

*The Liquidator shall implement the Liquidation Plan as approved by the court. Payments shall be made to the
creditors only in accordance with the provisions of the Plan.
*The Liquidation Plan and its implementation shall ensure that the concurrence and preference of credits as
enumerated in the Civil Code of the Philippines and other relevant laws shall be observed, unless a preferred
creditor voluntarily waives his preferred right.