FRIA Notes 3.

Corporation: BM + 2/3 OCS or 2/3

Outline Based on 2019 Bar Syllabus Members
Content Based on Reviewer on Commercial
Law by Sundiang & Aquino (2017), FRIA Grounds (must be alleged in the verified
(RA 10142) and FR Rules (AM No. 12-12- petition) and established (p.426):
11-SC) 1. Insolvency of the debtor; AND
Prepared by Harradier Isnani 2. Viability of rehabilitation

Note: Review this alongside the syllabus to INVOLUNTARY

be able to see the structure of the outline. Who approves/files (p.424)
Read alongside Sundiang too if you like. Sole Prop, Partnership, Corp (SPPC):
Also try checking FRIA (RA itself) and the FR Creditor or group of creditors with a
Rules promulgated by the SC (You can also claim of or the aggregate of whose claims
just master the FR Rules since it is the most in, at least P1,000,000.00 or at least 25% of
comprehensive among the materials and the subscribed capital stock or partners’
contains literally everything in the Syllabus). contributions, whichever is higher (1M or
25% SCS/contrib.)
A. Basic Concepts
Grounds (p.427)
1. Rehabilitation (p.426) 1. There is (a)no genuine issue of fact or
- Restoration of the debtor to a condition law on the claim/s of the petitioner/s, and
of successful operation and solvency, if it is that the (b1)due and demandable payments
shown that its continuance of operation is thereon have not been made for at least 60
economically feasible and its creditors can days or that the (b2)debtor has failed
recover by way of the present value of generally to meet its liabilities as they fall
payments projected in the plan, more if the due; OR
debtor continues as a going concern than if 2. A creditor, other than the petitioner/s,
it is immediately liquidated. has initiated foreclosure proceedings
against the debtor that (a)will prevent the
2. Insolvent (p.422) debtor from paying its debts as they
- Financial condition of a debtor that is become due or (b)will render it insolvent
generally (a) unable to pay its or his
liabilities as they fall due in the ordinary b. Commencement Order (including Stay
course of business or (b) has liabilities that Order) (pp.428-431) Also review Sec. 17
are greater than its or his assets. FRIA

3. Liquidation - The court having JD over the

- (See Discussion under C. below) rehabilitation case shall issue a
Commencement Order which shall include a
4. Suspension of Payments Stay Order.
- (See discussion under D. below)
- The Stay or Suspension Order shall: APES
1) Suspend all actions or proceedings for
B. Modes of Rehabilitation the enforcement of claims against the
debtor;
1. Court-Supervised Rehabilitation 2) Suspend all actions to enforce any
judgment, attachment, or other provisional
a. Voluntary vs. involuntary remedies against the debtor;
3) Prohibit the debtor from selling,
VOLUNTARY encumbering, transferring, or disposing any
Who approves/files (p.423) of its properties except in the ordinary
1. Sole proprietorship: Owner/Proprietor course of business; and
2. Partnership: Majority of Partners

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4) Prohibit the debtor from making any 1) Actual or eminent danger of dissipation,
payment of its liabilities outstanding as of loss, wastage, or destruction of the debtor’s
the commencement date. assets or properties;
- The Commencement Date, which refers 2) Paralyzation of the business operations
to the date on which the Court issues the of the debtor; or
Commencement Order, shall be retroactive 3) Gross mismanagement of the debtor, or
to the date of filing of the petition for fraud or other wrongful conduct on the part
voluntary or involuntary proceedings. of, or gross or willful violation of the FRIA by
existing management.
- The Commencement Order and Stay
Order shall be effective for the entire d. Determination of claims (FRIA Sec. 44-
duration of the rehab proceedings. (p.423) 46)

- Claim shall refer to all claims or demands Steps:

of whatever nature or character against the 1) Rehab receiver shall establish a
debtor or its property, which includes those preliminary registry of claims duly
that are not purely monetary in nature. supported by evidence, available for public
inspection, with publication notice to
- Rationale for suspension: (1) To enable debtor, creditors, stakeholders, and other
the rehabilitation receiver to effectively interested parties.
exercise its/his powers free from or 2) Debtor, creditors, stakeholders may
unburdened by any interference and (2) To submit a challenge to the claim/s.
enable the management committee or the 3) Rehab receiver shall submit to the court
rehab receiver to substitute defendant in the registry of claims, including undisputed
any pending action against it. claims.
4) Any decision of the rehab receiver
- The Stay Order covers all creditors, regarding a claim may be appealed to the
secured or unsecured. Preferred status of court.
secured over unsecured relative to
mortgage liens is retained but enforcement e. Rehabilitation plan (p.427)
of such preference is suspended. - Plan by which the financial well-being and
viability of an insolvent debtor can be
- Exceptions to Stay or Suspension Order: restored using various means including but
1) Cases already pending appeal in the not limited to, debt forgiveness, debt
Supreme Court as of commencement date rescheduling, reorganization or quasi-
2) Cases pending or filed at a specialized reorganization, dacion en pago, debt-equity
court or QJA which, upon determination by conversion and sale of the business (or
the court is capable of resolving the claim parts of it) as a going concern, or setting up
more quickly, fairly, and efficiently than the of new business entity, or other similar
court arrangements as may be approved by the
3) Claims against sureties and other persons court or creditors.
solidarily liable with the debtor - A rehabilitation plan is attached to the
4) Any criminal action against individual petition for rehabilitation. It is
debtor or owner, partner, director, or indispensable.
officer of a debtor (See Sundiang for more)
- See Rule 2, Sec. 61 FR Rules (AM 12-12-11-
c. Rehabilitation Receiver and SC) for contents of rehab plan:
Management Committee (p.431)
i. Concept of feasibility (BB)
- The existing Board and/or Management of - contain such other relevant information
the debtor shall continue. However, upon to enable a reasonable investor to make an
motion, the court may appoint either the informed decision on the feasibility of the
Rehab Receiver or a ManCom to undertake Rehabilitation Plan
management of the debtor in the ff. cases:
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ii. Material financial commitments (Y) (f) Other analogous circumstances as may
- include material financial undertakings or be defined by the rules of procedure.
commitments to support the Rehabilitation
Plan Upon a breach of, or upon a failure of the
Rehabilitation Plan the court, upon motion
iii. Liquidation analysis (B) by an affected party may: CCARE
- contain a liquidation analysis setting out
for each creditor or each class of creditor, (1) Issue an order directing that the breach
as applicable, the amounts they expect to be cured within a specified period of time,
receive under the Rehabilitation Plan and falling which the proceedings may be
those that they will receive if liquidation converted to a liquidation;
ensues within 120 days after the filing of (2) Issue an order converting the
the petition proceedings to a liquidation;
(3) Allow the debtor or rehabilitation
f. Creditor Approval and Confirmation receiver to submit amendments to the
(p.427) Rehabilitation Plan;
- The rehabilitation plan: (1) may be (4) Issue any other order to remedy the
approved by the creditors (50% of the total breach; or
claims); (2) confirmed by the court after (5) Enforce the applicable provisions of the
approval of the creditors or even without Rehabilitation Plan through a writ of
such approval or even over the objection of execution.
the creditors.
- Cram Down Rule: The rehabilitation plan h. Court action on Petition for
(including pre-negotiated plans) confirmed Rehabilitation (Not included in 2019 bar
by the Court shall be binding upon the syllabus) (pp.432-433)
debtor and all persons who may be affected
by it, including creditors, whether or not The court may either:
such persons have participated in the a) Give due course to the petition where:
proceedings, opposed the plan or whether 1) Debtor is insolvent; and
or not their claims have been scheduled. 2) Substantial likelihood: successful rehab

g. Failure of rehabilitation (FRIA Sec. 74-75) b) Dismiss the petition where:

1) Debtor is not insolvent; or
There is failure of rehabilitation in the 2) Sham filing intended only to delay
following cases: DR LOFO enforcement of creditor rights; or
(a) Dismissal of the petition by the court; 3) Petition, rehab plan, and attachments
(b) The debtor fails to submit a contain materially false or misleading
Rehabilitation Plan; statements; or
(c) Under the Rehabilitation Plan submitted 4) Debtor committed acts of
by the debtor, there is no substantial misrepresentation or in fraud of creditor/s
likelihood that the debtor can be or group of creditors
rehabilitated within a reasonable period;
(d) The Rehabilitation Plan or its c) Convert proceedings to liquidation
amendment is approved by the court but in proceedings where: insolvent + no
the implementation thereof, the debtor substantial likelihood of successful rehab
fails to perform its obligations thereunder
or there is a failure to realize the objectives,
targets or goals set forth therein, including 2. Pre-negotiated rehabilitation
the timelines and conditions for the
settlement of the obligations due to the a. How initiated (p.424)
creditors and other claimants; - The insolvent debtor and the
(e) The commission of fraud in securing the Rehabilitation Plan is endorsed or approved
approval of the Rehabilitation Plan or its by the creditors holding at least 2/3 of the
amendment; and
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total liabilities of the debtor including 2) Notice thereof is published in a
secured creditors holding more than 50% of newspaper of gen. circ. In the Philippines
the total secured claim and unsecured once a week for 2 consecutive weeks; and
creditors holding more than 50% of the 3) The standstill period does not exceed
unsecured claims. 120 days from the date of effectivity.
(2/3 ALL + >50% secured + >50%
unsecured) c. Cram down effect
- Applies upon publication of the notice of
b. Period and effect of approval (FRIA Sec. the out-of-court approved rehab plan
81-82)
- Period: Court has max 120 days from date C. Liquidation
of filing of the petition to approve the - Proceeding where claims are filed and the
Rehab Plan. If the court fails to act within assets of the insolvent debtor are disposed
said period, plan shall be deemed approved. and the proceeds are divided among the
- Effect of Approval: Same legal effect as creditors. (p.439)
confirmation of a Court-Supervised
Rehabilitation. 1. Voluntary liquidation vs. involuntary
liquidation vs. conversion (See Sundiang
p.438 for complete table, but note mistakes
3. Out-of-Court or Informal Restructuring – p.425 more accurate)
Agreement and Rehabilitation Plan
(pp.433-434) VOLUNTARY
Who approves/files (p.425)
a. Minimum Requirements (Debtor agrees SPPC/Juridical: Insolvent Debtor
+ 67% sec. + 75% unsec. + 85% ALL) Individual Debtor: One w/ at least P500k
1) The debtor must agree to the out-of- debts who does not have sufficient assets to
court or informal restricting / workout cover his liabilities
agreement or rehab plan
2) It must be approved by creditors INVOLUNTARY
representing at least 67% of the secured Who approves/files (p.425)
obligations of the debtor SPPC/Juridical: 3 or more creditors + 1M or
3) It must be approved by creditors 25% SCS, whichever is higher
representing at least 75% of the unsecured Individual Debtor: Any creditor or group of
obligations of the debtor creditors with claim aggregating at least
4) It must be approved by creditors holding P500k
at least 85% of the total liabilities secured
and unsecured, of the debtor CONVERSION
- Court may convert the rehab proceedings
b. Standstill period into liquidation proceedings where: (p.433)
- A period agreed upon by the debtor and 1) The debtor is insolvent; and
its creditors to enable them to negotiate 2) There is no substantial likelihood for the
and enter into an agreement or rehab plan debtor to be rehabilitated.
(FR Rules, Rule 1, Sec. 5, (q)).
- A period where creditors of the debtor 2. Procedure
cannot enforce their claim. It is binding, if
the ff. req. are present: (>50% ALL + a. Liquidation Order; Effects (pp.439-441)
published once a week for 2 consec. weeks
+ period does not exceed 120 days) - The Court that has JD over the liquidation
1) Agreement is approved by creditors proceedings shall issue a liquidation order,
representing more than 50% of the total which includes, among others:
liabilities of the debtor 1) declaring that debtor is insolvent
2) ordering liquidation of debtor
3) in case of juridical, declaring it dissolved

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 4) prohibiting payments and / or transfer of - Secured creditors who waived their
property by the debtor security, or those who have fixed the value
5) directing all claims to be filed to the of the property and admitted as creditor for
liquidator the balance, shall be considered unsecured
creditors.
Effects of Liquidation Order – FUC DAT - D & C who are mutually D & C of each
1) Juridical debtor shall be deemed other = set-off debts -> only the balance
dissolved and its corporate or juridical shall be allowed in the liquidation
existence terminated 2) Parties may submit a challenge to the
2) Legal title to and control of all assets claims to the court.
deemed vested in the liquidator or pending 3) Liquidator shall submit to the court the
his election/appointment, with the court registry of claims containing undisputed
3) All contracts of the debtor shall be claims which shall become final and may
deemed terminated and/or breached, subsequently be set aside only on grounds
unless the liquidator, w/in 90 days from his of FAME.
assumption of office, declares otherwise 4) Liquidator shall resolve disputed claims
and the contracting party agrees and submit findings to the court for final
4) No separate action for the collection of approval. Liquidator may disallow claims.
an unsecured claim shall be allowed.
5) All actions pending will be transferred to
the liquidator for him to accept and settle D. Suspension of Payments; Suspension of
or contest. Payment Order (pp. 435-436)
6) No foreclosure proceeding shall be
allowed for a period of 180 days. - Only an individual debtor may file a
petition for suspension of payment
Rights of Secured Creditors - The debtor has sufficient properties to
- The liquidation order shall not affect the cover all his debts (not insolvent) but
right of a secured creditor. He may: foresees the impossibility of meeting his
a) Waive his right, participate in the debts when they respectively fall due.
liquidation proceedings, and share in the - The purpose is to suspend or delay the
distribution of debtor’s assets payment of debts.
b) Maintain his rights: The value of the - The amount of indebtedness is not
property may be fixed in a manner agreed reduced or discharged.
upon by the creditor and liquidator. - The number of creditors is immaterial.
- If property value < claim = Convey
property + secured creditor will be admitted Suspension Order
for the balance a) Suspension order shall lapse:
- If property value > claim = convey i. After 3 months w/o the proposed
property + liquidator may waive right of agreement being accepted by
redemption upon receiving excess from creditors; or
creditor ii. As soon as such agreement is
- Even if secured creditor will maintain his denied
rights, the right is still subject to the b) No creditor shall sue or institute
temporary stay of foreclosure for 180 days, proceedings from the time of filing of
upon issuance of liquidation order. petition for suspension and for as long as
proceedings remain pending.
3. Determination of Claims
Exempted creditors:
Steps: 1) Creditors having claims for personal
1) Liquidator shall prepare a preliminary labor, maintenance, expense of last illness
registry of claims of secured and unsecured and funeral of the wife or children of the
creditors, available for public inspection, debtor incurred in the 60 days immediately
and provide publication notice to all parties. prior to the filing of the petition

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 2) Secured creditors Appeals under R65 of the ROC w/in 15 days
- Such creditors shall not be affected unless from notice of the decision or order.
they join and vote in the creditors’ meeting.

Prohibited Acts from Individual Debtor

during pendency of Suspension Proceedings
a) Selling, transferring, encumbering, or
disposing in any manner of his property,
except those used in the ordinary
operations
b) Making any payment outside of
necessary or legitimate expenses of his
business or industry

Creditors Meeting
Individual debtor shall attach to the petition
for suspension a proposed agreement w/
creditors
a) Presence of Creditors holding claims
amounting to at least 3/5 of the liabilities of
the debtor is necessary for the meeting
- no right to vote if he incurred his
credit within 90 days prior to the
filing of the petition for suspension
b) Double Majority for approval:
i) 2/3 of creditors vote
ii) Claims represented by majority
vote amount to at least 3/5 of total
liabilities of debtor
c) Failure to achieve double majority =
suspension of payments proceeding
terminated, creditors shall be free to
enforce their rights

E. Remedies (FR Rules, Rule 6, Sec. 1-2)

1. Motion for Reconsideration

- A party may file a MR of any order issued
by the court prior to the approval of the
Rehabilitation Plan. No relief can be
extended to the party aggrieved by the
court’s order on the motion through a R65
certiorari.

2. Petition for certiorari

- An order issued after the approval of the
Rehab Plan can be reviewed only through a
special civil action for certiorari under R65
of the ROC.
- An order approving or disapproving a
rehab plan can only be reviewed through a
petition for certiorari to the Court of