FINANCIAL REHABILITATION

AND INSOLVENCY ACT (FRIA)

ATTY. IVAN YANNICK S. BAGAYAO CPA, MBA

LAWS:

1. Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142

2. Concurrence and Preference of Credits (Article 2241-2244 of NCC)

POLICIES: (Sec. 2, FRIA)

1. FRIA expresses the policy of the State to encourage debtors, both juridical and natural persons, and
their creditors to collectively and realistically resolve and adjust competing claims and property
rights.

2. The State shall ensure timely, fair, transparent, effective and efficient rehabilitation or liquidation of
debtors.

3. When rehabilitation is NOT feasible, it is the interest of the State to facilitate a speedy and orderly
liquidation of the debtor’s assets and settlement of their obligations
POLICIES: (Sec. 2, FRIA)

4. FACTORS in rehabilitation or liquidation:

a. Recognize Creditors Right
b. Respect priority claims
c. Ensure or maintain certainty and predictability in commercial affairs
d. Ensure equitable treatment of creditors who are similarly situated
e. Preserve and maximize the value of the assets of theses debtors
WHO IS A DEBTOR?

Debtor shall refer to a Sole Proprietor, Partnership, a Corporation or an Individual debtor who has
become INSOLVENT.

a. Individual Debtor – Shall refer to a Natural person who is a Resident and Citizen of the Philippines
that has become insolvent.

b. Group of debtors – Shall refer to and cover only:

1. Corporations that are financially related to one another (Parent-Subsidiary or affiliates)
2. Partnerships that are owned more than 50% by the same person
3. Single proprietorships that are owned by the same person.
What is the concept of Insolvent?

Insolvent shall refer to the financial condition of a debtor that is:

1. Generally unable to pay its or his liabilities as they fall due in the ordinary course of business or
2. Has liabilities that are greater than its or his assets
What is a liability?

Liabilities shall refer to Monetary claims against the debtor, including stockholders
advances recorded in the debtor’s audited financial statement as advances for future
subscription.
Who is a Creditor?

Creditor shall refer to a natural or juridical person which has claim against the debtor that
arose on or before the commencement date.

1. General Unsecured Creditor

2. Secured Creditor
Can group of Debtors file Petition?

A group of debtors may jointly file for (voluntary) rehabilitation under FRIA when one or more of its members
foresee the impossibility of meeting debts when they respectfully fall due, and 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
proposed Rehabilitation plan (Section 12, FRIA)

E
Who are EXCLUDED Debtors?

Excluded from operations of FRIA are debtors which are:

1. B
2. P
3. I
4. NLGUA

They are governed by their respective Special Laws

What is REHABILITATION?

Rehabilitation shall refer to the restoration of the debtors to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its creditors can
recover by way of present value of payments projected in the plan, more if the debtor continues as a
going concern than if it is immediately liquidated. (Section 4 (gg), FRIA)
Grounds for Rehabilitation of any of the three business organizations:

A. Voluntary Rehabilitation:
1. the insolvency of the debtor
2. the viability of its rehabilitation

B. Involuntary Rehabilitation:
A creditor or group of creditors may initiate involuntary proceedings against the debtor by filing a
petition for rehabilitation with the court if:

1. There is No genuine issue of fact or law on the claim ans that the Due and Demandable payments
thereon have NOT been made for atleast 60 days or that the debtor has failed generally to meet its
liabilities as they fall due;

Or

2. A creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will
prevent the debtor from paying its debt as they become due or will render it insolvent
What is a Rehabilitation Plan?

Rehabilitation Plan shall refer to a plan by which the financial well-being and viability of an insolvent debtor
can be restored using various means as may be approved by the court or creditors (Sec. 62, FRIA)

• It is attached to the Petition for Rehabilitation

• It may be approved by the Creditor (50% of the total claims)
• Confirmed by the court after approval of the creditors, or even without approval or even over the
objection of the creditors (Sec. 68, FRIA)
What is CRAM DOWN RULE?

It is a rule indicating that the Rehabilitation plan (including the pre-negotiated plans) confirmed by the
Court shall be BINDING upon the debtor and all persons who may be affected by it, including creditors
whether or not such persons have participated in the proceedings, opposed the plan or whether or not
their claims have been scheduled. (BPI vs Sarabia Manor Hotel, G.R. No. 175844, July 29, 2013)
What is Stay or Suspension Order?

The Court shall issue a Commencement Order which shall include a Stay order. The stay order or
suspension order shall:

1. Suspend all actions or proceedings in court for the enforcement of claims against the debtor

2. Suspend all action to enforce any judgment, attachment or any provisional remedies against the
debtor

3. Prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its
properties, except in the ordinary course of business

4. Prohibit the debtor from making any payment of liabilities outstanding as of commencement date
except as may be provided herein (Sec. 16, FRIA)
Exception to the Stay or Suspension Order:

1. To cases already pending appeal in the Supreme Court as of commencement date.

2. Subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency
which is capable of resolving the claim more quickly, fairly and efficiently upon the determination of the court

3. To any form of action of customers of security market participant to recover or claim money and securities
entrusted to the latter in an ordinary course of business

4. Clearing or settlement of financial transactions through facilities of clearing agency duly authorized by
appropriate regulatory agency

5. To the actions of licensed brokers or dealer to sell pledged securities of a debtor in accordance with SRC

6. To the enforcement of claims against sureties and other persons solidarily liable with the debtor and third party
accommodation mortgagors

7. Any Criminal Action against individual debtor or owner, partner, director or officer of a debtor shall not be
affected by any proceedings commenced under FRIA
Who will manage the Debtor?

A. The existing Board and or Management of the Debtor shall Continue

B. Upon motion, the Court may appoint a Rehabilitation Receiver (RR) or Management Committee
(ManCom) to undertake the management of the debtor in the following cases:

1. Gross mismanagement of the debtor or fraud or wrongful conduct or willful violation of FRIA
2. Actual or imminent Danger of loss of assets or properties
3. Paralyzation of the business operations of the debtor
Court Action on Petition For Rehabilitation:

1. Give DUE COURSE to the Petition (Grant), or

2. DISMISS the Petition, or

3. CONVERT the proceedings into Liquidation Proceedings

Out of Court Rehabilitation:

Rehabilitation is not necessarily court supervised. This can be done in an informal restructuring agreement or
rehabilitation plan that meets the minimum requirements is recognized in FRIA

Minimum Requirements: (Sec. 84, FRIA)

1. Debtor must agree to out of court rehabilitation plan
2. It must be approved by creditors:
a. 67%. SO
b. 75%. UNSO
c. 85%. ToL-SU

* CRAM DOWN RULE also applies

SUSPENSION OF PAYMENTS:

Only an INDIVIDUAL DEBTOR may file a petition for Suspension of payments.

Characteristics:

1. The debtor has sufficient properties to cover all his debts but foresees the impossibility of meeting his debt when
they fall due
2. The purpose is to suspend or delay payment of debt
3. The amount of indebtedness is not affected
4. The number of creditors is immaterial
What is a Suspension Order:

Upon motion filed by Individual debtor, the court may issue an order suspending any pending execution against
the individual debtor. (sec. 96, FRIA)

When shall suspension order lapse?

After three (3) months without the proposed agreement being accepted by the creditors or as soon as such
agreement is denied.
The following creditors are not affected by the Stay Order: (Exceptions)

1. Creditors having claims for personal labor, maintenance, expenses of last illness and funeral of
the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing
of the petition, and

2. Secured Creditors
LIQUIDATION PROCESS:

This is the proceeding where claims are filed and the assets of the insolvent debtor are disposed and the
proceeds are divided among that creditors.

These rules apply to individual debtor, sole proprietorship, partnership and corporation.
LIQUIDATION OF INDIVIDUAL DEBTOR:

It may be:
1. Voluntary

2. Involuntary
LIQUIDATION ORDER:

The Court that has jurisdiction over liquidation proceedings shall in proper case, issue a Liquidation Order
which includes, among others:

1. Declaring the debtor insolvent

2. Ordering the liquidation of the debtor

3. In case of juridical person, declaring it as dissolved

4. Prohibiting payments and or transfer of property by the debtor

5. Directing all claims to be filed with Liquidator (Sec. 112,FRIA)

Rights of Secured Creditors:

The liquidation order shall not affect the right of a secured creditor to enforce his lien in accordance with the
applicable contract or law.

Maintain his rights over the security or lien, however, the right is subject to temporary stay of foreclosure
proceedings for a period of 180 days, upon issuance of Liquidation Order by the Court.
DISTRIBUTION OF ASSETS:

The assets of the insolvent debtor shall be divided among the creditors in accordance with the Liquidation
Plan submitted by the Liquidator and approved by the Court. The rules on concurrence and preference of
credits under the New Civil Code and other relevant laws shall be observed in Liquidation Plan (Sec. 113,
FRIA)
PROCEEDINGS COVERED BY FRIA:

FOR SPC:
1. Voluntary Rehabilitation
2. Involuntary Rehabilitation
3. Pre-Negotiated Rehabilitation
4. Voluntary Liquidation
5. Involuntary Liquidation

FOR INDIVIDUAL DEBTOR:

4. Suspension of Payment
5. Voluntary Liquidation
6. Involuntary Liquidation (Pet. For Acts of Insolvency)
Who will approve or File a Petition?

A. In a VOLUNTARY REHABILITATION:

1. Sole Proprietor

2. Partnership

3. Corporation
Who will approve or File a Petition?

B. In an INVOLUNTARY REHABILITATION:

For Sole Proprietor; Partnership;Corporation

Who will approve or File a Petition?

C. In an PRE-NEGOTIATED REHABILITATION:

For Sole Proprietor; Partnership;Corporation

Who will approve or File a Petition?

D. VOLUNTARY LIQUIDATION:

For Sole Proprietor; Partnership;Corporation

Who will approve or File a Petition?

E. INVOLUNTARY LIQUIDATION:

For Sole Proprietor; Partnership;Corporation

Who will approve or File a Petition?

F. SUSPENSION OF PAYMENT:

For Individual Debtor

Who will approve or File a Petition?

G. VOLUNTARY LIQUIDATION:

For Individual Debtor

Who will approve or File a Petition?

H. INVOLUNTARY LIQUIDATION:

For Individual Debtor

DIFFERENCE BETWEEN SUSPENSION OF PAYMENT AND LIQUIDATION:
DIFFERENCE BETWEEN SUSPENSION OF PAYMENT AND REHABILITATION:
DIFFERENCE BETWEEN VOLUNTARY LIQUIDATION AND INVOLUNTARY LIQUIDATION OF INDIVIDUAL DEBTOR
DIFFERENCE BETWEEN INVOLUNTARY LIQUIDATION OF INDIVIDUAL DEBTOR AND OF BUSINESS ORGANIZATION