History of Laws on Insolvency and FRIA

Philippine Laws on Philippine Laws on BankruptcyBankruptcy

Introduction Introduction

Prior to the Financial Rehabilitation and Prior to the Financial Rehabilitation and Insolvency Act, the Philippines operated Insolvency Act, the Philippines operated according to century-old bankruptcy according to century-old bankruptcy legislation. legislation.

Insolvency was governed by special laws Insolvency was governed by special laws insofar as said laws are not inconsistent with insofar as said laws are not inconsistent with the Civil Code (Article 2237). Said provision the Civil Code (Article 2237). Said provision of the Civil Code provides that Insolvency of the Civil Code provides that Insolvency shall be governed by Special Laws insofar as shall be governed by Special Laws insofar as they are not inconsistent with the Civil Code. they are not inconsistent with the Civil Code.

Laws Affecting InsolvencyLaws Affecting Insolvency

The basic special law on Insolvency was The basic special law on Insolvency was Act. No 1956; supplementary to it are the Act. No 1956; supplementary to it are the New Central Bank Act ( Republic Act New Central Bank Act ( Republic Act 7653) in case of banks, the Insurance 7653) in case of banks, the Insurance Code as amended by Presidential Decree Code as amended by Presidential Decree 1141 , in case of insurance companies, 1141 , in case of insurance companies, and the Presidential Decree No. 902-A as and the Presidential Decree No. 902-A as amended Republic Act No. 8799 on amended Republic Act No. 8799 on corporation and partnership in corporation and partnership in suspension of payments.suspension of payments.

HistoryHistory

The Insolvency Act of 1909 was, in reality, The Insolvency Act of 1909 was, in reality, virtually virtually never used in dealing with the never used in dealing with the claims of either corporations or claims of either corporations or individualsindividuals. In its place, the Philippine . In its place, the Philippine state has developed a unique process state has developed a unique process based on rules outlined by the Supreme based on rules outlined by the Supreme Court in 2000. These involve petitions for Court in 2000. These involve petitions for insolvency being heard by 60 specifically insolvency being heard by 60 specifically designed regional trial courts.designed regional trial courts.

APPLICABLE PHILIPPINE APPLICABLE PHILIPPINE LAWSLAWS

PRIOR TO FRIAPRIOR TO FRIALargely patterned after the Insolvency Largely patterned after the Insolvency Act of California of 1895, Act No. 1956 Act of California of 1895, Act No. 1956 was created by the Philippine was created by the Philippine Legislature with the Spanish Civil Code Legislature with the Spanish Civil Code of 1889, then still in force. The of 1889, then still in force. The suspension of payments aspect was suspension of payments aspect was taken from the Spanish Code of taken from the Spanish Code of Commerce, while the part relating to Commerce, while the part relating to insolvency is essentially akin to the insolvency is essentially akin to the bankruptcy laws of American origin bankruptcy laws of American origin because it because it dischargesdischarges the honest debtor the honest debtor..


PRIOR TO FRIAPRIOR TO FRIADespite debate in interpreting and applying the Despite debate in interpreting and applying the provisions of Act No. 1956, it remained largely provisions of Act No. 1956, it remained largely untouched for nearly sixty years.untouched for nearly sixty years.

In 1976, In 1976, Presidential Decree 902-APresidential Decree 902-A, was , was issued by President Ferdinand E. Marcos using issued by President Ferdinand E. Marcos using his dictatorial powers. With the intention of his dictatorial powers. With the intention of creating a more inviting climate for investment, creating a more inviting climate for investment, both domestic and foreign, the Decree both domestic and foreign, the Decree introduced several changes to the rules introduced several changes to the rules governing insolvency.governing insolvency.


PRIOR TO FRIAPRIOR TO FRIAForemost, Presidential Decree 902-A Foremost, Presidential Decree 902-A expressly established the concept of expressly established the concept of rehabilitation, which applies only to rehabilitation, which applies only to corporations, and is wholly different from corporations, and is wholly different from insolvency, because it allows the insolvency, because it allows the corporation to recover and be able to corporation to recover and be able to continue its business as a going concern. continue its business as a going concern.

Presidential Decree 902-A, however, Presidential Decree 902-A, however, lacked rules that would provide for an lacked rules that would provide for an effective corporate recovery systemeffective corporate recovery system..


PRIOR TO FRIAPRIOR TO FRIAFew financially distressed corporations Few financially distressed corporations in the Philippines availed of in the Philippines availed of proceedings under the laws then in proceedings under the laws then in force. For one, the filing of proceedings force. For one, the filing of proceedings under the Insolvency Act went against under the Insolvency Act went against the Oriental value of maintaining the Oriental value of maintaining 'social face. 'social face.


PRIOR TO FRIAPRIOR TO FRIA On the other hand, the "automatic stay" was On the other hand, the "automatic stay" was effective only against unsecured creditors, effective only against unsecured creditors, leaving the important assets of the debtor, leaving the important assets of the debtor, often covered by mortgages, susceptible to often covered by mortgages, susceptible to foreclosure anyway. As such, corporate foreclosure anyway. As such, corporate reorganization practice evolved slowly in the reorganization practice evolved slowly in the Philippine commercial landscape.Philippine commercial landscape.

The Philippine Supreme Court, acting on cases The Philippine Supreme Court, acting on cases elevated to it on appeal or certiorari from the elevated to it on appeal or certiorari from the SEC, took the task of interpreting and applying SEC, took the task of interpreting and applying the provisions of the Decree and formulating a the provisions of the Decree and formulating a body of policy, principles, and rules on body of policy, principles, and rules on corporate rehabilitationcorporate rehabilitation33..


PRIOR TO FRIAPRIOR TO FRIAIn November 1999, the SEC finally In November 1999, the SEC finally promulgated its promulgated its Rules on Corporate Rules on Corporate RecoveryRecovery. Shortly thereafter, in July . Shortly thereafter, in July 2000, the Philippine Congress 2000, the Philippine Congress promulgated the promulgated the Securities Regulation Securities Regulation Code (Republic Act No. 8799)Code (Republic Act No. 8799) which which transferred SEC's jurisdiction over transferred SEC's jurisdiction over corporate rehabilitation proceedings, corporate rehabilitation proceedings, among other cases, back to the regular among other cases, back to the regular courts.courts.


PRIOR TO FRIAPRIOR TO FRIAHaving been granted "rulemaking power" in Having been granted "rulemaking power" in the 1987 Constitution, the Supreme Court the 1987 Constitution, the Supreme Court did not waste time nor opportunity and did not waste time nor opportunity and pushed forward the development of the pushed forward the development of the whole body of corporate rehabilitation. whole body of corporate rehabilitation. Seen as an act of "judicial activism", the Seen as an act of "judicial activism", the Court promulgated the Court promulgated the Interim Rules of Interim Rules of Procedure on Corporate Recovery of Procedure on Corporate Recovery of 20002000, which contained not only procedural , which contained not only procedural rules but key provisions that bordered on rules but key provisions that bordered on substantive laws. In January 2009, the substantive laws. In January 2009, the SC SC Rules of Procedure on Corporate Rules of Procedure on Corporate RehabilitationRehabilitation (SC A.M. No. 00-8-10-SC) (SC A.M. No. 00-8-10-SC) took effect.took effect.


PRIOR TO FRIAPRIOR TO FRIAFinally, it is to be noted that these Finally, it is to be noted that these special laws and rules of procedure are special laws and rules of procedure are applied by the Court together with applied by the Court together with provisions of provisions of New Civil Code of the New Civil Code of the PhilippinesPhilippines and the and the Labor Code of Labor Code of the Philippinesthe Philippines. Moreover, certain . Moreover, certain concepts borrowed from foreign concepts borrowed from foreign jurisprudence are applied as well.jurisprudence are applied as well.

HIGHLIGHTS OFHIGHLIGHTS OF THE LAWS ON THE LAWS ON INSOLVENCYINSOLVENCY

Act No. 1956, as Act No. 1956, as amendedamended

I. Governing LawI. Governing Law

The basic special law on Insolvency The basic special law on Insolvency is Act. No 1956; supplementary to is Act. No 1956; supplementary to

it are the New Central Bank Actit are the New Central Bank Act ( Republic Act 7653) in case of ( Republic Act 7653) in case of

banks, the Insurance Code as banks, the Insurance Code as amended by Presidential Decree amended by Presidential Decree

1141 , in case of insurance 1141 , in case of insurance companies, and the Presidential companies, and the Presidential Decree No. 902-A as amended Decree No. 902-A as amended

Republic Act No. 8799 on Republic Act No. 8799 on corporation and partnership in corporation and partnership in

suspension of payments.suspension of payments.

II. ConceptII. Concept

Insolvency, in general, is the Insolvency, in general, is the state of inability of a person state of inability of a person to pay his debts at maturity. to pay his debts at maturity.

Under the Philippine law, Under the Philippine law, insolvency and bankruptcy insolvency and bankruptcy are synonymous terms and are synonymous terms and

used interchangeably. used interchangeably.


Insolvency is a Insolvency is a conditioncondition of a of a person who is insolvent; person who is insolvent;

inability to pay one’s debts; inability to pay one’s debts; the term insolvency is the term insolvency is

broader than bankruptcy and broader than bankruptcy and historically bankruptcy was historically bankruptcy was included within its scope.included within its scope.


Insolvency has two (2) distinct and Insolvency has two (2) distinct and well-defined significations.well-defined significations.

In its general and popular In its general and popular

meaning, insolvency denotes the meaning, insolvency denotes the state of one whose entire property state of one whose entire property and assets, where converted into and assets, where converted into money without unreasonable money without unreasonable haste or sacrifice, are insufficient haste or sacrifice, are insufficient to pay his debts, or his general to pay his debts, or his general inability to pay his debts. inability to pay his debts.


However, the turn is frequently However, the turn is frequently used in the more restricted used in the more restricted sense sense to express the inability to express the inability of the person to pay his debts of the person to pay his debts as they become due in the as they become due in the ordinary course of business ordinary course of business and it is generally so used and it is generally so used when applied to persons in when applied to persons in commercial pursuitscommercial pursuits. (44 C.J.S. . (44 C.J.S. 337-338)337-338)

II. Purpose and scheme of Law on II. Purpose and scheme of Law on InsolvencyInsolvency

A. General Purpose:A. General Purpose:

The main purpose of the insolvency law The main purpose of the insolvency law is to convert assets of the bankrupt into is to convert assets of the bankrupt into money for distribution among creditors, money for distribution among creditors, then to relieve the honest debtor from the then to relieve the honest debtor from the weight or oppressive indebtedness and weight or oppressive indebtedness and permit him to start anew free from the permit him to start anew free from the obligations and responsibilities consequent obligations and responsibilities consequent upon business misfortunes. (Williams v. upon business misfortunes. (Williams v. U.S. & G Co., 236 U.S. 549)U.S. & G Co., 236 U.S. 549)

Specific/Principal PurposesSpecific/Principal Purposes

1.1. To effect an equitable distribution To effect an equitable distribution of the property of the of the property of the bankrupt/insolvent among his bankrupt/insolvent among his creditors;creditors;

2.2. To permit the debtor to be To permit the debtor to be discharged enabling him to start discharged enabling him to start afresh relieving said honest debtor afresh relieving said honest debtor from oppressive indebtedness.from oppressive indebtedness.

B. Schemes/ClassesB. Schemes/Classes

The following methods are employed The following methods are employed in order to achieve the basic in order to achieve the basic objectives of the law, viz:objectives of the law, viz:1. Suspension of Payment1. Suspension of Payment

Suspension of payments is the Suspension of payments is the postponement, by court order, of postponement, by court order, of the payment of debts of one who, the payment of debts of one who, while possessing sufficient property while possessing sufficient property to cover his debts, foresees the to cover his debts, foresees the impossibility of meeting them when impossibility of meeting them when they respectively fall due. ( Sec. 2, they respectively fall due. ( Sec. 2, paragraph 1)paragraph 1)

SUSPENSION OF PAYMENTSUSPENSION OF PAYMENT

Purpose:Purpose:

The purpose of a suspension of The purpose of a suspension of payments is to suspend or delay payments is to suspend or delay the payment of debts the amount the payment of debts the amount of which is not affected although of which is not affected although a postponement is declared. The a postponement is declared. The basis is the probability of the basis is the probability of the debtor’s inability to meet his debtor’s inability to meet his obligations when they obligations when they respectively fall due, despite the respectively fall due, despite the fact that he has sufficient assets fact that he has sufficient assets to cover all his liabilities.to cover all his liabilities.

Procedure in Suspension of Procedure in Suspension of PaymentPayment

a. a. Procedures and EffectsProcedures and EffectsA debtor who has sufficient assets A debtor who has sufficient assets

but who may be unable to meet his but who may be unable to meet his obligations as and when they fall due, obligations as and when they fall due, may petition for suspension of may petition for suspension of payments, annexing thereto a payments, annexing thereto a schedule of his obligations and an schedule of his obligations and an inventory of his assets. The debtors inventory of his assets. The debtors proposal, or a modification thereof, proposal, or a modification thereof, will be sustained if it is approved by at will be sustained if it is approved by at least two-thirds (2/3) of the creditors least two-thirds (2/3) of the creditors representing at least three-fifths (3/5) representing at least three-fifths (3/5) of the total liabilities of the debtor of the total liabilities of the debtor stated in the petition.stated in the petition.


A)A) Filing of petition accompanied by Filing of petition accompanied by inventory of assets and detailed inventory of assets and detailed schedule of obligations, amounts schedule of obligations, amounts and their due dates;and their due dates;

B)B) Issue by court of an order setting Issue by court of an order setting the place and date for meeting of the place and date for meeting of creditors.creditors.

C)C) Publication of the order and service Publication of the order and service of simmons to all creditors listed in of simmons to all creditors listed in the petitionthe petition..


D) D) Meeting of creditors and Meeting of creditors and approval of the debtor’s approval of the debtor’s proposal by creditors at least proposal by creditors at least 2/3 in number representing at 2/3 in number representing at least 3/5 of the liabilities.least 3/5 of the liabilities.

E) Objections, if any, by the other E) Objections, if any, by the other creditors;creditors;

F) Order by the court to F) Order by the court to implement the agreementimplement the agreement

Next Mode : INSOLVENCY Next Mode : INSOLVENCY UNDER ACT NO. 1956 UNDER ACT NO. 1956

1.1.VOLUNTARY INSOLVENCY; ORVOLUNTARY INSOLVENCY; OR

2.2.INVOLUNTARY INSOLVENCYINVOLUNTARY INSOLVENCY

Voluntary and Involuntary Insolvency Voluntary and Involuntary Insolvency DistinguishedDistinguished

((1) In voluntary insolvency is initiated by at 1) In voluntary insolvency is initiated by at least three (3) creditors whose aggregate least three (3) creditors whose aggregate credit is not less than One Thousand Pesos credit is not less than One Thousand Pesos (P1, 000.00). The petitioning creditors must (P1, 000.00). The petitioning creditors must be residents whose credits accrued in the be residents whose credits accrued in the Philippines and none is a creditor by Philippines and none is a creditor by assignment within thirty (30) days prior to assignment within thirty (30) days prior to the petition. (the number and other the petition. (the number and other particulars required of creditors are particulars required of creditors are immaterial in suspension of payments and immaterial in suspension of payments and voluntary insolvency.) The debtor must be voluntary insolvency.) The debtor must be guilty of, in synthesis, any of the following guilty of, in synthesis, any of the following acts of insolvency:acts of insolvency:

Requisites of Petition for Voluntary Requisites of Petition for Voluntary InsolvencyInsolvency

The petition, which must be verified The petition, which must be verified (Sec. 17.), is to be filed by:(Sec. 17.), is to be filed by:

An insolvent debtor,An insolvent debtor,Owing debts exceeding in amount the Owing debts exceeding in amount the

sum of P1,000.00.sum of P1,000.00.In the Court of First Instance*(now In the Court of First Instance*(now

RTC) of the province or city in which RTC) of the province or city in which he has resided for six months next he has resided for six months next preceding the filing of such petition, preceding the filing of such petition, andand

Requisites of Petition for Voluntary Requisites of Petition for Voluntary InsolvencyInsolvency

Setting forth in his petition the following:Setting forth in his petition the following: His place of residence;His place of residence; The period of his residence therein The period of his residence therein

immediately prior to filing said petition;immediately prior to filing said petition; His inability to pay all his debts in full;His inability to pay all his debts in full; His willingness to surrender all his His willingness to surrender all his

property, estate, and effects not exempt property, estate, and effects not exempt from execution for the benefit of his from execution for the benefit of his creditors; andcreditors; and

An application to be adjudged an An application to be adjudged an insolvent. (Sec. 14.)insolvent. (Sec. 14.)

Effects of court order Effects of court order declaring debtor insolventdeclaring debtor insolvent

Upon the filing of the petition, the Upon the filing of the petition, the court, as a matter of course, shall court, as a matter of course, shall issue an order declaring the issue an order declaring the petitioning debtor insolvent. (Sec. petitioning debtor insolvent. (Sec. 18.) The effects of such order are the 18.) The effects of such order are the following:following:

All the assets of the debtor not All the assets of the debtor not exempt from execution are taken exempt from execution are taken possession of by the sheriff until the possession of by the sheriff until the appointment of the receiver or appointment of the receiver or assignee (ibid.);assignee (ibid.);

Effects of court order Effects of court order declaring debtor insolventdeclaring debtor insolvent

The payment to the debtor of any debts The payment to the debtor of any debts due to him and the delivery to the debtor due to him and the delivery to the debtor or to any person for him of any property or to any person for him of any property belonging to him and the transfer of any belonging to him and the transfer of any property by him are forbidden (ibid);property by him are forbidden (ibid);

All civil proceeding pending against the All civil proceeding pending against the insolvent debtor shall be stayed (ibid) upon insolvent debtor shall be stayed (ibid) upon due application of the debtor (Gabatan vs. due application of the debtor (Gabatan vs. Fernandez, [C.A.] L-3896); andFernandez, [C.A.] L-3896); and

Mortgages or pledges, attachments or Mortgages or pledges, attachments or execution on property of the debtor duly execution on property of the debtor duly recorded and not dissolved are not, recorded and not dissolved are not, however, affected by the order. (Sec 59.)however, affected by the order. (Sec 59.)

2. INVOLUNTARY2. INVOLUNTARY INSOLVENCYINSOLVENCY

Nature of involuntary insolvency proceedings.Nature of involuntary insolvency proceedings.

An involuntary insolvency is not a mere An involuntary insolvency is not a mere personal action against the insolvent for personal action against the insolvent for the collection of debts; but its purpose is to the collection of debts; but its purpose is to impound all of his non-exempt property, to impound all of his non-exempt property, to distribute it equitably among his creditors, distribute it equitably among his creditors, and to release him from further liability. It and to release him from further liability. It is accordingly a proceeding in rem as well is accordingly a proceeding in rem as well as in personam. (Sec. 46) It is in rem in the as in personam. (Sec. 46) It is in rem in the sense that it determines the status of the sense that it determines the status of the insolvent.insolvent.

Who may petition for Who may petition for involuntary insolvency?involuntary insolvency?

Persons, who may validly petition Persons, who may validly petition for involuntary insolvency, must for involuntary insolvency, must possess two things, namely;possess two things, namely;

(1) They have the (1) They have the qualifications required by the qualifications required by the Insolvency law; andInsolvency law; and

(2) Their credits must be (2) Their credits must be those contemplated by the those contemplated by the Insolvency LawInsolvency Law

Requisites of Petition for Requisites of Petition for Involuntary InsolvencyInvoluntary Insolvency

The petition is to be filed by:The petition is to be filed by: Three or more creditors.Three or more creditors. None of whom has become such creditor None of whom has become such creditor

by assignment, within 30 days prior to by assignment, within 30 days prior to the filing of the petition;the filing of the petition;

Residents of the Philippines;Residents of the Philippines; Whose credits accrued in the Philippines,Whose credits accrued in the Philippines, The total amount of which credits is not The total amount of which credits is not

less than P 1,000.00 andless than P 1,000.00 and

Requisites of petition for involuntary Requisites of petition for involuntary insolvencyinsolvency

In the Regional Trial Court of the province In the Regional Trial Court of the province or city in which the debtor resides or has or city in which the debtor resides or has his principal place of business.his principal place of business.

Must be verified by at least three (3) of Must be verified by at least three (3) of the petitioning creditors,the petitioning creditors,

Must set forth one or more acts of Must set forth one or more acts of insolvency mentioned in the law, andinsolvency mentioned in the law, and

Must be accompanied by a bond, Must be accompanied by a bond, approved by the Court with at least two approved by the Court with at least two sureties, in such penal sum as the court sureties, in such penal sum as the court shall direct. (Sec. 20)shall direct. (Sec. 20)

Adjudication of InsolvencyAdjudication of Insolvency If the respondent debtor shall make a If the respondent debtor shall make a

default, or it, after trial, the issues are default, or it, after trial, the issues are found in favor of the petitioning creditors, found in favor of the petitioning creditors, the court shall make an order adjudging the court shall make an order adjudging that said respondent is and was, at the that said respondent is and was, at the time of the filing of the petition, an time of the filing of the petition, an insolvent debtor and that the debtor was insolvent debtor and that the debtor was guilty of the acts and things charged in the guilty of the acts and things charged in the petition or such of them as the court may petition or such of them as the court may find to be true. (Sec. 24.)find to be true. (Sec. 24.)

The date of adjudication of insolvency The date of adjudication of insolvency retroacts to the date of the filing of the retroacts to the date of the filing of the petition for insolvencypetition for insolvency..

Distinctions between voluntary Distinctions between voluntary

insolvency and involuntary insolvencyinsolvency and involuntary insolvency They are the following:They are the following: In the former, one creditor is sufficient, while in In the former, one creditor is sufficient, while in

the latter, three or more creditors are required;the latter, three or more creditors are required; In the former, it is filed by the insolvent debtor, In the former, it is filed by the insolvent debtor,

while in the latter, it is filed by three or more while in the latter, it is filed by three or more creditors who possess the qualifications creditors who possess the qualifications required by the law;required by the law;

In the former, the debtor must not be guilty of In the former, the debtor must not be guilty of any of the acts of insolvency enumerated in any of the acts of insolvency enumerated in Section 20, while in the latter, the debtor must Section 20, while in the latter, the debtor must have committed one or more of such acts of have committed one or more of such acts of insolvency;insolvency;

In the former, the amount of indebtedness must In the former, the amount of indebtedness must exceed P1,000.00 while in the latter, it must not exceed P1,000.00 while in the latter, it must not be less than P1,000.00;be less than P1,000.00;

Distinctions between voluntary Distinctions between voluntary insolvency and involuntary insolvencyinsolvency and involuntary insolvency

In the former, an order of adjudication of In the former, an order of adjudication of insolvency may be granted ex-parte, while in insolvency may be granted ex-parte, while in the latter, it is granted only after hearing; the latter, it is granted only after hearing; andand

In the former, the petition is filed in the Court In the former, the petition is filed in the Court of First Instance* ( now Regional Trial Court) of First Instance* ( now Regional Trial Court) of the province or city in which the debtor of the province or city in which the debtor has resided for six months, while in the has resided for six months, while in the latter, the length or residence is immaterial.latter, the length or residence is immaterial.

In the former, a bond is not required, while in In the former, a bond is not required, while in the latter, the petition must be accompanied the latter, the petition must be accompanied by a bond;by a bond;

Distinctions between suspension of Distinctions between suspension of payments and insolvencypayments and insolvency

The distinctions are the following:The distinctions are the following: (1) In the former, the purpose is to suspend (1) In the former, the purpose is to suspend

or delay the payment of debts, while in the latter, or delay the payment of debts, while in the latter, to discharge the debtor form the payment of to discharge the debtor form the payment of debts;debts;

(2) In the former, the debtors has sufficient (2) In the former, the debtors has sufficient property to pay his debts, while in the latter, the property to pay his debts, while in the latter, the debtor does not have sufficient property to pay all debtor does not have sufficient property to pay all his debts;his debts;

(3) In the former, the amount of (3) In the former, the amount of indebtedness is not affected, while in the latter, indebtedness is not affected, while in the latter, the creditors receive less than their credits, and in the creditors receive less than their credits, and in case preferences are proper, some creditors, may case preferences are proper, some creditors, may not receive any amount at all; andnot receive any amount at all; and

(4) In the former, the number of creditors is (4) In the former, the number of creditors is immaterial while in the case of involuntary immaterial while in the case of involuntary insolvency, three or more creditors are required.insolvency, three or more creditors are required.

When receiver may be appointed?When receiver may be appointed?

Upon the filing of either a voluntary Upon the filing of either a voluntary or an involuntary petition in insolvency, or an involuntary petition in insolvency, a receiver may be appointed by the a receiver may be appointed by the court in which the proceedings is court in which the proceedings is pending, at any time before the election pending, at any time before the election of an assignee, when it appears by the of an assignee, when it appears by the verified petition of a creditor:verified petition of a creditor:

That the assets of the insolvent or That the assets of the insolvent or considerable portion thereof have been considerable portion thereof have been pledged, mortgaged, transferred, pledged, mortgaged, transferred, assigned, conveyed or seized, on legal assigned, conveyed or seized, on legal process in violation of Section 79; and;process in violation of Section 79; and;

That it is necessary to commence That it is necessary to commence an action to recover the same.an action to recover the same.

The receiver shall deliver all The receiver shall deliver all the property, assets or effects the property, assets or effects remaining in his hands to the remaining in his hands to the assignee who shall be assignee who shall be substituted for him in all substituted for him in all pending actions or proceedings. pending actions or proceedings. (Sec. 78(Sec. 78))

Assignee in Insolvency DefinedAssignee in Insolvency Defined

The assignee is the person elected The assignee is the person elected by the creditors or appointed by by the creditors or appointed by the court to whom an insolvent the court to whom an insolvent debtor makes an assignment for debtor makes an assignment for

the benefit of his creditors.the benefit of his creditors.

Nature of office of assigneeNature of office of assignee

The assignee represents the The assignee represents the insolvent as well as the creditors insolvent as well as the creditors in voluntary and involuntary in voluntary and involuntary proceedings. (Chartered Bank proceedings. (Chartered Bank vs. Imperial, 48 Phil. 931; Asia vs. Imperial, 48 Phil. 931; Asia Banking Corporation vs. Banking Corporation vs. Herridge, 45 Phil. 527)Herridge, 45 Phil. 527)

POWERS OF THE ASSIGNEEPOWERS OF THE ASSIGNEE

1)1) To sue and possess all assets and To sue and possess all assets and uncollected credits of the debtor;uncollected credits of the debtor;

2)2) To sell at auction said assets;To sell at auction said assets;

3)3) To redeem all mortgages;To redeem all mortgages;

4)4) To compromise with the insolvent’s To compromise with the insolvent’s debtors;debtors;

5)5) To recover properties fraudulently To recover properties fraudulently conveyed by the debtor.conveyed by the debtor.

FOR DUTIES OF ASSIGNEEFOR DUTIES OF ASSIGNEE

1.1. To conduct inventory of the To conduct inventory of the property of the insolvent;property of the insolvent;

2.2. To collect all assets;To collect all assets;

3.3. To convert all assets to cash;To convert all assets to cash;

4.4. To account for money received and To account for money received and paid out;paid out;

5.5. To distribute the assets to the To distribute the assets to the creditors.creditors.

Preference of payment:Preference of payment:

On the general ( free) assets of the insolvent:On the general ( free) assets of the insolvent:1.1. Funeral expenses;Funeral expenses;2.2. Debts to employees, laborers and helpers for one Debts to employees, laborers and helpers for one

year preceding the proceedings;year preceding the proceedings;3.3. Expenses of last illness.Expenses of last illness.4.4. Compensation due to laborers under the Labor Compensation due to laborers under the Labor

Welfare laws. Welfare laws. 5.5. Credits for support for one year preceding the Credits for support for one year preceding the

proceedings;proceedings;6.6. Support during insolvency and for 3 months Support during insolvency and for 3 months

thereafter;thereafter;7.7. Fines and civil liability from a crime.Fines and civil liability from a crime.8.8. Legal expenses for administration of insolvent’s Legal expenses for administration of insolvent’s

estateestate

99. Taxes and assessments due to the . Taxes and assessments due to the national government;national government;

10. Taxes and assessments due to the 10. Taxes and assessments due to the provincial government;provincial government;

11. Taxes and assessments due to the 11. Taxes and assessments due to the municipal or city government;municipal or city government;

12. Damages for torts;12. Damages for torts;13. Gift to charitable public or private 13. Gift to charitable public or private

institutions;institutions;14. Credits evidenced by a public 14. Credits evidenced by a public

instrument or a final judgment.instrument or a final judgment.

The following are taken under Section The following are taken under Section 50 of Insolvency law as modified by 50 of Insolvency law as modified by Article 2244 of the Civil; CodeArticle 2244 of the Civil; Code

PARTNERSHIPS AND PARTNERSHIPS AND CORPORATIONSCORPORATIONS

In petition for suspension of In petition for suspension of payments (but not petition payments (but not petition for insolvency) by for insolvency) by corporations and corporations and partnerships, jurisdiction lies partnerships, jurisdiction lies exclusively with the Courts in exclusively with the Courts in accordance with Republic Act accordance with Republic Act No. 8799.No. 8799.

5.2.The Commission's jurisdiction over all cases 5.2.The Commission's jurisdiction over all cases enumerated under Section 5 of enumerated under Section 5 of Presidential Decree Presidential Decree No. 902-A is hereby transferred to the Courts of No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional general jurisdiction or the appropriate Regional Trial CourtTrial Court: : Provided, That the Supreme Court in the Provided, That the Supreme Court in the exercise of its authority may designate the Regional exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain over these cases. The Commission shall retain jurisdiction over pending cases involving intra-jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution corporate disputes submitted for final resolution which should be resolved within one (1) year from the which should be resolved within one (1) year from the enactment of this Code. enactment of this Code. The Commission shall The Commission shall retain jurisdiction over pending suspension of retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 payments/rehabilitation cases filed as of 30 June 2000 until finally disposedJune 2000 until finally disposed..

**JURISDICTION FROM SEC TO REGULAR COURTSJURISDICTION FROM SEC TO REGULAR COURTSSECTION 5.SECTION 5. In addition to the regulatory and adjudicative In addition to the regulatory and adjudicative

functions of the Securities and Exchange Commission functions of the Securities and Exchange Commission over corporations, partnerships and other forms of over corporations, partnerships and other forms of associations registered with it as expressly granted associations registered with it as expressly granted under existing laws and decrees, it shall have original under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases and exclusive jurisdiction to hear and decide cases involving.involving.a)a) Devices or schemes employed by or any acts, Devices or schemes employed by or any acts, of the board of directors, business associates, its of the board of directors, business associates, its officers or partnership, amounting to fraud and officers or partnership, amounting to fraud and misrepresentation which may be detrimental to misrepresentation which may be detrimental to the interest of the public and/or of the the interest of the public and/or of the stockholder, partners, members of associations stockholder, partners, members of associations or organizations registered with the Commission;or organizations registered with the Commission;

b)b) Controversies arising out of intra-corporate Controversies arising out of intra-corporate or partnership relations, between and among or partnership relations, between and among stockholders, members, or associates; between stockholders, members, or associates; between any or all of them and the corporation, any or all of them and the corporation, partnership or association of which they are partnership or association of which they are stockholders, members or associates, stockholders, members or associates, respectively; and between such corporation, respectively; and between such corporation, partnership or association and the state insofar partnership or association and the state insofar as it concerns their individual franchise or right as it concerns their individual franchise or right to exist as such entity;to exist as such entity;c)c) Controversies in the election or Controversies in the election or appointments of directors, trustees, officers or appointments of directors, trustees, officers or managers of such corporations, partnerships or managers of such corporations, partnerships or associations.associations.

Can partnership may be declared Can partnership may be declared insolvent?insolvent?

A partnership may be adjudged A partnership may be adjudged insolvent voluntary or insolvent voluntary or involuntary, during the involuntary, during the continuation of the partnership continuation of the partnership business or after its dissolution business or after its dissolution but before the final settlement but before the final settlement thereof.thereof.

Who may petition for declaration Who may petition for declaration of insolvency of a partnership?of insolvency of a partnership?

In case of voluntary In case of voluntary insolvency- The petition may insolvency- The petition may be filed by all of the partners, be filed by all of the partners, or any one of them.or any one of them.

In case of involuntary insolvency – The In case of involuntary insolvency – The petition is filed by one or more of the petition is filed by one or more of the partners or three or more creditors of the partners or three or more creditors of the partnership. If the petition be filed by partnership. If the petition be filed by less than all the partners of the less than all the partners of the partnership, those partners who do not partnership, those partners who do not join the petition shall be ordered to show join the petition shall be ordered to show cause why they, as individuals and said cause why they, as individuals and said partnership, should not be adjudged to partnership, should not be adjudged to be insolvent in the same manner as other be insolvent in the same manner as other creditors are required to show cause creditors are required to show cause upon a creditor’s petition.upon a creditor’s petition.

Properties included in the insolvency Properties included in the insolvency proceedings.proceedings.

Upon order of the Court, the Upon order of the Court, the following property shall be taken:following property shall be taken:

All property of the partnership; andAll property of the partnership; and All the separate property of each of All the separate property of each of

the partners exceptthe partners exceptSeparate properties of limited Separate properties of limited

partners (See Art. 1843) and partners (See Art. 1843) and Properties which are exempt by law Properties which are exempt by law

(sec. 51)(sec. 51)

Effects of filing of petition.Effects of filing of petition.

When insolvency proceedings are When insolvency proceedings are instituted against or by a partnership, instituted against or by a partnership, the proceedings are deemed to the proceedings are deemed to commence against the partners at the commence against the partners at the same time even if a partner is not same time even if a partner is not ordered included in the proceedings until ordered included in the proceedings until after sometime later (Far Eastern surety after sometime later (Far Eastern surety vs. Yu Guioc Lo, L-44767);vs. Yu Guioc Lo, L-44767);

Upon order of the court, all the property Upon order of the court, all the property of the partnership and also all the of the partnership and also all the separate property of each partner, if they separate property of each partner, if they are liable, shall be taken (Sec. 51)are liable, shall be taken (Sec. 51)

All creditors of the partnership and the All creditors of the partnership and the separate creditors of each partner separate creditors of each partner shall be allowed to prove their shall be allowed to prove their respective claims;respective claims;

The assignee shall be chosen by the The assignee shall be chosen by the creditors of the partnership; andcreditors of the partnership; and

Pending the insolvency proceedings by Pending the insolvency proceedings by or against any partnership (person or or against any partnership (person or corporation), no statute of limitations corporation), no statute of limitations shall run upon a claim of or against the shall run upon a claim of or against the estate of the debtor (See Sec. 73)estate of the debtor (See Sec. 73)

Distribution of the proceeds.Distribution of the proceeds.

If the partnership is If the partnership is adjudged insolvent, the adjudged insolvent, the distribution of the net proceeds distribution of the net proceeds shall be as follows:shall be as follows:

The net proceeds of the The net proceeds of the partnership property shall be partnership property shall be appropriated to the payment of appropriated to the payment of partnership debts ( see Art. 1839 partnership debts ( see Art. 1839 (8) Civil Code;(8) Civil Code;

The net proceeds of the individual estate of each The net proceeds of the individual estate of each partner shall be applied to the payment of his partner shall be applied to the payment of his individual debts (ibid);individual debts (ibid);

Should any surplus remain of the property of any Should any surplus remain of the property of any (general) partner after paying his individual debts, (general) partner after paying his individual debts, so much thereof as corresponds to him as his share so much thereof as corresponds to him as his share in the subsidiary liability for partnership debts (see in the subsidiary liability for partnership debts (see Art. 1816, ibid, under which the solidary liability of Art. 1816, ibid, under which the solidary liability of the partner has been abolished) shall be added to the partner has been abolished) shall be added to the partnership assets and be applied to the the partnership assets and be applied to the payment of such debts (see Art. 1839 (9), ibid); and payment of such debts (see Art. 1839 (9), ibid); and

Should any surplus of the partnership property Should any surplus of the partnership property remain after paying the partnership debts, such remain after paying the partnership debts, such surplus shall be added to the assets of the surplus shall be added to the assets of the individual partners in the proportion of their individual partners in the proportion of their respective interests in the partnership. (Sec. 51; respective interests in the partnership. (Sec. 51; see Arts. 1812, 1839 (2), ibid)see Arts. 1812, 1839 (2), ibid)

Who may petition for declaration of insolvency of a Who may petition for declaration of insolvency of a corporation?corporation?

(1) In case of voluntary insolvency.- The (1) In case of voluntary insolvency.- The petition may be filed by any officer duly authorized petition may be filed by any officer duly authorized by the vote of the board of directors r trustees at a by the vote of the board of directors r trustees at a meeting especially called for that purpose, or by the meeting especially called for that purpose, or by the assent in writing of a majority of the directors or assent in writing of a majority of the directors or trustees, as the case may be (Sec. 52).trustees, as the case may be (Sec. 52).

(2) In case of involuntary insolvency(2) In case of involuntary insolvencyFirst view - Upon a creditor’s petition made and First view - Upon a creditor’s petition made and

presented in the manner provided in respect to presented in the manner provided in respect to debtors (ibid)debtors (ibid)

Second view – The petition must be filed by at Second view – The petition must be filed by at least three (3) creditors of the corporation of least three (3) creditors of the corporation of the corporation under circumstances mentioned the corporation under circumstances mentioned by law (see Sec. 52)by law (see Sec. 52)

When so adjudged, the When so adjudged, the property and assets of the property and assets of the corporation shall be distributed corporation shall be distributed to the creditors, but no discharge to the creditors, but no discharge shall be granted to it. shall be granted to it.

The declaration of insolvency The declaration of insolvency of banks and insurance of banks and insurance companies is governed by special companies is governed by special laws (see the New Central Bank laws (see the New Central Bank Act and the Insurance Code.Act and the Insurance Code.

Alternative rights of secured creditor.Alternative rights of secured creditor. To maintain his rights under his security or To maintain his rights under his security or

lien and ignore the insolvency proceedings, in lien and ignore the insolvency proceedings, in which case it is the duty of the assignee to which case it is the duty of the assignee to surrender to him the property encumbered; orsurrender to him the property encumbered; or

To waive his right under the security or lien To waive his right under the security or lien and thereby share in the distribution of the and thereby share in the distribution of the assets of the debtor; orassets of the debtor; or

To have the value of the encumbered property To have the value of the encumbered property appraised and then share in the distribution appraised and then share in the distribution of the assets of the debtor with respect to the of the assets of the debtor with respect to the balance of his credit (see Sec. 59)balance of his credit (see Sec. 59)

Composition – is a Composition – is a proceeding voluntary on both proceeding voluntary on both sides, by which the debtor, of sides, by which the debtor, of his own motion, offers to pay his own motion, offers to pay his creditors a certain his creditors a certain percentage of their claims in percentage of their claims in exchange for a release from exchange for a release from his liability.his liability.

Requirements for a valid offer of compositionRequirements for a valid offer of composition The offer of the terms of composition must be The offer of the terms of composition must be

made after the filing in court of the schedule made after the filing in court of the schedule of property and submission of list of creditors;of property and submission of list of creditors;

The offer must be accepted in writing by The offer must be accepted in writing by majority of the creditors representing a majority of the creditors representing a majority of the claims which have been majority of the claims which have been allowed;allowed;

It must be made after depositing in such place It must be made after depositing in such place designated by the court the consideration to designated by the court the consideration to be paid and the costs of the proceedings; andbe paid and the costs of the proceedings; and

The terms of the composition must be The terms of the composition must be approved or confirmed by the court. (Sec 63)approved or confirmed by the court. (Sec 63)

When court may confirm composition?When court may confirm composition? It is for the best interest of the creditors;It is for the best interest of the creditors; The debtor has not been guilty of any of The debtor has not been guilty of any of

the acts or of a failure to perform any of the acts or of a failure to perform any of the duties which would create a bar to the duties which would create a bar to his discharge; andhis discharge; and

The offer and its acceptance are in good The offer and its acceptance are in good faith and have not been made or faith and have not been made or procured in a manner forbidden by the procured in a manner forbidden by the Act.Act.

DISCHARGEDISCHARGE

Discharge, under the insolvency Discharge, under the insolvency law, is the formal and judicial law, is the formal and judicial release of an insolvent debtor release of an insolvent debtor

from his debts with the from his debts with the exception of those expressly exception of those expressly

reserved by law.reserved by law.

When an insolvent debtor may apply for When an insolvent debtor may apply for discharge?discharge?

A debtor may apply to the court for the A debtor may apply to the court for the discharge at any time after the expiration of discharge at any time after the expiration of three months from the adjudication of three months from the adjudication of insolvency, but not later than one year from insolvency, but not later than one year from such adjudication of insolvency, but not later such adjudication of insolvency, but not later than one year from such adjudication unless than one year from such adjudication unless the property of the insolvent has not been the property of the insolvent has not been converted into money (Sec. 64) without his converted into money (Sec. 64) without his fault thereby delaying the distribution of fault thereby delaying the distribution of dividends among the creditors in which case dividends among the creditors in which case the court may extend the period.the court may extend the period.

Acts of debtors or grounds which will prevent a Acts of debtors or grounds which will prevent a discharge.discharge.They are the following:They are the following:

False swearing;False swearing; Concealment of any part of his estate or Concealment of any part of his estate or

effects;effects; Fraud or willful neglect in the care of his Fraud or willful neglect in the care of his

property or in the delivery thereof to the property or in the delivery thereof to the assignee;assignee;

Procuring his properties to be attached or Procuring his properties to be attached or seized on execution within one month before seized on execution within one month before the commencement of insolvency proceedings;the commencement of insolvency proceedings;

Destruction, mutilation, alteration or Destruction, mutilation, alteration or falsification of his books, documents and falsification of his books, documents and papers;papers;

Giving fraudulent preference to a creditor;Giving fraudulent preference to a creditor;

Non-disclosure to the assignee of a proven false or Non-disclosure to the assignee of a proven false or fictitious debt within one after acquiring knowledge;fictitious debt within one after acquiring knowledge;

Being a merchant, failure to keep proper books of Being a merchant, failure to keep proper books of accounts;accounts;

Influencing the action of any creditor, at any stage of Influencing the action of any creditor, at any stage of the proceedings, by any pecuniary consideration;the proceedings, by any pecuniary consideration;

Effecting any transfer, conveyance or mortgage in Effecting any transfer, conveyance or mortgage in contemplation of insolvency;contemplation of insolvency;

Conviction of any misdemeanor under the Insolvency Conviction of any misdemeanor under the Insolvency law;law;

In case of voluntary insolvency, he has received the In case of voluntary insolvency, he has received the benefit of insolvency within six years preceding his benefit of insolvency within six years preceding his application for discharge; andapplication for discharge; and

If insolvency proceedings in which he could have If insolvency proceedings in which he could have applied for a discharge are pending by or against applied for a discharge are pending by or against him in the Regional Trial Court of any other province him in the Regional Trial Court of any other province or city (Sec. 65)or city (Sec. 65)

DebtsDebts released by discharge.released by discharge.

The following debts are released by The following debts are released by discharge under the Insolvency Law;discharge under the Insolvency Law;

All claims, debts and liabilities, and All claims, debts and liabilities, and demands set forth in the schedule; anddemands set forth in the schedule; and

All claims, debts, liabilities and All claims, debts, liabilities and demands which were or might have demands which were or might have been proved against the estate in been proved against the estate in insolvency. (sec. 69)insolvency. (sec. 69)

Debts not released OR AFFECTED BY Debts not released OR AFFECTED BY discharge.discharge.

1.1. Assessments due to national and local Assessments due to national and local government;government;

2.2. Debts due to fraud, embezzlement or Debts due to fraud, embezzlement or defalcation by the debtor;defalcation by the debtor;

3.3. Debts with another where he is bound Debts with another where he is bound solidarily;solidarily;

4.4. Alimony or support;Alimony or support;5.5. Corporate debts’Corporate debts’6.6. Debts not included in the schedule Debts not included in the schedule

submitted by the insolvent debtor.submitted by the insolvent debtor.

When discharge takes effect?When discharge takes effect?

A discharge, when granted, A discharge, when granted, takes effect not from its date takes effect not from its date but from the commencement but from the commencement

of the proceedings in of the proceedings in insolvency.insolvency.

Cession (Article 1255 of the Civil Code Cession (Article 1255 of the Civil Code versus Insolvency under Act 1956)versus Insolvency under Act 1956)

Payment by cession is a voluntary Payment by cession is a voluntary procedure entered by both the debtor procedure entered by both the debtor and his creditors if in case debtor is at and his creditors if in case debtor is at least partially insolvent. Said debtor least partially insolvent. Said debtor voluntarily surrenders his properties voluntarily surrenders his properties not exempted for execution to his not exempted for execution to his creditors allowing the latter to sell the creditors allowing the latter to sell the same and apply ratably the proceeds to same and apply ratably the proceeds to their respective claims. Debtor is their respective claims. Debtor is released only up to the proceeds of the released only up to the proceeds of the sale and remain indebted unless if he is sale and remain indebted unless if he is expressly released by his creditors. No expressly released by his creditors. No court intervention is required.court intervention is required.

Cession (Article 1255 of the Civil Code Cession (Article 1255 of the Civil Code versus Insolvency under Act 1956)versus Insolvency under Act 1956)

Insolvency is in fact a proceeding Insolvency is in fact a proceeding where court intervention is where court intervention is required. Parties are required to required. Parties are required to submit to the procedural submit to the procedural requirement of the law. requirement of the law. Otherwise , any disposition or Otherwise , any disposition or distribution of the properties of distribution of the properties of the insolvent debtor is NULL AND the insolvent debtor is NULL AND VOIDVOID..

EffectivityEffectivity

The insolvency law took effect on The insolvency law took effect on its passage. It was enacted on its passage. It was enacted on May 20, 1909.May 20, 1909.

SC Interim Rules of Procedure on Corporate Recovery of 2000

Under the these Rules, there are three types of rehabilitation proceedings: (1)debtor-initiated, (2)creditor-initiated, and (3)pre-negotiated rehabilitation.


The Regional Trial Court which has jurisdiction over the principal office of the debtor, as specified in the articles of incorporation, is where rehabilitation proceedings are to be had. If a group of companies is concerned, venue lies in the RTC which has jurisdiction over the parent company. At present, there are 65 trial courts specially designated by the Supreme Court as 'commercial courts' and hear such petitions. Proceedings are to be summary and non-adversarial, thus certain pleadings are prohibited.

SC Interim Rules of Procedure on Corporate Recovery of 2000The Rehabilitation Receiver and the Management CommitteeAside from the debtor, its creditor/s, and the rehabilitation Court, there are other parties involved in the proceeding.The Rehabilitation Receiver is a person appointed by the Court to closely oversee and monitor the operations of the debtor, ensure that the value of the debtor's property is reasonably maintained during the pendency of the proceedings, and to implement the rehabilitation plan once approved.


The receiver, however, shall not take over the management and control of the debtor. Instead, he may recommend the appointment of a Management Committee when there is (1) imminent danger of waste or dissipation, loss, wastage, or destruction of assets or (2) paralyzation of business operations (of the debtor) which may be prejudicial to the interest of minority stockholders, parties-litigants, or the general public.

The Stay OrderIf the Court finds the petition to be sufficient in form and substance, it shall, not later than five (5) working days from its filing, issue a "Stay Order", whose effects include: staying enforcement of all claims,

whether for money or otherwise whether such enforcement is by court action or

otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor,

prohibiting the debtor from selling or disposing its properties except in the ordinary course of businessprohibiting the debtor from making any payment of its liabilities except

For supply of goods and services in the ordinary course of business

For administrative expenses incurred after the issuance of the stay order

For payment of new loans or other forms of credit accommodations obtained for the rehabilitation with prior court approval

SC Interim Rules of Procedure on Corporate Recovery of 2000Recognition of Foreign ProceedingsWhere assistance is sought by a foreign court or a foreign representative in connection with a foreign proceeding; where assistance is sought in a foreign State in connection with a domestic proceeding governed by (Philippine law); or where a foreign proceeding and a domestic proceeding are concurrently taking place, a petition may be filed in the rehabilitation court for this purpose.

SC Interim Rules of Procedure on Corporate Recovery of 2000The Rehabilitation PlanA rehabilitation plan shall be drawn up and shall include the desired business targets or goals and the duration and coverage of the rehabilitation, the terms and conditions of such rehabilitation, and the means for the execution of the rehabilitation plan, i.e., debt to equity conversion, restructuring of the debts, dacion en pago, or sale exchange or any disposition of assets or of the interest of the shareholders.

SC Interim Rules of Procedure on Corporate Recovery of 2000Once approved, the rehabilitation

plan shall be binding upon the debtor and all persons who may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled. However, the plan may be revoked, upon motion, on the ground that it was secured through fraud.


Termination of ProceedingsThe court shall, upon motion or upon recommendation of the rehabilitation receiver, terminate the proceeding when, among other instances, the petition is dismissed, the debtor fails to submit a rehabilitation plan or the same is disapproved, or after the successful implementation of an approved rehabilitation plan.


CURRENT EFFORTSPresently, there is continuing effort--this time, on the part of the Legislature--to create a more systematic framework for insolvency proceedings. It is well-recognized in the Philippines that the solutions to be afforded by laws should be adequate to meet complex modern issues and over-all, provide a good investment climate.

What legislation is What legislation is present applicable to present applicable to

insolvencies and insolvencies and reorganizations?reorganizations?

The applicable law is Republic Act The applicable law is Republic Act No. 10142, known as the Financial No. 10142, known as the Financial Rehabilitation and Insolvency Act Rehabilitation and Insolvency Act

of 2010 (FRIA). The FRIAof 2010 (FRIA). The FRIA

took effect on 18 July 2010.took effect on 18 July 2010.

By constitutional fiat, a bill By constitutional fiat, a bill approved by Congress approved by Congress

automatically becomes a law if automatically becomes a law if it is not vetoed by the President it is not vetoed by the President within 30 days from receipt of within 30 days from receipt of

its official copy.its official copy.

Historical Background of Historical Background of FRIAFRIA

After After 101 years101 years, the Philippines , the Philippines finally has finally has a new law to a new law to

address present-day address present-day rehabilitation and insolvency rehabilitation and insolvency

issuesissues. Republic Act No. 10142 . Republic Act No. 10142 or The Financial Rehabilitation or The Financial Rehabilitation

and Insolvency Act of 2010 and Insolvency Act of 2010 (FRIA) took effect on (FRIA) took effect on August August 31, 201031, 2010, replacing Act No. , replacing Act No. 1956 or the Insolvency Law 1956 or the Insolvency Law

which was enacted on which was enacted on May 20, May 20, 1909 1909 under the American under the American

Rule .Rule .

The overriding policy of the The overriding policy of the FRIA is to FRIA is to encourage debtorsencourage debtors and and their creditors to collectively and their creditors to collectively and realistically resolve and adjust realistically resolve and adjust competing claims and property competing claims and property rights.rights.

In a nutshell, the FRIA wants to In a nutshell, the FRIA wants to give debtors who are unable to give debtors who are unable to

meet their credit obligations, in the meet their credit obligations, in the absence of bad faith or negligence, absence of bad faith or negligence,

a breathing spell by way of a breathing spell by way of suspension of payments and suspension of payments and

adoption of remedial measures adoption of remedial measures that can help them put their house that can help them put their house

in order again.in order again.

The FRIA governs debtors that are The FRIA governs debtors that are generally unable to pay their generally unable to pay their

liabilities as they are due in the liabilities as they are due in the ordinary course of business ordinary course of business or or have liabilities that are greater have liabilities that are greater than their assetsthan their assets, but excludes , but excludes

banks, insurance companies, pre-banks, insurance companies, pre-need companies and national and need companies and national and

local government agencies or units local government agencies or units which shall be governed by other which shall be governed by other

special laws. special laws.

RationaleRationale

The FRIA is an attempt The FRIA is an attempt to institutionalize to institutionalize in statutory law useful doctrines and in statutory law useful doctrines and principles in rehabilitation proceedingprinciples in rehabilitation proceedings, s, which until recently have only found which until recently have only found sanction in judicial pronouncements and sanction in judicial pronouncements and procedural rulesprocedural rules. .

The absence of effective and orderly The absence of effective and orderly procedures that may be applied procedures that may be applied consistently can aggravate economic and consistently can aggravate economic and financial crises. Without them, credit financial crises. Without them, credit availability may be compromised and availability may be compromised and inevitably severely affect commercial inevitably severely affect commercial transactions. transactions.

What criteria are applied in your What criteria are applied in your country to determine if a debtor is country to determine if a debtor is insolvent?insolvent?A debtor is considered insolvent A debtor is considered insolvent if it if it is unable to pay its liabilities as is unable to pay its liabilities as they fall due in the ordinary course they fall due in the ordinary course of business or has liabilities that of business or has liabilities that are greater than its assetsare greater than its assets (FRIA (FRIA section 4(p)).section 4(p)).

Definition of Debtors Definition of Debtors under FRIAunder FRIA

Debtors' under the FRIA Debtors' under the FRIA are are individuals who are individuals who are citizens and residents of citizens and residents of the Philippines as well as the Philippines as well as

sole proprietorships, sole proprietorships, partnerships and partnerships and

corporations organized and corporations organized and authorized to do business authorized to do business

under Philippine laws.under Philippine laws.

What courts are involved in the insolvency What courts are involved in the insolvency process? Are there restrictions on the process? Are there restrictions on the matters that the courts may deal with? matters that the courts may deal with? Under the Financial Rehabilitation Rules of Under the Financial Rehabilitation Rules of Procedure 2013 passed by the Supreme Procedure 2013 passed by the Supreme Court dated August 27, 2013:Court dated August 27, 2013:

Excluded entities and excluded assetsExcluded entities and excluded assetsWhat entities are excluded from What entities are excluded from customary insolvency proceedings and customary insolvency proceedings and what legislation applies to them? what legislation applies to them? What assets are excluded from insolvency What assets are excluded from insolvency proceedings or are exempt from claims of proceedings or are exempt from claims of creditors?creditors?Banks, insurance companies and pre-need Banks, insurance companies and pre-need companies are not covered by the FRIA. The companies are not covered by the FRIA. The rehabilitation of banks, insurance companies rehabilitation of banks, insurance companies and pre-need companies is governed by and pre-need companies is governed by Republic Act No. 7653 (the New Central Bank Republic Act No. 7653 (the New Central Bank Act), Presidential Decree No. 612 (Insurance Act), Presidential Decree No. 612 (Insurance Code of the Philippines) and Republic Act No. Code of the Philippines) and Republic Act No. 9829 (Pre-Need Code of the Philippines), 9829 (Pre-Need Code of the Philippines), respectively (FRIA section 5).respectively (FRIA section 5).

The following assets are The following assets are excluded from insolvency excluded from insolvency proceedings and are exempt proceedings and are exempt from execution:from execution:

• • the insolvent debtor’s the insolvent debtor’s family home as provided by family home as provided by law, or the homestead in law, or the homestead in which he or she resides, and which he or she resides, and land necessarily used in land necessarily used in connection therewith;connection therewith;• • ordinary tools and ordinary tools and implements personally used implements personally used by him or her in his or her by him or her in his or her trade, employment or trade, employment or livelihood;livelihood;

• • three horses, or three cows, or three horses, or three cows, or three carabaos or other beasts of three carabaos or other beasts of burden at the option of the burden at the option of the judgment obligor as may be judgment obligor as may be necessary in his ordinary necessary in his ordinary occupation;occupation;• • his necessary clothing and his necessary clothing and articles for ordinary personal use, articles for ordinary personal use, excluding jewellery;excluding jewellery;• • household furniture and utensils household furniture and utensils necessary for housekeeping, andnecessary for housekeeping, andused for that purpose by the used for that purpose by the judgment obligor and his family, judgment obligor and his family, such as the judgment obligor may such as the judgment obligor may select, of a value not exceeding select, of a value not exceeding 100,000 Philippine pesos100,000 Philippine pesos

provisions for individual or family provisions for individual or family use sufficient for four months;use sufficient for four months;

• • the professional libraries and the professional libraries and equipment of judges, lawyers, equipment of judges, lawyers, physicians, pharmacists, dentists, physicians, pharmacists, dentists, engineers, surveyors, clergymen,engineers, surveyors, clergymen,

teachers and other professionals, not teachers and other professionals, not exceeding 300,000 Philippine exceeding 300,000 Philippine pesos in value;pesos in value;

• • one fishing boat and accessories one fishing boat and accessories not exceeding the total value of not exceeding the total value of 100,000 Philippine pesos owned by 100,000 Philippine pesos owned by a fisherman and by the lawful use a fisherman and by the lawful use of which he or she earns his of which he or she earns his livelihood;livelihood;

• • as much of the salaries, wages or as much of the salaries, wages or earnings of the insolvent debtor for earnings of the insolvent debtor for his or her personal services within his or her personal services within the four months preceding the levy the four months preceding the levy as are necessary for the support of as are necessary for the support of his or her family;his or her family;• • lettered gravestones;lettered gravestones;• • monies, benefits, privileges or monies, benefits, privileges or annuities accruing or in any manner annuities accruing or in any manner growing out of any life insurance;growing out of any life insurance;• • the right to receive legal support, the right to receive legal support, or money or property obtained as or money or property obtained as such support, or any pension or such support, or any pension or gratuity from the government;gratuity from the government;andand• • properties specially exempt by law properties specially exempt by law (Rules of Court rule 39 section 13; (Rules of Court rule 39 section 13; FRIA section 130).FRIA section 130).

Secured lending and credit Secured lending and credit (immovables)(immovables)

What principal types of security are What principal types of security are taken on immoveable (real) property?taken on immoveable (real) property?

The principal type of The principal type of security taken over security taken over

immoveable property is the immoveable property is the real estate mortgage.real estate mortgage.

Secured lending and credit (movables)Secured lending and credit (movables)What principal types of security are What principal types of security are taken on moveable (personal) taken on moveable (personal) property?property?

The principal types of security The principal types of security taken over personal property taken over personal property are the are the chattel mortgage and chattel mortgage and the pledge.the pledge.

PROCESSESPROCESSESThe FRIA provides for the following The FRIA provides for the following processesprocesses::Rehabilitation for sole proprietorships, Rehabilitation for sole proprietorships, partnerships and corporationspartnerships and corporationsSuspension of Payments for individualsSuspension of Payments for individualsInsolvency for all types of covered debtorsInsolvency for all types of covered debtors

Rehabilitation proceedings Rehabilitation proceedings ( ( proceedings intendedproceedings intended to restore him from his solvent to restore him from his solvent conditioncondition) may be initiated by ) may be initiated by the debtor and/ or the the debtor and/ or the creditor(s). creditor(s). Subject to compliance with Subject to compliance with certain requirements, they certain requirements, they may take the form of may take the form of a.) court-superviseda.) court-supervisedb) pre-negotiated or;b) pre-negotiated or;c) out-of-court/informal c) out-of-court/informal proceedingsproceedings. .

Upon a determination that the Upon a determination that the debtor may no longer be debtor may no longer be rehabilitated, pending rehabilitated, pending rehabilitation proceedings may be rehabilitation proceedings may be converted into converted into liquidationliquidation proceedingsproceedings on motion of the on motion of the debtor or creditor(s)debtor or creditor(s)..

The practical approach to business The practical approach to business recovery may already be seen from recovery may already be seen from this attempt to allow flexibility in the this attempt to allow flexibility in the manner by which debtors and creditors manner by which debtors and creditors may finally want to settle their claims.may finally want to settle their claims.

The proceedings, being The proceedings, being summarysummary and and non-adversarialnon-adversarial, are more , are more efficient and thus responsive to efficient and thus responsive to fast-paced business transactions. fast-paced business transactions.

Voluntary liquidationsVoluntary liquidationsWhat are the requirements for a What are the requirements for a debtor commencing a voluntary debtor commencing a voluntary liquidation case and what are the liquidation case and what are the effects?effects?

Voluntary liquidation is initiated by an Voluntary liquidation is initiated by an insolvent debtor via a verified insolvent debtor via a verified petition, or a verified motion in a petition, or a verified motion in a court-supervised or pre-negotiated court-supervised or pre-negotiated rehabilitation proceedings rehabilitation proceedings (FRIA (FRIA section 90).section 90).

If the petition or motion is meritorious, the court If the petition or motion is meritorious, the court will issue a will issue a liquidation order, liquidation order, which shall, among which shall, among other things:other things:• • declare the debtor insolvent;declare the debtor insolvent;• • order the liquidation of the debtor and, in the order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;case of a juridical debtor, declare it as dissolved;• • order the sheriff to take possession and control order the sheriff to take possession and control of all the property of the debtor, except those that of all the property of the debtor, except those that may be exempt from executionmay be exempt from execution;;• • direct payments of any claims and conveyance of direct payments of any claims and conveyance of any property due the debtor to the liquidatorany property due the debtor to the liquidator;;• • prohibit payments by the debtor and the transfer prohibit payments by the debtor and the transfer of any property by the debtorof any property by the debtor;;• • direct all creditors to file their claims with the direct all creditors to file their claims with the liquidator within the period set by the rules of liquidator within the period set by the rules of procedureprocedure; and; and• • set the case for hearing for the election and set the case for hearing for the election and appointment of the liquidator appointment of the liquidator (FRIA section 112).(FRIA section 112).

Involuntary liquidationsInvoluntary liquidationsWhat are the requirements What are the requirements for creditors placing a debtor for creditors placing a debtor into involuntary liquidation into involuntary liquidation and what are the effects?and what are the effects?Three or more creditors with Three or more creditors with an aggregate claim of at an aggregate claim of at least least 1 million Philippine 1 million Philippine pesos or at least 25 per cent pesos or at least 25 per cent of the subscribed capital of the subscribed capital stock or partners’ stock or partners’ contributions, whichever is contributions, whichever is higherhigher, may initiate , may initiate liquidation proceedings liquidation proceedings against an insolvent debtor against an insolvent debtor by filing a verified by filing a verified petition for liquidation with petition for liquidation with the court. the court.

The petition must show that:The petition must show that:

• • there is no genuine issue of fact or there is no genuine issue of fact or law in the claim of the petitioner,law in the claim of the petitioner,

and that the due and demandable and that the due and demandable payments thereon have not been payments thereon have not been made for at least 180 days or that made for at least 180 days or that the debtor has failed generally to the debtor has failed generally to meet its liabilities as they fall due; meet its liabilities as they fall due; andand

• • there is no substantial likelihood there is no substantial likelihood that the debtor may be rehabilitated that the debtor may be rehabilitated (FRIA section 91).(FRIA section 91).

Rehabilitation proceedings may also be Rehabilitation proceedings may also be converted into liquidation proceedings:converted into liquidation proceedings:• • when the rehabilitation when the rehabilitation court finds court finds that the debtor is insolvent and there that the debtor is insolvent and there is no substantial likelihood for the is no substantial likelihood for the debtor to be successfully rehabilitated;debtor to be successfully rehabilitated;• • when the rehabilitation plan is not when the rehabilitation plan is not confirmed by the rehabilitation confirmed by the rehabilitation court court within one year from filing of the within one year from filing of the petition;petition;• • when the rehabilitation proceedings when the rehabilitation proceedings is is terminated due to failure of terminated due to failure of rehabilitation or dismissal of the rehabilitation or dismissal of the rehabilitation petition for reasons rehabilitation petition for reasons other than technical groundsother than technical grounds; or; or

• • at any time during the pendency of or at any time during the pendency of or after court-supervised or pre-after court-supervised or pre-negotiated rehabilitation proceedings, negotiated rehabilitation proceedings, upon motion of the debtor or of three upon motion of the debtor or of three or more creditors whose claims are at or more creditors whose claims are at least either 1 million Philippine pesos least either 1 million Philippine pesos or at least 25 per cent of the or at least 25 per cent of the subscribed capital stock or of the subscribed capital stock or of the debtor’s contribution in the debtor’s contribution in the partnership, whichever is higher partnership, whichever is higher (FRIA (FRIA section 91).section 91).As in cases of As in cases of voluntary liquidationsvoluntary liquidations, , the court will issue a liquidation order the court will issue a liquidation order if the petition or motion is meritorious if the petition or motion is meritorious (FRIA section 112).(FRIA section 112).

Voluntary Voluntary ReorganizationsReorganizations

What are the requirements for a debtor What are the requirements for a debtor commencing a formal financial reorganization and commencing a formal financial reorganization and what are the effects?what are the effects?

Court-supervised rehabilitationCourt-supervised rehabilitationAn insolvent debtor may file a verified petition An insolvent debtor may file a verified petition for rehabilitation when approved by the owner in for rehabilitation when approved by the owner in the case of a sole proprietorship, orthe case of a sole proprietorship, or

by a majority of the partners in the case of a by a majority of the partners in the case of a partnership or, in the case of a corporation, by a partnership or, in the case of a corporation, by a majority vote of the board of directors or trustees majority vote of the board of directors or trustees and authorised by the vote of the stockholders and authorised by the vote of the stockholders representing at least two-thirds of the representing at least two-thirds of the outstanding capital stock, or of the members, in a outstanding capital stock, or of the members, in a stockholders’ or members’ meeting duly called for stockholders’ or members’ meeting duly called for the purpose. The petition must the purpose. The petition must establish the establish the insolvency of the debtor and the viability of its insolvency of the debtor and the viability of its rehabilitation rehabilitation (FRIA section 12).(FRIA section 12).

If the court finds the petition to be If the court finds the petition to be sufficient in form and substance, it will sufficient in form and substance, it will issue a issue a commencement ordercommencement order, which , which shall, among other things:shall, among other things:• • appoint a rehabilitation receiver;appoint a rehabilitation receiver;• • summarise the requirements and summarise the requirements and deadlines for creditors to establish their deadlines for creditors to establish their claims against the debtor;claims against the debtor;• • prohibit suppliers of goods or services prohibit suppliers of goods or services from withholding supply for as long as the from withholding supply for as long as the debtor makes prompt payments;debtor makes prompt payments;• • prohibit the debtor from making any prohibit the debtor from making any payment of its outstanding liabilities; andpayment of its outstanding liabilities; and• • issue a stay or suspension order (FRIA issue a stay or suspension order (FRIA section 16).section 16).

The The commencement order commencement order also:also:• • prohibits and renders null and void prohibits and renders null and void extrajudicial process or activity to seize extrajudicial process or activity to seize property, sell encumbered property or property, sell encumbered property or otherwise attempt to collect on or enforce otherwise attempt to collect on or enforce a claim against the debtor, after the a claim against the debtor, after the commencement date, unless otherwise commencement date, unless otherwise allowed under the FRIA;allowed under the FRIA;• • renders null and void any set-off, after renders null and void any set-off, after the commencement date, of any debt the commencement date, of any debt owed to the debtor by any of the debtor’s owed to the debtor by any of the debtor’s creditors;creditors;andand• • renders null and void the perfection, renders null and void the perfection, after the commencement date, of any lien after the commencement date, of any lien against the debtor’s properties (FRIA against the debtor’s properties (FRIA section 17).section 17).

Imposition of national and local Imposition of national and local taxes and fees, penalties and taxes and fees, penalties and surcharges are also waived from surcharges are also waived from issuance of the commencement issuance of the commencement order until approval of the order until approval of the rehabilitation plan or dismissal of rehabilitation plan or dismissal of the petition the petition (FRIA section 19).(FRIA section 19).

Pre-Negotiated RehabilitationPre-Negotiated RehabilitationAn insolvent debtor, by itself An insolvent debtor, by itself or jointly with any of its or jointly with any of its creditors, may file a verified creditors, may file a verified petition with the court for the petition with the court for the approval of a approval of a pre-negotiated pre-negotiated rehabilitation planrehabilitation plan, , endorsed endorsed or approved by creditors or approved by creditors holding at least two-thirds of holding at least two-thirds of the total liabilities of the the total liabilities of the debtor, including secured debtor, including secured creditors holding more than creditors holding more than 50 per cent of the total 50 per cent of the total secured claims and secured claims and unsecured creditors holding unsecured creditors holding more than 50 per cent of the more than 50 per cent of the total unsecured claims total unsecured claims (FRIA (FRIA section 76).section 76).

If the court finds the petition to be If the court finds the petition to be sufficient in form and substance, it sufficient in form and substance, it will issue an order, which shall, will issue an order, which shall, among other things:among other things:

• • declare that the debtor is under declare that the debtor is under

rehabilitation;rehabilitation;

• • appoint a rehabilitation receiver, appoint a rehabilitation receiver, if provided under the plan; andif provided under the plan; and

• • issue a stay or suspension order issue a stay or suspension order (FRIA section 77).(FRIA section 77).

Out-of-court or informal Out-of-court or informal restructuring/workout agreement or restructuring/workout agreement or

rehabilitation plan (Cession)rehabilitation plan (Cession)This may be done if:This may be done if:• • the debtor agrees to the out-of-court or the debtor agrees to the out-of-court or informal restructuring/ workout informal restructuring/ workout agreement or rehabilitation plan; and agreement or rehabilitation plan; and the agreement or plan is approved by:the agreement or plan is approved by:creditors representing at least 67 per creditors representing at least 67 per cent of the secured obligations;cent of the secured obligations;creditors representing at least 75 per creditors representing at least 75 per cent of the unsecured obligations; andcent of the unsecured obligations; and• • creditors holding at least 85 per cent of creditors holding at least 85 per cent of the total liabilities, secured and the total liabilities, secured and unsecured (FRIA section 84).unsecured (FRIA section 84).

Involuntary reorganizationsInvoluntary reorganizationsWhat are the requirements What are the requirements for creditors commencing an for creditors commencing an involuntary reorganization involuntary reorganization and what are the effects?and what are the effects?Any creditor or group of Any creditor or group of creditors with a claim of, or creditors with a claim of, or the aggregate of whose the aggregate of whose claims is, at least 1 million claims is, at least 1 million Philippine pesos or at least Philippine pesos or at least 25 per cent of the subscribed 25 per cent of the subscribed capital stock or partners’ capital stock or partners’ contributions, whichever is contributions, whichever is higher, may initiate higher, may initiate involuntary rehabilitation involuntary rehabilitation proceedings against the proceedings against the debtor by filing a verified debtor by filing a verified petition for rehabilitation petition for rehabilitation with the court if:with the court if:

• • there is no genuine issue of there is no genuine issue of fact or law in the claim of the fact or law in the claim of the petitioner and that the due petitioner and that the due and demandable payments and demandable payments thereon have not been made thereon have not been made for at least 60 days or that the for at least 60 days or that the debtor has failed generally to debtor has failed generally to meet its liabilities as they fall meet its liabilities as they fall duedue; or; or

• • a creditor, other than the a creditor, other than the petitioner, has initiated petitioner, has initiated foreclosure proceedings foreclosure proceedings against the debtor that will against the debtor that will prevent the debtor from prevent the debtor from paying its debts as they paying its debts as they become due or will render it become due or will render it insolvent insolvent (FRIA section 13).(FRIA section 13).

Similarly to a court-supervised Similarly to a court-supervised voluntary rehabilitation, the court voluntary rehabilitation, the court will issue a commencement order if will issue a commencement order if the petition is sufficient in form and the petition is sufficient in form and substance substance (FRIA section 15)(FRIA section 15)..Mandatory commencement of Mandatory commencement of insolvency proceedingsinsolvency proceedings Are companies required to Are companies required to commence insolvency proceedings commence insolvency proceedings in particular circumstances? If in particular circumstances? If proceedings are not commenced, proceedings are not commenced, what liabilities can result?what liabilities can result?There are There are no instances where no instances where companies are required to companies are required to commence insolvency proceedings commence insolvency proceedings under the FRIA.under the FRIA.

Doing business in Doing business in reorganizationsreorganizations

Under what conditions can Under what conditions can the debtor carry on business the debtor carry on business during a reorganization? during a reorganization? What conditions apply to What conditions apply to the use or sale of the assets the use or sale of the assets of the business?of the business? Is any special treatment Is any special treatment given to creditors who given to creditors who supply goods or services supply goods or services after the filing?after the filing? What are the roles of the What are the roles of the creditors and the court in creditors and the court in supervising the debtor’s supervising the debtor’s business activities?business activities?

The debtor The debtor may may carry on its ordinary carry on its ordinary business during the rehabilitation, and business during the rehabilitation, and suppliers of goods or services are suppliers of goods or services are prohibited from withholding supply to prohibited from withholding supply to the debtor for as long as the debtor the debtor for as long as the debtor makes prompt payments (FRIA section makes prompt payments (FRIA section 16). 16). ForFor purposes of continuing the purposes of continuing the businessbusiness, , thethe managementmanagement of the of the debtor shall remain with the existing debtor shall remain with the existing management, subject to applicable management, subject to applicable laws and agreements, if any, on the laws and agreements, if any, on the election or appointment of directors, election or appointment of directors, managers or managing partnermanagers or managing partner. . However, However, all disbursements, payments all disbursements, payments or sale, disposal, assignment, transfer or sale, disposal, assignment, transfer or encumbrance of property, or any or encumbrance of property, or any other act affecting title or interest in other act affecting title or interest in property, will be subject to the property, will be subject to the approval of the rehabilitation receiver approval of the rehabilitation receiver and/or the court and/or the court (see discussion in (see discussion in question 16 on sale of assets) (FRIA question 16 on sale of assets) (FRIA section section 47).47).

The rehabilitation receiver is appointed by the court and The rehabilitation receiver is appointed by the court and shall have the following minimum qualifications: shall have the following minimum qualifications:(a)A citizen of the Philippines or a resident of the (a)A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding Philippines in the six (6) months immediately preceding his nomination;his nomination;(b)Of good moral character and with acknowledged (b)Of good moral character and with acknowledged integrity, impartiality and independence;integrity, impartiality and independence;(c)Has the requisite knowledge of insolvency and other (c)Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well relevant commercial laws, rules and procedures, as well as the relevant training and/or experience that may be as the relevant training and/or experience that may be necessary to enable him to properly discharge the necessary to enable him to properly discharge the duties and obligations of a rehabilitation receiver; andduties and obligations of a rehabilitation receiver; and(d)Has no conflict of interest: Provided, That such (d)Has no conflict of interest: Provided, That such conflict of interest may be waived, expressly or conflict of interest may be waived, expressly or impliedly, by a party who may be prejudiced thereby.impliedly, by a party who may be prejudiced thereby.Other qualifications and disqualification’s of the Other qualifications and disqualification’s of the rehabilitation receiver shall be set forth in procedural rehabilitation receiver shall be set forth in procedural rules, taking into consideration the nature of the rules, taking into consideration the nature of the business of the debtor and the need to protect the business of the debtor and the need to protect the interest of all stakeholders concerned.interest of all stakeholders concerned.

The court may, upon motion of any The court may, upon motion of any interested party, appoint and direct interested party, appoint and direct the rehabilitation receiver or a the rehabilitation receiver or a management committee to assume the management committee to assume the powers of management of the debtor powers of management of the debtor if:if:• • there is actual or imminent danger of there is actual or imminent danger of dissipation, loss, wastage or dissipation, loss, wastage or destruction of the debtor’s assets or destruction of the debtor’s assets or other properties;other properties;• • business operations of the debtor business operations of the debtor are paralysed; orare paralysed; or• • there is gross mismanagement of the there is gross mismanagement of the debtor, or fraud or other wrongful debtor, or fraud or other wrongful conduct on the part of, or gross or conduct on the part of, or gross or wilful violation of the FRIA by, wilful violation of the FRIA by, existing management of the debtor or existing management of the debtor or the owner, partner, director, officer the owner, partner, director, officer or representative in management of or representative in management of the debtor (FRIA section 36).the debtor (FRIA section 36).

Stays of proceedings and moratoriaStays of proceedings and moratoriaWhat prohibitions against the continuation of legal What prohibitions against the continuation of legal proceedings or the enforcement of claims by proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief In what circumstances may creditors obtain relief from such prohibitions?from such prohibitions?

The The commencement order in rehabilitation commencement order in rehabilitation proceedings proceedings includes a stay or suspension order includes a stay or suspension order that suspends all actions or proceedings, in court or that suspends all actions or proceedings, in court or otherwise, for the enforcement of claims against otherwise, for the enforcement of claims against the debtor and suspends all actions to enforce any the debtor and suspends all actions to enforce any judgment, attachment or other provisional judgment, attachment or other provisional remedies against the debtor (FRIA section 16(q)).remedies against the debtor (FRIA section 16(q)).

Attempts to seek legal or other recourse against Attempts to seek legal or other recourse against the debtor outside the rehabilitation proceedings the debtor outside the rehabilitation proceedings shall be sufficient to support a finding of indirect shall be sufficient to support a finding of indirect contempt of court (FRIA section 17).contempt of court (FRIA section 17).

The court, upon motion or The court, upon motion or recommendation of the rehabilitation recommendation of the rehabilitation receiver, receiver, may allow a secured creditor to may allow a secured creditor to enforce his security or lien, or foreclose enforce his security or lien, or foreclose upon property of the debtor securing its upon property of the debtor securing its claim, if the said property is not claim, if the said property is not necessary for the rehabilitation of the necessary for the rehabilitation of the debtor debtor (FRIA section 60). The court, on (FRIA section 60). The court, on motion or motu proprio (ie, on its own), motion or motu proprio (ie, on its own), may also terminate, modify or set may also terminate, modify or set conditions for the continuance of conditions for the continuance of suspension of payment, or relieve a suspension of payment, or relieve a claim from the coverage thereof, upon claim from the coverage thereof, upon showing that:showing that:• • a creditor does not have adequate a creditor does not have adequate protection over property securing its protection over property securing its claim; orclaim; or• • the value of a claim secured by a lien, the value of a claim secured by a lien, on property which is noton property which is notnecessary for rehabilitation of the necessary for rehabilitation of the debtor, exceeds the fair marketdebtor, exceeds the fair marketvalue of the said property (FRIA section value of the said property (FRIA section 61).61).

In liquidation proceedingsIn liquidation proceedings, , no separate no separate action for the collection of an unsecured action for the collection of an unsecured claim is allowed after the issuance of the claim is allowed after the issuance of the liquidation orderliquidation order. . Pending actions will be Pending actions will be transferred to the liquidator for him to transferred to the liquidator for him to accept and settle or contest. If the accept and settle or contest. If the liquidator contests or disputes the claim, liquidator contests or disputes the claim, the court will allow, hear and resolve the court will allow, hear and resolve such contest except when the case is such contest except when the case is already on appeal. In such a case, the already on appeal. In such a case, the suit may proceed to judgment, and any suit may proceed to judgment, and any final and executory judgment therein for final and executory judgment therein for a claim against the debtor shall be filed a claim against the debtor shall be filed and allowed in the court.and allowed in the court.

Furthermore, no foreclosure proceeding is Furthermore, no foreclosure proceeding is allowed for a period of 180 days from allowed for a period of 180 days from issuance of the liquidation order (FRIA section issuance of the liquidation order (FRIA section 113).113).The FRIA provides that the liquidation order The FRIA provides that the liquidation order shall not affect the right of a secured creditor shall not affect the right of a secured creditor to enforce his lien in accordance with the to enforce his lien in accordance with the applicable contract or law (FRIA section 114).applicable contract or law (FRIA section 114).

Post-filing creditPost-filing creditMay a debtor in a liquidation or May a debtor in a liquidation or reorganisation obtain secured or unsecured reorganisation obtain secured or unsecured loans or credit? What priority is given to loans or credit? What priority is given to such loans or credit?such loans or credit?

As regards liquidation, As regards liquidation, there is no specific there is no specific provision in the FRIA permitting or provision in the FRIA permitting or prohibiting the debtor from obtaining prohibiting the debtor from obtaining secured or unsecured loans or creditsecured or unsecured loans or credit. . However, sections 113 (on effects of the However, sections 113 (on effects of the liquidation order) and 119 (on the powers, liquidation order) and 119 (on the powers, duties and responsibilities of the liquidator) duties and responsibilities of the liquidator) of the FRIA of the FRIA appear to imply that a debtor in appear to imply that a debtor in liquidation may not obtain such loans or liquidation may not obtain such loans or credit. credit.

According to section 113, the According to section 113, the juridical juridical debtor shall be deemed dissolved upon debtor shall be deemed dissolved upon the issuance of the liquidation order. the issuance of the liquidation order. Furthermore, the section states that Furthermore, the section states that legal title to and control of all the legal title to and control of all the assets of the debtor,assets of the debtor, except those that except those that may be exempt from execution, shall be may be exempt from execution, shall be deemed vested in deemed vested in the liquidator the liquidator or, or, pending his election or appointment, pending his election or appointment, with the courtwith the court. .

Section 119 does not expressly Section 119 does not expressly authorise the liquidator to obtain such authorise the liquidator to obtain such loans or credit.loans or credit.

With respect to With respect to rehabilitationrehabilitation, section , section 55 of the FRIA provides that a 55 of the FRIA provides that a debtor debtor may perform may perform the following acts in order the following acts in order to enhance its rehabilitation:to enhance its rehabilitation:• • enter enter into credit arrangementsinto credit arrangements;;• • enter into credit arrangements, secured enter into credit arrangements, secured by mortgages of its unencumbered by mortgages of its unencumbered property or secondary mortgages of property or secondary mortgages of encumbered property with the approval of encumbered property with the approval of senior secured parties with regardsenior secured parties with regardto the encumbered property; orto the encumbered property; or• • incur other obligations as may be incur other obligations as may be essential to rehabilitation.essential to rehabilitation.

The debtor may do these with the The debtor may do these with the approval of approval of the court and upon the recommendation the court and upon the recommendation of the rehabilitation receiver.of the rehabilitation receiver.

Section 55 of the FRIA further states that the Section 55 of the FRIA further states that the payment of the foregoing obligations shall be payment of the foregoing obligations shall be considered considered administrative expensesadministrative expenses. On the . On the other hand, section 16(l) of the FRIA states other hand, section 16(l) of the FRIA states that that the commencement order shall authorise the commencement order shall authorise the payment of administrative expenses the payment of administrative expenses as they become dueas they become due. Consequently, the credit . Consequently, the credit arrangements or obligations obtained by the arrangements or obligations obtained by the debtor under section 55 of the FRIA may be said debtor under section 55 of the FRIA may be said to be given priority to the extent that they are to be given priority to the extent that they are to be paid as they become due.to be paid as they become due.

Set-off and nettingSet-off and nettingTo what extent are creditors able To what extent are creditors able to exercise rights of set-off or to exercise rights of set-off or netting in a liquidation or in a netting in a liquidation or in a reorganization? Can creditors be reorganization? Can creditors be deprived of the right of set-off deprived of the right of set-off either temporarily or either temporarily or permanently?permanently?With respect to liquidation, the With respect to liquidation, the FRIA provides that a debt shall FRIA provides that a debt shall be offset against another debt if be offset against another debt if the insolvent debtor and a the insolvent debtor and a creditor are mutually debtor and creditor are mutually debtor and creditor of each other (section creditor of each other (section 124). The liquidation 124). The liquidation proceedings shall only include proceedings shall only include the balance, if any, of the set-off.the balance, if any, of the set-off.

As regards court-supervised rehabilitation, it As regards court-supervised rehabilitation, it appears that appears that the right of set-off the right of set-off may be may be exercised exercised only prior to the commencement of only prior to the commencement of the rehabilitation proceedings.the rehabilitation proceedings. The issuance The issuance by the court of a commencement order shall by the court of a commencement order shall serve as the legal basis for rendering null serve as the legal basis for rendering null and void any set-off after the commencement and void any set-off after the commencement date of the rehabilitation proceedings (FRIA date of the rehabilitation proceedings (FRIA section 17(c)).section 17(c)). The commencement date of the The commencement date of the rehabilitation proceedings refers to the date rehabilitation proceedings refers to the date on which the court issues the on which the court issues the commencement order, which, however, commencement order, which, however, shall shall be retroactive to the date of the filing of the be retroactive to the date of the filing of the petition for voluntary or involuntary petition for voluntary or involuntary proceedings (FRIA section 4(b)). proceedings (FRIA section 4(b)). In this In this connection, under the old law, the stay order connection, under the old law, the stay order was not expressly given any retroactive was not expressly given any retroactive effect.effect.

Sale of assetsSale of assets

In reorganizations and liquidations, In reorganizations and liquidations, what provisions apply to the sale of what provisions apply to the sale of specific assets out of the ordinary specific assets out of the ordinary course of business and to the sale of course of business and to the sale of the entire business of the debtor? the entire business of the debtor?

Does the purchaser acquire the Does the purchaser acquire the assets ‘free and clear’ of claims or assets ‘free and clear’ of claims or do some liabilities pass with the do some liabilities pass with the assetsassets??

In practice, does your system allow In practice, does your system allow for ‘for ‘stalking horse’ bidsstalking horse’ bids in sale in sale procedures and does your system procedures and does your system permit credit bidding in sales? permit credit bidding in sales?

Definition of 'Stalking-Horse Definition of 'Stalking-Horse Bid'Bid'An initial bid on a bankrupt An initial bid on a bankrupt company's assets from an company's assets from an interested buyer chosen by the interested buyer chosen by the bankrupt company. From a bankrupt company. From a pool of bidders, the bankrupt pool of bidders, the bankrupt company chooses the stalking company chooses the stalking horse to make the first bid.horse to make the first bid.This method allows the This method allows the distressed company to avoid distressed company to avoid low bids on its assets. Once low bids on its assets. Once the stalking horse has made the stalking horse has made its bid, other potential buyers its bid, other potential buyers may submit competing bids for may submit competing bids for the bankrupt company's the bankrupt company's assets. In essence, the stalking assets. In essence, the stalking horse sets the bar so that horse sets the bar so that other bidders can't low-ball the other bidders can't low-ball the purchase price.purchase price.

In rehabilitation, the debtor may use In rehabilitation, the debtor may use or dispose of funds or property in the or dispose of funds or property in the ordinary course of business or if ordinary course of business or if necessary to finance the necessary to finance the administrative expenses of the administrative expenses of the rehabilitation proceedings rehabilitation proceedings (FRIA (FRIA section 48)section 48)

Outside the ordinary course of Outside the ordinary course of business, business, unencumbered assets of unencumbered assets of the debtor may be sold but only the debtor may be sold but only with court authorization, upon with court authorization, upon application of the rehabilitation application of the rehabilitation receiver. receiver. The application must The application must show that the property, by its show that the property, by its nature or because of other nature or because of other circumstance, is perishable, costly circumstance, is perishable, costly to maintain, susceptible to to maintain, susceptible to devaluation or otherwise in devaluation or otherwise in jeopardy (FRIA section 49).jeopardy (FRIA section 49).

The court may also The court may also authorize the sale of authorize the sale of unencumbered assets:unencumbered assets:• • if such are in the interest if such are in the interest of administering the debtor of administering the debtor and facilitating the and facilitating the preparation and preparation and implementation of a implementation of a rehabilitation plan;rehabilitation plan;• • in order to provide a in order to provide a substitute lien, mortgage substitute lien, mortgage or pledge of property under or pledge of property under the FRIA;the FRIA;• • for payments made to for payments made to meet administrative meet administrative expenses as they arise;expenses as they arise;

• • for payments to victims of for payments to victims of quasi-delicts (ie, torts) upon a quasi-delicts (ie, torts) upon a showing that the claim is valid showing that the claim is valid and the debtor has insurance and the debtor has insurance to reimburse the debtor for to reimburse the debtor for the payments made;the payments made;• • for payments made to for payments made to repurchase property of the repurchase property of the debtor that is auctioned off in debtor that is auctioned off in a judicial or extrajudicial sale a judicial or extrajudicial sale under the FRIA;under the FRIA;oror• • for payments made to for payments made to reclaim property of the debtor reclaim property of the debtor held pursuant to a possessory held pursuant to a possessory lien (FRIA section 52).lien (FRIA section 52).

Meanwhile, sale of encumbered property of Meanwhile, sale of encumbered property of the debtor, or property of others held by the the debtor, or property of others held by the debtor, where there is a security interest debtor, where there is a security interest pertaining to third parties under a financial, pertaining to third parties under a financial, credit or other similar transactions may be credit or other similar transactions may be done with court authorisation, upon done with court authorisation, upon application of the rehabilitation receiver, with application of the rehabilitation receiver, with the consent of the affected owners of the the consent of the affected owners of the property or secured creditors, and after notice property or secured creditors, and after notice and hearing. and hearing. The court must determine thatThe court must determine that::• • such sale, transfer, conveyance or disposal such sale, transfer, conveyance or disposal is necessary for the continued operation of is necessary for the continued operation of the debtor’s business; andthe debtor’s business; and• • the debtor has made arrangements to the debtor has made arrangements to provide a substitute lien or ownership right provide a substitute lien or ownership right that provides an equal level of security for the that provides an equal level of security for the counterparty’s claim or right (FRIA section counterparty’s claim or right (FRIA section 50).50).

In liquidation, the liquidator may sell In liquidation, the liquidator may sell the the unencumbered assets of the debtor unencumbered assets of the debtor and convert the same into moneyand convert the same into money. The . The sale shall be made at sale shall be made at public auction. public auction. However, a private sale may be However, a private sale may be allowed with the approval of the court allowed with the approval of the court if:if:

• • the goods to be sold are of a perishable the goods to be sold are of a perishable nature, or are liable to quickly nature, or are liable to quickly deteriorate in value, or are deteriorate in value, or are disproportionately expensive to keep disproportionately expensive to keep or maintain; oror maintain; or

• • the private sale is in the best interests the private sale is in the best interests of the debtor and his creditors.of the debtor and his creditors.

With the approval of the court, With the approval of the court, unencumbered property of the debtor unencumbered property of the debtor may also be conveyed may also be conveyed to a creditor in to a creditor in satisfaction of his claim or part thereof satisfaction of his claim or part thereof (FRIA section 131).(FRIA section 131).

Rejection and disclaimer of contracts in Rejection and disclaimer of contracts in reorganizations Can a debtor undergoing a reorganizations Can a debtor undergoing a reorganisation reject or disclaim an reorganisation reject or disclaim an unfavourable contract? Are there contracts unfavourable contract? Are there contracts that may not be rejected?that may not be rejected?What procedure is followed to reject a What procedure is followed to reject a contract and what is the effect of rejection contract and what is the effect of rejection on the other party?on the other party?YesYes, a debtor can reject an unfavourable , a debtor can reject an unfavourable contract by not confirming the contract in a contract by not confirming the contract in a rehabilitation proceedingrehabilitation proceeding. All contracts not . All contracts not confirmed by the debtor, with the consent of the confirmed by the debtor, with the consent of the rehabilitation receiver, within 90 days following rehabilitation receiver, within 90 days following the commencement of the rehabilitation the commencement of the rehabilitation proceedings, are considered terminated. Claims proceedings, are considered terminated. Claims for actual damages, if any, arising as a result of for actual damages, if any, arising as a result of the election to terminate a contract shall be the election to terminate a contract shall be considered considered a pre-commencement claim a pre-commencement claim against the debtor (against the debtor (FRIA section 57).FRIA section 57).

Arbitration processes in insolvency casesArbitration processes in insolvency casesHow frequently is arbitration used in How frequently is arbitration used in insolvencyinsolvency proceedingsproceedings? What limitations ? What limitations are there on the availability of arbitration are there on the availability of arbitration in insolvency cases? Will the court allow in insolvency cases? Will the court allow arbitration proceedings to continue after arbitration proceedings to continue after an insolvency case is opened?an insolvency case is opened?Under the old law, arbitration Under the old law, arbitration was was generally not generally not used in used in insolvency insolvency proceedingsproceedings. However, under the FRIA, . However, under the FRIA, with respect to with respect to court-supervised court-supervised rehabilitationrehabilitation, any dispute involving the , any dispute involving the rehabilitation plan or the rehabilitation rehabilitation plan or the rehabilitation proceedings may be referred by the proceedings may be referred by the court court to arbitration or other dispute-resolution to arbitration or other dispute-resolution mechanisms mechanisms (FRIA section 26). (FRIA section 26).

The court shall first determine The court shall first determine whether arbitration or other whether arbitration or other dispute-resolution mechanisms dispute-resolution mechanisms will resolve the dispute more will resolve the dispute more quickly, fairly and efficiently than quickly, fairly and efficiently than the court (FRIA section 26).the court (FRIA section 26).

As regards liquidation, the As regards liquidation, the FRIA does not specifically FRIA does not specifically provide for the referral of a provide for the referral of a dispute involving the dispute involving the liquidation plan or the liquidation plan or the liquidation proceedings to liquidation proceedings to arbitration or other dispute arbitration or other dispute resolution mechanisms.resolution mechanisms.Unless the rehabilitation or Unless the rehabilitation or liquidation court allows liquidation court allows arbitration proceedings to arbitration proceedings to continue, the arbitration continue, the arbitration proceedings shall be subject proceedings shall be subject to the stay or suspension to the stay or suspension order.order.

Successful ReorganizationsSuccessful ReorganizationsWhat features are mandatory in a What features are mandatory in a Reorganisation Plan? How are creditors Reorganisation Plan? How are creditors classified for purposes of a plan and how is the classified for purposes of a plan and how is the plan approved? plan approved? Can a reorganization plan release non-debtor Can a reorganization plan release non-debtor parties from liability, and, if so, in what parties from liability, and, if so, in what circumstances?circumstances?Mandatory features of a rehabilitation planMandatory features of a rehabilitation planAccording to section 62 of the FRIA, a rehabilitation According to section 62 of the FRIA, a rehabilitation plan must contain the following plan must contain the following minimumminimum features: features:• • specify the underlying assumptions, the financial specify the underlying assumptions, the financial goals and the procedures proposed to accomplish goals and the procedures proposed to accomplish such goals;such goals;• • compare the amounts expected to be received by compare the amounts expected to be received by the creditors under the rehabilitation plan with those the creditors under the rehabilitation plan with those that they will receive if liquidation ensues within the that they will receive if liquidation ensues within the next 120 days;next 120 days;

• • contain information sufficient to give the contain information sufficient to give the various classes of creditors a reasonable basis various classes of creditors a reasonable basis for determining whether supporting the plan is for determining whether supporting the plan is in their financial interest when compared to in their financial interest when compared to the immediate liquidation of the debtor, the immediate liquidation of the debtor, including any reduction of principal interest including any reduction of principal interest and penalties payable to the creditors;and penalties payable to the creditors;

• • establish classes of voting creditors;establish classes of voting creditors;

• • establish subclasses of voting creditors if establish subclasses of voting creditors if prior approval has been granted by the court;prior approval has been granted by the court;

• • indicate how the insolvent debtor will be indicate how the insolvent debtor will be rehabilitated including, but not limited to, debt rehabilitated including, but not limited to, debt forgiveness, debt rescheduling, reorganisation forgiveness, debt rescheduling, reorganisation or quasi-reorganisation, dacion en pago (ie, or quasi-reorganisation, dacion en pago (ie, payment by assignment of property), debt-payment by assignment of property), debt-equity conversion and sale of the business (or equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of parts of it) as a going concern, or setting-up of a newa new

business entity or other similar arrangements business entity or other similar arrangements as may be necessary to restore the financial as may be necessary to restore the financial well-being and viability of the insolvent debtor;well-being and viability of the insolvent debtor;

• • specify the treatment of each specify the treatment of each class or subclass of voting class or subclass of voting creditors;creditors;• • provide for equal treatment of provide for equal treatment of all claims within the same class all claims within the same class or subclass, unless a particular or subclass, unless a particular creditor voluntarily agrees to creditor voluntarily agrees to less favourable treatment;less favourable treatment;• • ensure that the payments ensure that the payments made under the plan follow the made under the plan follow the priority established under the priority established under the provisions of the Civil Code on provisions of the Civil Code on concurrence and preference of concurrence and preference of credits and other applicable credits and other applicable laws;laws;

• • maintain the security interest of maintain the security interest of secured creditors and preserve secured creditors and preserve the liquidation value of the the liquidation value of the security unless such has been security unless such has been waived or modified voluntarily;waived or modified voluntarily;• • disclose all payments to disclose all payments to creditors for pre-commencement creditors for pre-commencement debts made during the debts made during the proceedings and the justifications proceedings and the justifications thereof;thereof;• • describe the disputed claims describe the disputed claims and the provisioning of funds to and the provisioning of funds to account for appropriate payments account for appropriate payments should the claim be ruled valid or should the claim be ruled valid or its amount adjusted;its amount adjusted;

identify the debtor’s role in the identify the debtor’s role in the implementation of the plan;implementation of the plan;

• • state any rehabilitation covenants state any rehabilitation covenants of the debtor, the breach ofof the debtor, the breach of

which shall be considered a material which shall be considered a material breach of the plan;breach of the plan;

• • identify those responsible for the identify those responsible for the future management of thefuture management of the

debtor and the supervision and debtor and the supervision and implementation of the plan, theirimplementation of the plan, their

affiliation with the debtor and their affiliation with the debtor and their remuneration;remuneration;

• • address the treatment of claims address the treatment of claims arising after the confirmation ofarising after the confirmation of

the rehabilitation plan;the rehabilitation plan;

• • require the debtor and its require the debtor and its counterparties to adhere to the termscounterparties to adhere to the termsof all contracts that the debtor has of all contracts that the debtor has chosen to confirm;chosen to confirm;• • arrange for the payment of all arrange for the payment of all outstanding administrativeoutstanding administrativeexpenses as a condition to the plan’s expenses as a condition to the plan’s approval unless such conditionapproval unless such conditionhas been waived in writing by the has been waived in writing by the creditors concerned;creditors concerned;• • arrange for the payment of all arrange for the payment of all outstanding taxes and assessments,outstanding taxes and assessments,or an adjusted amount pursuant to a or an adjusted amount pursuant to a compromise settlementcompromise settlementwith the Bureau of Internal Revenue with the Bureau of Internal Revenue (BIR) or other(BIR) or otherapplicable tax authorities;applicable tax authorities;

include a certified copy of a include a certified copy of a certificate of tax clearance or certificate of tax clearance or evidence of a compromise evidence of a compromise settlement with the BIR;settlement with the BIR;

• • include a valid and binding include a valid and binding resolution of a meeting of the resolution of a meeting of the debtor’s stockholders to increase the debtor’s stockholders to increase the shares by the required amount in shares by the required amount in cases where the plan contemplates cases where the plan contemplates an additional issuance of shares by an additional issuance of shares by the debtor;the debtor;

• • state the compensation and status, if state the compensation and status, if any, of the rehabilitation receiver any, of the rehabilitation receiver after the approval of the plan; andafter the approval of the plan; and

• • contain provisions for conciliation contain provisions for conciliation and/or mediation as a prerequisite to and/or mediation as a prerequisite to court assistance or intervention in court assistance or intervention in the event of any disagreement in the the event of any disagreement in the interpretation or implementation of interpretation or implementation of the rehabilitation plan.the rehabilitation plan.

Classification of creditorsClassification of creditorsThe FRIA does not expressly provide The FRIA does not expressly provide for the criteria to be utilised in for the criteria to be utilised in classifying creditors for purposes of classifying creditors for purposes of the rehabilitation plan. However, the rehabilitation plan. However, section 42 of the FRIA recognises section 42 of the FRIA recognises several classes of creditors, namely:several classes of creditors, namely:• • secured creditors;secured creditors;• • unsecured creditors;unsecured creditors;• • trade creditors and suppliers; trade creditors and suppliers; andand• • employees of the debtor.employees of the debtor.The above-mentioned list does not The above-mentioned list does not exhaust all possible classification of exhaust all possible classification of creditors, and the rehabilitation plan creditors, and the rehabilitation plan may establish other classesmay establish other classesof voting creditors (FRIA section of voting creditors (FRIA section 62(d)).62(d)).

Process for Approval of Rehabilitation Process for Approval of Rehabilitation PlanPlanThe process for approval of a The process for approval of a rehabilitation plan depends on the rehabilitation plan depends on the nature of the rehabilitation proceeding, nature of the rehabilitation proceeding, in particular:in particular:• • court-supervised rehabilitation;court-supervised rehabilitation;• • pre-negotiated rehabilitation; andpre-negotiated rehabilitation; and• • out-of-court or informal restructuring out-of-court or informal restructuring agreements or rehabilitation plans.agreements or rehabilitation plans.

Court-supervised Court-supervised rehabilitationrehabilitation

Pursuant to section 64 of the Pursuant to section 64 of the FRIA, the rehabilitation FRIA, the rehabilitation receiver shall notify the receiver shall notify the creditors and stakeholders creditors and stakeholders for the examination of the for the examination of the rehabilitation plan. Within rehabilitation plan. Within 20 days from notification, 20 days from notification, the rehabilitation receiver the rehabilitation receiver shall convene the creditors shall convene the creditors for purposes of voting on for purposes of voting on the approval of the the approval of the rehabilitation plan (FRIA rehabilitation plan (FRIA section 64). section 64).


The rehabilitation plan must The rehabilitation plan must be approved by all classes of be approved by all classes of creditors whose rights are creditors whose rights are adversely affected by the adversely affected by the said plan. The rehabilitation said plan. The rehabilitation plan is deemed to have been plan is deemed to have been approved by a class of approved by a class of creditors creditors if members of the if members of the class holding more than 50 class holding more than 50 per cent of the total claims per cent of the total claims of the class vote for the of the class vote for the approval of the rehabilitation approval of the rehabilitation plan (FRIA section 64).plan (FRIA section 64).


If the rehabilitation plan is approved, the plan If the rehabilitation plan is approved, the plan shall be submitted shall be submitted to the court for to the court for confirmation confirmation (FRIA section 65). An objection (FRIA section 65). An objection may be filed by a creditor within 20 days from may be filed by a creditor within 20 days from receipt of the court notice regarding the receipt of the court notice regarding the submission of the rehabilitation plan for submission of the rehabilitation plan for confirmation (FRIA section 66). confirmation (FRIA section 66). The court The court shall confirm the rehabilitation planshall confirm the rehabilitation planIf no objections are filed within the relevant If no objections are filed within the relevant period or, if objections are filed, the court finds period or, if objections are filed, the court finds them lacking in merit, or determines that the them lacking in merit, or determines that the basis for the objection has been cured, or basis for the objection has been cured, or determines that the debtor has complied with determines that the debtor has complied with an order to cure the objection’ (FRIA section an order to cure the objection’ (FRIA section 68)68)

Pre-negotiated Pre-negotiated RehabilitationRehabilitationUpon the determination that the petition Upon the determination that the petition

for the approval of a prenegotiated for the approval of a prenegotiated rehabilitation plan is sufficient in form and rehabilitation plan is sufficient in form and substance, the court shall issue an order substance, the court shall issue an order which shall, among other things, state that which shall, among other things, state that copies of the petition and the copies of the petition and the rehabilitation plan are available for rehabilitation plan are available for examination and copying by any examination and copying by any interested party interested party (FRIA section 77(f)).(FRIA section 77(f)). The court shall approve the rehabilitation The court shall approve the rehabilitation plan within 10 days from the date of the plan within 10 days from the date of the second publication of the order, unless an second publication of the order, unless an objection is filed by a creditor or other objection is filed by a creditor or other interested party (FRIA section 78).interested party (FRIA section 78).

Pre-negotiated rehabilitationPre-negotiated rehabilitation

The rehabilitation plan shall be deemed The rehabilitation plan shall be deemed approved upon a court determination that approved upon a court determination that the objection has no substantial merit, or the objection has no substantial merit, or that the same has been fixed (FRIA section that the same has been fixed (FRIA section 80).80).

Moreover, the court shall have a maximum Moreover, the court shall have a maximum period of 120 days from the date of the filing period of 120 days from the date of the filing of the petition to approve the rehabilitation of the petition to approve the rehabilitation plan. The rehabilitation plan shall be deemed plan. The rehabilitation plan shall be deemed approved in the event that the court does approved in the event that the court does not act within the given period (FRIA section not act within the given period (FRIA section 81).81).

Pursuant to section 84 of the FRIA, an out-of-Pursuant to section 84 of the FRIA, an out-of-court or informal restructuring or workout court or informal restructuring or workout agreement or rehabilitation plan shall qualify agreement or rehabilitation plan shall qualify under the FRIA provided the following minimum under the FRIA provided the following minimum requirements are satisfied:requirements are satisfied:

• • the debtor must agree to the out-of-court or the debtor must agree to the out-of-court or informal restructuring or workout agreement or informal restructuring or workout agreement or rehabilitation plan;rehabilitation plan;

• • it must be approved by creditors representing it must be approved by creditors representing at least at least 67 per cent of the secured 67 per cent of the secured obligations of the debtorobligations of the debtor;;

Out-of-court or informal Out-of-court or informal restructuring agreements or restructuring agreements or

rehabilitation plansrehabilitation plans

• • it must be approved by creditors it must be approved by creditors representing at least representing at least 75 per cent of 75 per cent of the unsecured obligations the unsecured obligations of the of the debtor; anddebtor; and

• • it must be approved by creditors it must be approved by creditors holding at least holding at least 85 per cent of the 85 per cent of the total liabilitiestotal liabilities, secured and , secured and unsecured, of the debtor.unsecured, of the debtor.

Out-of-court or informal Out-of-court or informal restructuring agreements or restructuring agreements or

rehabilitation plansrehabilitation plans

The FRIA does not expressly The FRIA does not expressly provide for the release of non-provide for the release of non-debtor parties from liability and the debtor parties from liability and the circumstances for such releasecircumstances for such release. It . It must be noted, however, that the must be noted, however, that the rehabilitation plan must aim to rehabilitation plan must aim to restore ‘the financial well-being restore ‘the financial well-being and viability of an insolvent debtor’ and viability of an insolvent debtor’ (FRIA section 4(ii)).(FRIA section 4(ii)).

Release of Non-Debtor PartiesRelease of Non-Debtor Parties

Expedited ReorganizationsExpedited Reorganizations

Do procedures exist for expedited Do procedures exist for expedited reorganisations?reorganisations?

The FRIA does not expressly The FRIA does not expressly provide for expedited reorganisations provide for expedited reorganisations or rehabilitations. It does, however, or rehabilitations. It does, however, recognise and permit recognise and permit pre-negotiated pre-negotiated rehabilitation plans. rehabilitation plans.

Unsuccessful Unsuccessful ReorganisationsReorganisations

How is a proposed reorganisation defeated and How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not what is the effect of a reorganisation plan not being approved? What if the debtor fails to being approved? What if the debtor fails to perform a plan?perform a plan?

According to section 74 of the FRIA, the According to section 74 of the FRIA, the following instances constitute failure of following instances constitute failure of rehabilitation:rehabilitation:

• • dismissal of the petition by the court;dismissal of the petition by the court;

• • the debtor fails to submit a rehabilitation plan;the debtor fails to submit a rehabilitation plan;

• • under the rehabilitation plan submitted by the under the rehabilitation plan submitted by the debtor, there is no substantial likelihood that debtor, there is no substantial likelihood that the debtor can be rehabilitated within a the debtor can be rehabilitated within a reasonable periodreasonable period;;

the rehabilitation plan or its the rehabilitation plan or its amendment is approved by the court amendment is approved by the court but in the implementation thereof, the but in the implementation thereof, the debtor fails to perform its obligations debtor fails to perform its obligations thereunder, or there is a failure to thereunder, or there is a failure to realise the objectives, targets or goals realise the objectives, targets or goals set forth therein, including the set forth therein, including the timelines and conditions for the timelines and conditions for the settlement of the obligations due to settlement of the obligations due to the creditors and other claimants;the creditors and other claimants;

• • the commission of fraud in securing the the commission of fraud in securing the approval approval

of the rehabilitation plan or its of the rehabilitation plan or its amendment; andamendment; and

• • other analogous circumstances as may other analogous circumstances as may be defined by the rules of procedurebe defined by the rules of procedure..

Section 74 of the FRIA further provides Section 74 of the FRIA further provides that the court, upon breach or failure of that the court, upon breach or failure of the rehabilitation plan, may perform the the rehabilitation plan, may perform the following:following:• • issue an order directing that the breach issue an order directing that the breach be cured within a specified period of be cured within a specified period of time, failing which the proceedings may time, failing which the proceedings may be converted to a liquidation;be converted to a liquidation;• • issue an order converting the issue an order converting the proceedings to a liquidationproceedings to a liquidation;;• • allow the debtor or rehabilitation allow the debtor or rehabilitation receiver to submit amendments to the receiver to submit amendments to the rehabilitation plan, the approval of which rehabilitation plan, the approval of which shall be governed by the same shall be governed by the same requirements for the approval of a requirements for the approval of a rehabilitation plan;rehabilitation plan;

• • issue any other order to issue any other order to remedy the breach consistent remedy the breach consistent with the present regulation, with the present regulation, other applicable law and the best other applicable law and the best interests ofinterests of

the creditors; orthe creditors; or

• • enforce the applicable enforce the applicable provisions of the rehabilitation provisions of the rehabilitation plan through a writ of execution.plan through a writ of execution.

Insolvency ProcessesInsolvency Processes

In the event that a petition or motion for In the event that a petition or motion for liquidation is sufficient in form and liquidation is sufficient in form and substance, the court shall issue a substance, the court shall issue a liquidation order (FRIA section 112). The liquidation order (FRIA section 112). The liquidation order directs, among others, liquidation order directs, among others, the publication of the petition or motion the publication of the petition or motion for liquidation in a newspaper of general for liquidation in a newspaper of general circulation once a week for two circulation once a week for two consecutive weeks (FRIA section 112(d)). consecutive weeks (FRIA section 112(d)). Furthermore, the Furthermore, the liquidation order directs liquidation order directs all creditors to file their claims with the all creditors to file their claims with the liquidator within the period set by the liquidator within the period set by the rules of procedure rules of procedure (FRIA section 112(g)).(FRIA section 112(g)).

Insolvency ProcessesInsolvency Processes

The FRIA does not expressly provide for The FRIA does not expressly provide for the holding of meetings and the manner the holding of meetings and the manner of calling meetings during liquidation of calling meetings during liquidation proceedingsproceedings. It is the duty of the . It is the duty of the liquidator to prepare a registry of claims liquidator to prepare a registry of claims of secured and unsecured creditors, and of secured and unsecured creditors, and to make such registry available for public to make such registry available for public inspectioninspection. The liquidator must also . The liquidator must also inform, through publication notice, the inform, through publication notice, the creditors and stakeholders of the creditors and stakeholders of the debtor/individual debtor of the place and debtor/individual debtor of the place and time for inspection of the registry of time for inspection of the registry of claims (FRIA section 123).claims (FRIA section 123).

Insolvency ProcessesInsolvency Processes Furthermore, it is the duty of the Furthermore, it is the duty of the

liquidator to make and keep a record of liquidator to make and keep a record of all monies received and all all monies received and all disbursements made by him or under his disbursements made by him or under his authority as liquidator (FRIA section authority as liquidator (FRIA section 121). The liquidator shall also render a 121). The liquidator shall also render a quarterly report thereof to the court, quarterly report thereof to the court, which report shall be made available to which report shall be made available to all interested parties (FRIA section 121).all interested parties (FRIA section 121).

The liquidator shall also submit such The liquidator shall also submit such reports as may be required by the court reports as may be required by the court from time to time as well as a final from time to time as well as a final report at the end of the liquidation report at the end of the liquidation proceedings (FRIA section 121).proceedings (FRIA section 121).

Insolvency ProcessesInsolvency ProcessesA A creditorcreditor may, with the consent of the may, with the consent of the liquidatorliquidator, initiate and prosecute an , initiate and prosecute an action action for rescission or declaration of nullity for rescission or declaration of nullity of transactions entered into by the of transactions entered into by the debtor or involving its assets in order debtor or involving its assets in order to defraud creditors or give undue to defraud creditors or give undue preference to creditorspreference to creditors (FRIA sections (FRIA sections 127 and 128). The action may be instituted 127 and 128). The action may be instituted with leave of court if the liquidator does not with leave of court if the liquidator does not consent to its filing or prosecution (FRIA consent to its filing or prosecution (FRIA section 128).section 128).

Enforcement of Estate’s Enforcement of Estate’s RightsRights

If the insolvency administrator has If the insolvency administrator has no assets to pursue a claim, may the no assets to pursue a claim, may the creditors pursue the estate’s creditors pursue the estate’s remedies? If so, to whom do the remedies? If so, to whom do the fruits of the remedies belong?fruits of the remedies belong?

Under the FRIA, only the Under the FRIA, only the rehabilitation receiver or liquidator rehabilitation receiver or liquidator is entitled to sue and recover, with is entitled to sue and recover, with approval of the court, properties approval of the court, properties pertaining to the debtor pertaining to the debtor (sections (sections 31(f) and 119(a)). 31(f) and 119(a)).


An exception is the action for An exception is the action for rescission or declaration of rescission or declaration of invalidity of transactions invalidity of transactions entered into by the debtor or entered into by the debtor or involving its assets in order to involving its assets in order to defraud creditors or give defraud creditors or give undue preference to creditors, undue preference to creditors, a creditor may initiate and a creditor may initiate and prosecute, with the consent of prosecute, with the consent of the liquidator or with leave of the liquidator or with leave of court. Having said that, the court. Having said that, the Civil Code allows creditors to Civil Code allows creditors to exercise all the debtor’s rights exercise all the debtor’s rights and bring all actions of the and bring all actions of the latter to satisfy their claims latter to satisfy their claims (called (called accion subrogatoria;accion subrogatoria; article 1177). article 1177).


This is pertinent in liquidation This is pertinent in liquidation proceedings of an individual debtor who proceedings of an individual debtor who is liable with all his property, present is liable with all his property, present and future, for the fulfilment of his and future, for the fulfilment of his obligations (Civil Code article 2236) – obligations (Civil Code article 2236) – that is, even after the termination of that is, even after the termination of liquidation proceedings. The fruits of liquidation proceedings. The fruits of the remedies will belong to the the remedies will belong to the creditors to the extent of their credit.creditors to the extent of their credit.

Creditor RepresentationCreditor RepresentationWhat committees can be formed (or What committees can be formed (or representative counsel appointed) and what representative counsel appointed) and what powers or responsibilities do they have? How are powers or responsibilities do they have? How are they selected and appointed? May they retain they selected and appointed? May they retain advisers and how are their expenses funded?advisers and how are their expenses funded?With respect to rehabilitation, With respect to rehabilitation, a class of a class of creditors creditors may establish may establish a committee a committee (FRIA (FRIA section 42). Furthermore, a creditors’ committee section 42). Furthermore, a creditors’ committee may be established by all the creditors may be established by all the creditors acting as acting as a bodya body, and a , and a representativerepresentative from each class of from each class of creditors shall be a member of the creditors’ creditors shall be a member of the creditors’ committee (FRIA section 42). The representative committee (FRIA section 42). The representative from each class shall be elected, and the from each class shall be elected, and the rehabilitation receiver or his representative shall rehabilitation receiver or his representative shall assist in the said election (FRIA section 42).assist in the said election (FRIA section 42).

Creditor Creditor RepresentationRepresentation

It shall be the duty of the It shall be the duty of the creditors’ creditors’ committee committee to assist the rehabilitation to assist the rehabilitation receiver in communicating with the receiver in communicating with the creditors and shall be the principal liaison creditors and shall be the principal liaison between the rehabilitation receiver and the between the rehabilitation receiver and the creditorscreditors (FRIA section 43). However, the (FRIA section 43). However, the creditors’ committee does not have the authority creditors’ committee does not have the authority to exercise or waive any right or give any to exercise or waive any right or give any consent on behalf of any creditor, unless consent on behalf of any creditor, unless specifically authorised in writing by such creditor specifically authorised in writing by such creditor (FRIA section 43). The court or the rehabilitation (FRIA section 43). The court or the rehabilitation receiver may assign other tasks to the creditors’ receiver may assign other tasks to the creditors’ committee to facilitate the rehabilitation committee to facilitate the rehabilitation proceedings (FRIA section 43).proceedings (FRIA section 43).

Creditor Creditor RepresentationRepresentation

As regards liquidation, the As regards liquidation, the liquidatorliquidator may may recommend to the court the creation of a recommend to the court the creation of a creditors’ committee which will assist him in creditors’ committee which will assist him in the discharge of his functions (FRIA section the discharge of his functions (FRIA section 119(g)). The creditors’ committee shall have 119(g)). The creditors’ committee shall have such powers as the court may deem just, such powers as the court may deem just, reasonable and necessary (FRIA section reasonable and necessary (FRIA section 119(g)).119(g)).

The expenses of the creditors’ committee The expenses of the creditors’ committee incurred in the performance of its duties incurred in the performance of its duties may be considered as administrative may be considered as administrative expenses.expenses.

Creditor RepresentationCreditor RepresentationAdministrative expenses are paid as they Administrative expenses are paid as they become due, pursuant to the commencement become due, pursuant to the commencement order in a rehabilitation proceeding or the order in a rehabilitation proceeding or the liquidation order (FRIA sections 16 and 112.) liquidation order (FRIA sections 16 and 112.) The FRIA does not expressly provide for the The FRIA does not expressly provide for the retention of advisers by the creditors’ retention of advisers by the creditors’ committee.committee.

Insolvency of Corporate Insolvency of Corporate GroupsGroupsIn insolvency proceedings involving a In insolvency proceedings involving a

corporate group, are the proceedings corporate group, are the proceedings by the parent and its subsidiaries by the parent and its subsidiaries combined for administrative combined for administrative purposes? May the assets and purposes? May the assets and liabilities of the companies be pooled liabilities of the companies be pooled for distribution purposes? May assets for distribution purposes? May assets be transferred from an be transferred from an administration in your country to an administration in your country to an administration in another country?administration in another country?

Insolvency of Corporate Insolvency of Corporate GroupsGroupsWith respect to rehabilitation, a With respect to rehabilitation, a group of group of

debtors debtors may jointly file a petition for may jointly file a petition for rehabilitation (FRIA section 12). Section 4(n) rehabilitation (FRIA section 12). Section 4(n) of the FRIA specifically defines a group of of the FRIA specifically defines a group of debtors as strictly referring to any of the debtors as strictly referring to any of the following:following:• • corporations that are financially related to corporations that are financially related to one another as parent corporations, one another as parent corporations, subsidiaries or affiliates;subsidiaries or affiliates;• • partnerships that are owned more than 50 partnerships that are owned more than 50 per cent by the same person; orper cent by the same person; or• • single proprietorships that are owned by single proprietorships that are owned by the same person.the same person.

Insolvency of Corporate Insolvency of Corporate GroupsGroupsThe petition for rehabilitation may The petition for rehabilitation may

be filed by a group of debtors when be filed by a group of debtors when one or more of its members foresee one or more of its members foresee the impossibility of meeting debts the impossibility of meeting debts when they respectively fall due, and when they respectively fall due, and the financial distress would be likely the financial distress would be likely to adversely affect the financial to adversely affect the financial condition and/or operations of the condition and/or operations of the other members of the group and/or other members of the group and/or the participation of the other the participation of the other members of the group is essential members of the group is essential under the terms and conditions of under the terms and conditions of the proposed rehabilitation plan the proposed rehabilitation plan (FRIA section 12).(FRIA section 12).

As a general rule, the debtor’s assets As a general rule, the debtor’s assets and liabilities cannot be commingled or and liabilities cannot be commingled or aggregated with those of another entity aggregated with those of another entity (FRIA section 7). However, the (FRIA section 7). However, the commingling or aggregation of assets is commingling or aggregation of assets is permitted if the other entity is a related permitted if the other entity is a related enterprise which is directly or indirectly enterprise which is directly or indirectly owned or controlled by the same owned or controlled by the same interests (FRIA section 7). The interests (FRIA section 7). The commingling and aggregation must commingling and aggregation must satisfy the following requisites:satisfy the following requisites:• • there was commingling in fact of there was commingling in fact of assets and liabilities of the debtor and assets and liabilities of the debtor and the related enterprise prior to the the related enterprise prior to the commencement of the proceedings;commencement of the proceedings;

the debtor and the related enterprise the debtor and the related enterprise have common creditors and it will be have common creditors and it will be more convenient to treat them more convenient to treat them together rather than separately;together rather than separately;

• • the related enterprise voluntarily the related enterprise voluntarily accedes to join the debtor as party accedes to join the debtor as party petitioner and to commingle its assets petitioner and to commingle its assets and liabilities with the debtor’s; andand liabilities with the debtor’s; and

• • the consolidation of assets and the consolidation of assets and liabilities of the debtor and the related liabilities of the debtor and the related enterprise is beneficial to all concerned enterprise is beneficial to all concerned and promotes the objectives of and promotes the objectives of rehabilitation (FRIA section 7).rehabilitation (FRIA section 7).

The FRIA does not expressly provide for The FRIA does not expressly provide for the transfer of assets from an the transfer of assets from an administration in this jurisdiction to an administration in this jurisdiction to an administration in another jurisdictionadministration in another jurisdiction. It . It should be noted, however, that the UNCITRAL should be noted, however, that the UNCITRAL Model Law on Cross-border Insolvency has Model Law on Cross-border Insolvency has been adopted as part of the FRIA (FRIA section been adopted as part of the FRIA (FRIA section 139). Furthermore, section 141(d) of the FRIA 139). Furthermore, section 141(d) of the FRIA states that the states that the court may issue an order court may issue an order requiring the surrender of property of a requiring the surrender of property of a foreign entity located in this jurisdiction foreign entity located in this jurisdiction to its foreign representative, in relation to its foreign representative, in relation to an insolvency or rehabilitation to an insolvency or rehabilitation proceeding in another jurisdictionproceeding in another jurisdiction..

With respect to liquidation, the FRIA does not With respect to liquidation, the FRIA does not expressly provide for the filing of a petition for expressly provide for the filing of a petition for liquidation by a group of debtors.liquidation by a group of debtors.

Modifying creditors’ rightsModifying creditors’ rights

May the court change the rank of a May the court change the rank of a creditor’s claim? If so, what are the creditor’s claim? If so, what are the grounds for doing so and how grounds for doing so and how frequently does this occur?frequently does this occur?Generally, the court cannot change the Generally, the court cannot change the priority of claims in rehabilitation or priority of claims in rehabilitation or liquidation. This can only be done through liquidation. This can only be done through a waiver of preference by the creditor. In a waiver of preference by the creditor. In rehabilitation cases, however, the priority rehabilitation cases, however, the priority of claims may be modified through of claims may be modified through confirmation of a rehabilitation plan which confirmation of a rehabilitation plan which binds the debtor and all participating binds the debtor and all participating creditors (FRIAcreditors (FRIAsection 69section 69).).

Modifying creditors’ Modifying creditors’ rightsrights

While generally the rehabilitation plan While generally the rehabilitation plan requires approval of creditors (holding requires approval of creditors (holding more than 50 per cent of the total more than 50 per cent of the total claims), the court can nonetheless claims), the court can nonetheless confirm the rehabilitation plan (despite confirm the rehabilitation plan (despite creditor rejection) if all of the following creditor rejection) if all of the following circumstances are present:circumstances are present:• • the rehabilitation plan complies with the rehabilitation plan complies with the requirements specified in the FRIA;the requirements specified in the FRIA;• • the rehabilitation receiver recommends the rehabilitation receiver recommends the confirmation of the rehabilitation the confirmation of the rehabilitation plan;plan;

Modifying creditors’ rightsModifying creditors’ rightsthe shareholders, owners or partners of the shareholders, owners or partners of

the juridical debtor lose at least their the juridical debtor lose at least their controlling interest as a result of the controlling interest as a result of the rehabilitation plan; andrehabilitation plan; and

• • the rehabilitation plan would likely the rehabilitation plan would likely provide the objecting class of creditors provide the objecting class of creditors with compensation which has a net with compensation which has a net present value greater than that which present value greater than that which they would have received if the debtor they would have received if the debtor were under liquidation (FRIA section were under liquidation (FRIA section 64).64).

PRIORITY CLAIMSPRIORITY CLAIMS

Apart from employee-Apart from employee-related claims, what are the related claims, what are the major privileged and major privileged and priority claims in priority claims in liquidations and liquidations and reorganisations? Which reorganisations? Which have priority over secured have priority over secured creditors?creditors?Philippine law classifies credits Philippine law classifies credits into three general categories, into three general categories, namely:namely:• • special preferred credits (Civil special preferred credits (Civil Code articles 2241 and 2242);Code articles 2241 and 2242);• • ordinary preferred credits ordinary preferred credits (Civil Code article 2244); and(Civil Code article 2244); and• • common credits (Civil Code common credits (Civil Code article 2245).article 2245).

The special and ordinary credits are the The special and ordinary credits are the major privileged and priority claims major privileged and priority claims in liquidations and reorganisationsin liquidations and reorganisations (FRIA section 133). The (FRIA section 133). The special special preferred credits preferred credits are the are the highest highest priority claims that attach as liens or priority claims that attach as liens or encumbrances on the specific encumbrances on the specific moveable or immoveable property to moveable or immoveable property to which they relatewhich they relate. Moreover, they are . Moreover, they are considered as ‘mortgages or pledges of considered as ‘mortgages or pledges of real or personal property, or liens within real or personal property, or liens within the purview of legal provisions governing the purview of legal provisions governing insolvency’ (Civil Code article 2243).insolvency’ (Civil Code article 2243).

With reference to specific moveable With reference to specific moveable property, they are the following:property, they are the following:

• • duties, taxes and fees due thereon to the duties, taxes and fees due thereon to the state or any subdivision thereof;state or any subdivision thereof;

• • claims arising from misappropriation, claims arising from misappropriation, breach of trust, or malfeasance by public breach of trust, or malfeasance by public officials committed in the performance of officials committed in the performance of their duties, on the movables, money or their duties, on the movables, money or securities obtained by them;securities obtained by them;

• • claims for the unpaid price of movables sold, claims for the unpaid price of movables sold, on said movables, so long as they are in the on said movables, so long as they are in the possession of the debtor, up to the value of possession of the debtor, up to the value of the same; and if the moveable has been resold the same; and if the moveable has been resold by the debtor and the price is still unpaid, the by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is lien may be enforced on the price; this right is not lost by the immobilisation of the thing by not lost by the immobilisation of the thing by destination, provided it has not lost its form, destination, provided it has not lost its form, substance and identity; neither is the right lost substance and identity; neither is the right lost by the sale of the thing together with other by the sale of the thing together with other property for a lump sum, when the price property for a lump sum, when the price thereof can be determined proportionally;thereof can be determined proportionally;credits guaranteed with a pledge so long as credits guaranteed with a pledge so long as the things pledged are in the hands of the the things pledged are in the hands of the creditor, or those guaranteed by a chattel creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgage, upon the things pledged or mortgaged, up to the value thereof;mortgaged, up to the value thereof;

• • credits for the making, repair, credits for the making, repair, safekeeping or preservation of safekeeping or preservation of personal property, on the moveable personal property, on the moveable thus made, repaired, kept or thus made, repaired, kept or possessed;possessed;claims for labourers’ wages, on the claims for labourers’ wages, on the goods manufactured or the work goods manufactured or the work done;done;

• • for expenses of salvage, upon the for expenses of salvage, upon the goods salvagedgoods salvaged;;

credits between the landlord and the tenant, credits between the landlord and the tenant, arising from the contract of tenancy on arising from the contract of tenancy on shares, on the share of each in the fruits or shares, on the share of each in the fruits or harvest;harvest;

• • credits for transport, upon the goods carried, credits for transport, upon the goods carried, for the price of the contract and incidental for the price of the contract and incidental expenses, until their delivery and for 30 days expenses, until their delivery and for 30 days thereafter;thereafter;

credits for lodging and supplies usually credits for lodging and supplies usually furnished to travellers by hotel keepers, on furnished to travellers by hotel keepers, on the moveables belonging to the guest as long the moveables belonging to the guest as long as such moveables are in the hotel, but not for as such moveables are in the hotel, but not for money loaned to the guests;money loaned to the guests;

• • credits between the landlord and the tenant, credits between the landlord and the tenant, arising from the contract of tenancy on shares, arising from the contract of tenancy on shares, on the share of each in the fruits or harvest;on the share of each in the fruits or harvest;credits for transport, upon the goods carried, credits for transport, upon the goods carried, for the price of the contract and incidental for the price of the contract and incidental expenses, until their delivery and for 30 days expenses, until their delivery and for 30 days thereafter;thereafter;• • credits for lodging and supplies usually credits for lodging and supplies usually furnished to travellers by hotel keepers, on the furnished to travellers by hotel keepers, on the movables belonging to the guest as long as such movables belonging to the guest as long as such movables are in the hotel, but not for money movables are in the hotel, but not for money loaned to the guests credits for seeds and loaned to the guests credits for seeds and expenses for cultivation and harvestexpenses for cultivation and harvestadvanced to the debtor, upon the fruits advanced to the debtor, upon the fruits harvested;harvested;

• • credits for rent for one year, upon credits for rent for one year, upon the personal property of the lessee the personal property of the lessee existing on the immoveable leased existing on the immoveable leased and on the fruits of the same, but not and on the fruits of the same, but not on money or instruments of credit; on money or instruments of credit; and and

••claims in favour of the depositor if claims in favour of the depositor if the depositary has wrongfully sold the the depositary has wrongfully sold the thing deposited, upon the price of the thing deposited, upon the price of the sale (Civil Code article 2241).;sale (Civil Code article 2241).;

With respect to specific immoveable With respect to specific immoveable property and real rights, they are the property and real rights, they are the following:following:• • taxes due upon the land or building;taxes due upon the land or building;• • for the unpaid price of real property sold, for the unpaid price of real property sold, upon the immoveable sold;upon the immoveable sold;• • claims of labourers, masons, mechanics claims of labourers, masons, mechanics and other workmen, as well as of architects, and other workmen, as well as of architects, engineers and contractors, engaged in the engineers and contractors, engaged in the construction, reconstruction or repair of construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works, upon said buildings, canals or other works;buildings, canals or other works;• • claims of furnishers of materials used in claims of furnishers of materials used in the construction, reconstruction, or repair of the construction, reconstruction, or repair of buildings, canals or other works, upon said buildings, canals or other works, upon said buildings, canals or other works;buildings, canals or other works;

mortgage credits recorded in the registry of mortgage credits recorded in the registry of property, upon the real estate mortgaged;property, upon the real estate mortgaged;

• • expenses for the preservation or improvement expenses for the preservation or improvement of real property when the law authorises of real property when the law authorises reimbursement, upon the immoveable reimbursement, upon the immoveable preserved or improved;preserved or improved;

• • credits annotated in the registry of property, in credits annotated in the registry of property, in virtue of a judicial order, by attachments or virtue of a judicial order, by attachments or executions, upon the property affected, and executions, upon the property affected, and only as to later credits claims of co-heirs for only as to later credits claims of co-heirs for warranty in the partition of an immoveable warranty in the partition of an immoveable among them, upon the real property thus among them, upon the real property thus divided;divided;

• • claims of donors or real property for pecuniary claims of donors or real property for pecuniary charges or other conditions imposed upon the charges or other conditions imposed upon the donee, upon the Immoveable donated; anddonee, upon the Immoveable donated; and

• • credits of insurers, upon the property insured, credits of insurers, upon the property insured, for the insurance premium for two years (Civil for the insurance premium for two years (Civil Code article 2242).Code article 2242).

The enumeration above does not establish an The enumeration above does not establish an order of preference. Such claims concur and are order of preference. Such claims concur and are satisfied on a prorated basis (Civil Code article satisfied on a prorated basis (Civil Code article 2247). 2247).

For special preferred credits, there is a two-tier For special preferred credits, there is a two-tier order of preference: the first tier includes only order of preference: the first tier includes only taxes, duties and fees due to the Philippine taxes, duties and fees due to the Philippine state, and the second tier includes all other state, and the second tier includes all other special preferred credits which are to be special preferred credits which are to be satisfied, pari passu and pro rata, out of any satisfied, pari passu and pro rata, out of any residual value of the specific property (ie, net of residual value of the specific property (ie, net of the taxes, duties and fees due to the Philippine the taxes, duties and fees due to the Philippine state) (state) (Republic v PeraltaRepublic v Peralta, GR No. 56568, 20 , GR No. 56568, 20 May 1987; May 1987; Development Bank of the Philippines Development Bank of the Philippines v National Labor Relations Commissionv National Labor Relations Commission, GR No. , GR No. 86227, 19 January 1994). 86227, 19 January 1994).

Thus only taxes, duties and fees due to Thus only taxes, duties and fees due to the Philippine state will have priority the Philippine state will have priority over secured creditors. As a special over secured creditors. As a special

case, if the debtor is a securities case, if the debtor is a securities market participant, trade-related market participant, trade-related

claims of its customers are deemed to claims of its customers are deemed to have absolute priority over all other have absolute priority over all other

claims of whatever nature or kind in so claims of whatever nature or kind in so far as trade-related assets are far as trade-related assets are concerned (FRIA section 136).concerned (FRIA section 136).

Unlike special preferred credits, ordinary Unlike special preferred credits, ordinary preferred credits create no liens that attach preferred credits create no liens that attach to determinate property. Ordinary preferred to determinate property. Ordinary preferred credits only create rights in favour of certain credits only create rights in favour of certain creditors out of the ‘free property’ of the creditors out of the ‘free property’ of the insolvent debtor (ie, the residual value of the insolvent debtor (ie, the residual value of the debtor’s assets when the special preferred debtor’s assets when the special preferred credits are satisfied) in the order below:credits are satisfied) in the order below:

• • credits for services rendered the insolvent credits for services rendered the insolvent debtor by employees, labourers or debtor by employees, labourers or household helpers for one year (as modified household helpers for one year (as modified by article 110 of the Labour Code or by article 110 of the Labour Code or Presidential Decree No. 442; Presidential Decree No. 442; Republic v Republic v PeraltaPeralta););

proper funeral expenses for the debtor, or children under his proper funeral expenses for the debtor, or children under his or her parental authority who have no property of their own, or her parental authority who have no property of their own, when approved by the court;when approved by the court;

• • expenses during the last illness of the debtor or of his or herexpenses during the last illness of the debtor or of his or her

spouse and children under his or her parental authority, if theyspouse and children under his or her parental authority, if they

have no property of their own;have no property of their own;

• • compensation due the labourers or their dependants under compensation due the labourers or their dependants under laws providing for indemnity for damages in cases of labour laws providing for indemnity for damages in cases of labour accident, or illness resulting from the nature of the accident, or illness resulting from the nature of the employment;employment;

• • credits and advancements made to the debtor for support ofcredits and advancements made to the debtor for support of

himself or herself, and family, during the last year preceding himself or herself, and family, during the last year preceding thethe

insolvency;insolvency;

• • support during the insolvency proceedings, and for three support during the insolvency proceedings, and for three months thereafter;months thereafter;

fines and civil indemnification arising fines and civil indemnification arising from a criminal offence;from a criminal offence;

• • legal expenses, and expenses legal expenses, and expenses incurred in the administration of the incurred in the administration of the insolvent’s estate for the common insolvent’s estate for the common interest of the creditors, when interest of the creditors, when properly authorised and approved by properly authorised and approved by the court;the court;

• • taxes and assessments due to the taxes and assessments due to the national government, othernational government, other

than those mentioned in the Civil Code than those mentioned in the Civil Code articles 2241(1) and 2242(1) (on articles 2241(1) and 2242(1) (on special preferred credits);special preferred credits);

• • taxes and assessments due to any taxes and assessments due to any province, other than those referred to province, other than those referred to in the Civil Code articles 2241(1) and in the Civil Code articles 2241(1) and 2242(1) (on special preferred credits);2242(1) (on special preferred credits);• • taxes and assessments due to any taxes and assessments due to any city or municipality, other than those city or municipality, other than those indicated in the Civil Code articles indicated in the Civil Code articles 2241(1) and 2242(1) (on special 2241(1) and 2242(1) (on special preferred credits);preferred credits);• • damages for death or personal damages for death or personal injuries caused by a quasi-delict;injuries caused by a quasi-delict;• • gifts due to public and private gifts due to public and private institutions of charity or beneficence;institutions of charity or beneficence;

AndAndcredits that, without special privilege, credits that, without special privilege, appear in a public instrument or in a final appear in a public instrument or in a final judgment, if they have been the subject judgment, if they have been the subject of litigation. These credits shall have of litigation. These credits shall have preference among themselves in the preference among themselves in the order of priority of the dates of the order of priority of the dates of the instruments and of the judgments, instruments and of the judgments, respectively.respectively.Common credits are the ones that do Common credits are the ones that do not enjoy preference and are satisfied not enjoy preference and are satisfied pro rata regardless of dates (Civil Code pro rata regardless of dates (Civil Code article 2251 in relation to article 2245).article 2251 in relation to article 2245).

Employment-related liabilities in Employment-related liabilities in restructuringsrestructuringsWhat employee claims arise where What employee claims arise where employees are terminated during a employees are terminated during a restructuring or liquidation? What are the restructuring or liquidation? What are the procedures for termination?procedures for termination?When employees are terminated in restructurings When employees are terminated in restructurings that are not due to ‘serious business losses or that are not due to ‘serious business losses or financial reverses’, the terminated employees are financial reverses’, the terminated employees are entitled to separation pay equivalent to one entitled to separation pay equivalent to one month’s pay or at least one-half month’s pay for month’s pay or at least one-half month’s pay for every year of service, whichever is higher (Labor every year of service, whichever is higher (Labor Code section 283). Code section 283). However, if the termination However, if the termination is due to the employer’s insolvency or is due to the employer’s insolvency or liquidation (ie, due to serious business liquidation (ie, due to serious business losses or financial reverses), the terminated losses or financial reverses), the terminated employees are not entitled to separation payemployees are not entitled to separation pay ((Republic v PeraltaRepublic v Peralta; ; Cama et al v Joni’s Food Cama et al v Joni’s Food Services IncServices Inc, GR No. 153021, 10 March 2004). , GR No. 153021, 10 March 2004).

Liabilities that survive Liabilities that survive insolvency insolvency

proceedingsproceedings

Do any liabilities of a debtor survive Do any liabilities of a debtor survive an insolvency or a reorganisation?an insolvency or a reorganisation?For a juridical debtor, no liabilities survive For a juridical debtor, no liabilities survive because the insolvent partnership or because the insolvent partnership or corporation is corporation is automatically dissolved automatically dissolved upon liquidation upon liquidation (FRIA sections 113(a), (FRIA sections 113(a), 134 and 135). Claims that survive in 134 and 135). Claims that survive in rehabilitation proceedings due to failure rehabilitation proceedings due to failure of rehabilitation or dismissal of the of rehabilitation or dismissal of the petition for rehabilitation are petition for rehabilitation are automatically carried over to liquidation automatically carried over to liquidation proceedings and are therefore proceedings and are therefore extinguished upon termination of the extinguished upon termination of the liquidation proceedings (FRIA section 75)liquidation proceedings (FRIA section 75)

DISTRIBUTIONDISTRIBUTION

How and when are distributions made to How and when are distributions made to creditors in liquidations and reorganisations?creditors in liquidations and reorganisations?Distributions are made to creditors pursuant Distributions are made to creditors pursuant to a rehabilitation or liquidation plan to a rehabilitation or liquidation plan confirmed by the court or a duly approved out-confirmed by the court or a duly approved out-of court restructuring agreement (approved by of court restructuring agreement (approved by the debtor and the creditors).the debtor and the creditors).

Under the FRIA, the court is given one year Under the FRIA, the court is given one year from the filing of the petition to confirm a from the filing of the petition to confirm a court-supervised rehabilitation plan (section court-supervised rehabilitation plan (section 72) and 120 days for pre-negotiated 72) and 120 days for pre-negotiated rehabilitation (section 81); no period is rehabilitation (section 81); no period is mentioned under the statute for the mentioned under the statute for the approval of the liquidation plan. Once the approval of the liquidation plan. Once the rehabilitation or liquidation plan is confirmed rehabilitation or liquidation plan is confirmed or approved, the distribution may proceed in or approved, the distribution may proceed in accordance thereto.accordance thereto.

During the employer’s bankruptcy or During the employer’s bankruptcy or liquidation, employee claims for wages liquidation, employee claims for wages and other monetary claims enjoy the and other monetary claims enjoy the highest priority as an ordinaryhighest priority as an ordinarypreferred credit (see question 29; preferred credit (see question 29; Republic v PeraltaRepublic v Peralta).).Termination is achieved by serving a Termination is achieved by serving a written notice both on the workers and written notice both on the workers and the Philippine Department of Labor the Philippine Department of Labor and Employmentand Employmentat least one month before the intended at least one month before the intended date of termination.date of termination.

Transactions that may be annulledTransactions that may be annulledWhat transactions can be annulled or set What transactions can be annulled or set aside in liquidations and reorganisations aside in liquidations and reorganisations and what are the grounds? What is the and what are the grounds? What is the result of a transaction being annulled?result of a transaction being annulled?Transactions before or during Transactions before or during rehabilitation or liquidation proceedings rehabilitation or liquidation proceedings which are entered into in fraud of creditors which are entered into in fraud of creditors may be rescinded or declared null and void may be rescinded or declared null and void (FRIA, sections 52, 58 and 127; Civil Code (FRIA, sections 52, 58 and 127; Civil Code articles 1177, 1381(3) and 1382). There is a articles 1177, 1381(3) and 1382). There is a disputable presumption that the disputable presumption that the transactions were done with intent to transactions were done with intent to defraud creditors if committed as follows:defraud creditors if committed as follows:

provide unreasonably inadequate provide unreasonably inadequate consideration to the debtor and are consideration to the debtor and are executed within 90 days prior to the executed within 90 days prior to the commencement date of the commencement date of the rehabilitation or liquidation;rehabilitation or liquidation;

• • involve an accelerated payment of a involve an accelerated payment of a claim to a creditor within 90 days prior claim to a creditor within 90 days prior to the commencement date of the to the commencement date of the rehabilitation or liquidation;rehabilitation or liquidation;

• • provide security or additional security provide security or additional security executed within 90 days prior to the executed within 90 days prior to the commencement date of the commencement date of the rehabilitation orrehabilitation or

liquidation;liquidation;

• • involve creditors, where a creditor involve creditors, where a creditor obtained, or received the benefit of, obtained, or received the benefit of, more than its pro rata share in the more than its pro rata share in the assets of the debtor, executed at a assets of the debtor, executed at a time when the debtor was insolvent; ortime when the debtor was insolvent; or

• • are intended to defeat, delay or are intended to defeat, delay or hinder the ability of the creditors to hinder the ability of the creditors to collect claims where the effect of the collect claims where the effect of the transaction is to put assets of the transaction is to put assets of the debtor beyond the reach of creditors or debtor beyond the reach of creditors or to otherwise prejudice the interests of to otherwise prejudice the interests of creditors (FRIA sections 58 and 127).creditors (FRIA sections 58 and 127).

Moreover, in rehabilitation proceedings, the Moreover, in rehabilitation proceedings, the court can rescind transactions entered into court can rescind transactions entered into after the Commencement of the after the Commencement of the rehabilitation if they are not in the ordinary rehabilitation if they are not in the ordinary course of business of the debtor (FRIA section course of business of the debtor (FRIA section 52).52).Rescission creates the obligation to return Rescission creates the obligation to return the things which were the object of the the things which were the object of the contract, together with their fruits, and the contract, together with their fruits, and the price with its interest. price with its interest. Rescission, however, Rescission, however, cannot take place when the things cannot take place when the things which are the object of the contract are which are the object of the contract are legally in the possession of third legally in the possession of third persons who did not act in bad faith. In persons who did not act in bad faith. In this case, indemnity for damages may this case, indemnity for damages may be demanded from the person causing be demanded from the person causing the loss the loss (Civil Code article 1385).(Civil Code article 1385).

Creditors’ EnforcementCreditors’ Enforcement

Are there processes by which some or all Are there processes by which some or all of the assets of a business may be seized of the assets of a business may be seized outside of court proceedings? How are outside of court proceedings? How are these processes carried out?these processes carried out?

Before rehabilitation or liquidation proceedings, Before rehabilitation or liquidation proceedings, if the debtor’s assets are encumbered and the if the debtor’s assets are encumbered and the security contract (eg, mortgage) provides for an security contract (eg, mortgage) provides for an extrajudicial foreclosure (coupled with a special extrajudicial foreclosure (coupled with a special power of attorney in favour of the creditor for power of attorney in favour of the creditor for the purpose of foreclosure), the creditorthe purpose of foreclosure), the creditor

may take physical possession of the may take physical possession of the encumbered assets and foreclose them without encumbered assets and foreclose them without court proceedings. court proceedings.

Under Philippine law, the contracting parties Under Philippine law, the contracting parties can stipulate in their contract that in the case can stipulate in their contract that in the case of default or non-payment of the debt the of default or non-payment of the debt the creditor may foreclose by selling the asset at a creditor may foreclose by selling the asset at a private sale, without previous advertisement or private sale, without previous advertisement or notice for the purpose of applying the proceeds notice for the purpose of applying the proceeds thereof to the payment of the debt (thereof to the payment of the debt (Philippine Philippine National Bank v Manila Investment & National Bank v Manila Investment & Construction IncConstruction Inc, GR No. L-27132, 29 April , GR No. L-27132, 29 April 1971; 1971; Philippine National Bank v Philippine National Bank v De PoliDe Poli, GR , GR No. 19026, 3 April 1923).No. 19026, 3 April 1923).

However, during rehabilitation or However, during rehabilitation or liquidation, foreclosures are stayed liquidation, foreclosures are stayed unless lifted by the court in unless lifted by the court in rehabilitation proceedings (FRIA rehabilitation proceedings (FRIA section 21) or after the expiry of 120 section 21) or after the expiry of 120 days from the liquidation order in days from the liquidation order in liquidation proceedings (FRIA section liquidation proceedings (FRIA section 113(e)). Once the stay is lifted or has 113(e)). Once the stay is lifted or has expired, creditors can seize the expired, creditors can seize the encumbered assets for the purposes of encumbered assets for the purposes of foreclosure outside of court foreclosure outside of court proceedings.proceedings.

Corporate Corporate ProceduresProcedures

Are there corporate procedures for the Are there corporate procedures for the liquidation or dissolution of a corporation? How liquidation or dissolution of a corporation? How do such processes contrast with bankruptcy do such processes contrast with bankruptcy proceedings?proceedings?

Yes. Under the Corporation Code, two sets of procedure Yes. Under the Corporation Code, two sets of procedure governgovern

voluntary dissolution voluntary dissolution depending on the effect on depending on the effect on creditors. If nocreditors. If no

creditors are prejudiced by the dissolution, it may be creditors are prejudiced by the dissolution, it may be done through a majority vote of the board of directors done through a majority vote of the board of directors of the corporation, and a stockholders’ resolution of the corporation, and a stockholders’ resolution authorising the dissolution adopted by two-thirds of the authorising the dissolution adopted by two-thirds of the outstanding capital stock. A copy of the resolution outstanding capital stock. A copy of the resolution (certified by the board of directors and countersigned (certified by the board of directors and countersigned by the secretary of the corporation) is sent to the by the secretary of the corporation) is sent to the Philippine Securities and Exchange Commission (SEC). Philippine Securities and Exchange Commission (SEC). The SEC will then issue the certificate of dissolution The SEC will then issue the certificate of dissolution (Corporation Code section 118).(Corporation Code section 118).

Corporate ProceduresCorporate ProceduresIf creditors are affected, voluntary If creditors are affected, voluntary dissolution must be done through a dissolution must be done through a petition filed with the SEC. The petition filed with the SEC. The petition is signed by a majority of the petition is signed by a majority of the board of directors or other officers board of directors or other officers having the management of its affairs, having the management of its affairs, verified by its president or secretary verified by its president or secretary or one of its directors or trustees, or one of its directors or trustees, and shall set forth all claims and and shall set forth all claims and demands against it, and state that its demands against it, and state that its dissolution was resolved upon by the dissolution was resolved upon by the two-thirds affirmative vote of the two-thirds affirmative vote of the stockholders of the corporation.stockholders of the corporation.

Corporate ProceduresCorporate ProceduresThe SEC issues an order reciting the purpose of The SEC issues an order reciting the purpose of the petition and sets a period to receive the petition and sets a period to receive objections from any interested party. Before objections from any interested party. Before such hearing, the SEC order is published at least such hearing, the SEC order is published at least once a week foronce a week for

three consecutive weeks in a newspaper of three consecutive weeks in a newspaper of general circulation in the municipality or city general circulation in the municipality or city where the principal office of the corporation is where the principal office of the corporation is situated, or if there be no such newspaper, then situated, or if there be no such newspaper, then in a newspaper ofin a newspaper of

general circulation in the Philippines, and a general circulation in the Philippines, and a similar copy shall be posted for three similar copy shall be posted for three consecutive weeks in three public places in consecutive weeks in three public places in such municipality or city.such municipality or city.

Corporate ProceduresCorporate Procedures

Upon five days’ notice, given after the Upon five days’ notice, given after the date on which the right to file date on which the right to file objections as fixed in the order has objections as fixed in the order has expired, the SEC shall proceed to hear expired, the SEC shall proceed to hear the petition and try any issue made by the petition and try any issue made by the objections filed;the objections filed;

and if no such objection is sufficient, and if no such objection is sufficient, and the material allegations of the and the material allegations of the petition are true, the SEC shall render petition are true, the SEC shall render judgment dissolving the corporation judgment dissolving the corporation and directing such disposition of its and directing such disposition of its assets, and may appoint a receiver to assets, and may appoint a receiver to collect such assets and pay the debts collect such assets and pay the debts of the of the corporation (Corporation Code corporation (Corporation Code section 118).section 118).

Corporate ProceduresCorporate ProceduresVoluntary dissolution may also be Voluntary dissolution may also be done by shortening of the corporate done by shortening of the corporate term. This merely involves amending term. This merely involves amending the articles of incorporation to the articles of incorporation to shorten the corporate term. A copy of shorten the corporate term. A copy of the amended articles of incorporation the amended articles of incorporation is submitted to the SEC. Upon is submitted to the SEC. Upon approval of the amended articles of approval of the amended articles of incorporation, the corporation shall incorporation, the corporation shall be deemed dissolved without any be deemed dissolved without any further proceedings (Corporation further proceedings (Corporation Code sectionCode section120).120).

Corporate ProceduresCorporate ProceduresThus, while rehabilitation and Thus, while rehabilitation and liquidation are under the liquidation are under the jurisdiction of the courts (FRIA jurisdiction of the courts (FRIA section 4(g)), corporate liquidation section 4(g)), corporate liquidation is under the jurisdiction of the SEC is under the jurisdiction of the SEC (Corporation Code, sections 117 to (Corporation Code, sections 117 to 122;122;Presidential Decree No. 902-A). Presidential Decree No. 902-A). An important difference between An important difference between the two is the automatic stay of the two is the automatic stay of claims in the rehabilitation or claims in the rehabilitation or liquidation, which is not present in liquidation, which is not present in corporate liquidation.corporate liquidation.

Conclusion of CasesConclusion of CasesHow are liquidation and How are liquidation and reorganisation cases formally reorganisation cases formally concluded? Rehabilitation concluded? Rehabilitation proceedings are formally proceedings are formally concluded through a court concluded through a court order (initiated by motion by order (initiated by motion by any stockholder or the any stockholder or the rehabilitation receiver), either rehabilitation receiver), either declaring a successful declaring a successful implementation of the implementation of the rehabilitation plan or a failure rehabilitation plan or a failure of rehabilitation (FRIA section of rehabilitation (FRIA section 74).74).

Conclusion of CasesConclusion of Cases

Liquidation proceedings are formally Liquidation proceedings are formally concluded through a court order concluded through a court order terminating the proceedings upon:terminating the proceedings upon:• • determination that the liquidation has determination that the liquidation has been completed accordingbeen completed accordingto the FRIA and other applicable laws; andto the FRIA and other applicable laws; and• • evidence showing that the juridical evidence showing that the juridical debtor has been removeddebtor has been removedfrom the registry of legal entities in the from the registry of legal entities in the Philippine Securities andPhilippine Securities andExchange Commission (FRIA sections 134 Exchange Commission (FRIA sections 134 to 135).to 135).

International casesInternational casesWhat recognition or relief is available What recognition or relief is available concerning an insolvency proceeding concerning an insolvency proceeding in another country? How are foreign in another country? How are foreign creditors dealt with in liquidations creditors dealt with in liquidations and reorganisations? Are foreign and reorganisations? Are foreign judgments or orders recognised and judgments or orders recognised and in what circumstances? Is your in what circumstances? Is your country a signatory to a treaty on country a signatory to a treaty on international insolvency or on the international insolvency or on the recognition of foreign judgments? recognition of foreign judgments? Has the UNCITRAL Model Law on Has the UNCITRAL Model Law on Cross-Border Insolvency been Cross-Border Insolvency been adopted or is it under consideration adopted or is it under consideration in your country?in your country?

In cross-border insolvency In cross-border insolvency proceedings, insolvency courts in the proceedings, insolvency courts in the Philippines can grant any necessary Philippines can grant any necessary relief including those granted under relief including those granted under the UNCITRAL Model Law on Cross-the UNCITRAL Model Law on Cross-Border Insolvency and orders:Border Insolvency and orders:• • suspending any action to enforce suspending any action to enforce claims against the entity or otherwise claims against the entity or otherwise seize or foreclose on property of the seize or foreclose on property of the foreign entity located in the foreign entity located in the Philippines; orPhilippines; or• • requiring the surrender of property requiring the surrender of property of the foreign entity to the foreign of the foreign entity to the foreign representative (FRIA section 141).representative (FRIA section 141).

The FRIA expressly adopts the The FRIA expressly adopts the UNCITRAL Model Law, subject only to UNCITRAL Model Law, subject only to section 136 of the FRIA (on liquidation section 136 of the FRIA (on liquidation of a securities market participant) of a securities market participant) and the rules of procedure that may and the rules of procedure that may be adopted by the Supreme Court be adopted by the Supreme Court (FRIA section 139). Accordingly, the (FRIA section 139). Accordingly, the treatment of foreign creditors in treatment of foreign creditors in liquidations and reorganisations is liquidations and reorganisations is based on the model law, which based on the model law, which provides them direct access to provides them direct access to Philippine courts (UNCITRAL Model Philippine courts (UNCITRAL Model Law chapter II).Law chapter II).

A foreign court judgment or final A foreign court judgment or final order (foreign judgment) may be order (foreign judgment) may be enforced in the Philippines enforced in the Philippines through a petition to be filed with through a petition to be filed with the appropriate regional trial the appropriate regional trial court with territorial jurisdiction court with territorial jurisdiction over either the plaintiff or the over either the plaintiff or the defendant, at the election of the defendant, at the election of the plaintiff.plaintiff.

The effect of a judgment or final order of a The effect of a judgment or final order of a tribunal of a foreign country, having tribunal of a foreign country, having jurisdiction to render the judgment or final jurisdiction to render the judgment or final order is as follows:order is as follows:• • in case of a judgment or final order upon in case of a judgment or final order upon a specific object, the judgment or final a specific object, the judgment or final order is conclusive upon the title to the order is conclusive upon the title to the object; andobject; and• • in case of a judgment or final order in case of a judgment or final order against a person, the judgment or final against a person, the judgment or final order is presumptive evidence of a right as order is presumptive evidence of a right as between the parties and their successors between the parties and their successors in interest by a subsequent title.in interest by a subsequent title.

The foreign judgment may be repelled by evidence The foreign judgment may be repelled by evidence of lack of jurisdiction, want of notice to the party, of lack of jurisdiction, want of notice to the party, collusion, fraud, or clear mistake of law or fact. collusion, fraud, or clear mistake of law or fact. (Rule 39, section 48 of the 1997 Rules of Civil (Rule 39, section 48 of the 1997 Rules of Civil Procedure) In addition, the defendant may claim Procedure) In addition, the defendant may claim that the foreign judgment is contrary to morals that the foreign judgment is contrary to morals and public policy. and public policy. To date, the Philippines is not signatory to any To date, the Philippines is not signatory to any other treaty on international insolvency or on the other treaty on international insolvency or on the recognition of foreign judgments. Nonetheless, recognition of foreign judgments. Nonetheless, Philippine case law recognises that while there is Philippine case law recognises that while there is no obligatory rule derived from treaties or no obligatory rule derived from treaties or conventions that require the Philippines to conventions that require the Philippines to recognise foreign judgments, or allow the recognise foreign judgments, or allow the enforcement thereof, these are recognised enforcement thereof, these are recognised pursuant to generally accepted principles of pursuant to generally accepted principles of international law, which under the Constitution international law, which under the Constitution form part of Philippine laws. (See, form part of Philippine laws. (See, Mijares v JavierMijares v Javier, , GR No. 139325, 12 April,GR No. 139325, 12 April,

Cross-border cooperationCross-border cooperationDoes your country’s system allow Does your country’s system allow cooperation between domestic and foreign cooperation between domestic and foreign courts and domestic and foreign insolvency courts and domestic and foreign insolvency administrators in cross-border insolvencies administrators in cross-border insolvencies and restructurings? Have courts in your and restructurings? Have courts in your country refused to recognise foreign country refused to recognise foreign proceedings or to cooperate with foreign proceedings or to cooperate with foreign courts?courts?

The FRIA does not prohibit cooperation The FRIA does not prohibit cooperation between domestic and foreign courts and between domestic and foreign courts and domestic and foreign insolvency domestic and foreign insolvency administrators in cross-border insolvencies administrators in cross-border insolvencies and restructurings. However, the FRIA and restructurings. However, the FRIA (which adopted the UNCITRAL Model Law) (which adopted the UNCITRAL Model Law) was only recently enacted in 2010. Thus, was only recently enacted in 2010. Thus, there are no known examples yet of such there are no known examples yet of such cooperation under the FRIA.cooperation under the FRIA.

Cross-border insolvency protocols and joint Cross-border insolvency protocols and joint court hearingscourt hearingsIn cross-border cases, have the courts in your In cross-border cases, have the courts in your country entered into cross-border insolvency country entered into cross-border insolvency protocols or other arrangements to coordinate protocols or other arrangements to coordinate proceedings with courts in other countries? proceedings with courts in other countries? Have courts in your country communicated or Have courts in your country communicated or held joint hearings with courts in other held joint hearings with courts in other countries in cross-border cases? If so, with countries in cross-border cases? If so, with which other countries?which other countries?We are not aware of any cross-border We are not aware of any cross-border insolvency protocols or other arrangements insolvency protocols or other arrangements that the Philippines may have entered into with that the Philippines may have entered into with other countries. We are also not aware of other countries. We are also not aware of Philippine courts communicating with or Philippine courts communicating with or holding joint hearings with courts in other holding joint hearings with courts in other countries in cross-border cases.countries in cross-border cases.

A good insolvency system could cushion the blow not A good insolvency system could cushion the blow not only to the financially distressed company, but to the only to the financially distressed company, but to the economy as a whole,”economy as a whole,”An insolvency law following global best An insolvency law following global best practices can help improve the country’s global practices can help improve the country’s global competiveness rankings,( citing annual reports competiveness rankings,( citing annual reports published by the World Economic Forum and published by the World Economic Forum and the Heritage Foundation’s Index of Economic the Heritage Foundation’s Index of Economic Freedom.) Freedom.) In those reports, the Philippines lagged behind In those reports, the Philippines lagged behind its regional peers when it came to insolvency-its regional peers when it came to insolvency-related areas. “While the Philippine economy related areas. “While the Philippine economy shows promise, we cannot escape these scores shows promise, we cannot escape these scores and ranks—all of which relate to, in one way or and ranks—all of which relate to, in one way or another, our country’s insolvency system,”. another, our country’s insolvency system,”. With FRIA, it is believed that we will conform With FRIA, it is believed that we will conform with international benchmarks, will pave the with international benchmarks, will pave the way for a new insolvency framework meant to way for a new insolvency framework meant to preserve “sustainable” business while preserve “sustainable” business while achieving the broader goals of raising the achieving the broader goals of raising the country’s competiveness amid unseen risks in country’s competiveness amid unseen risks in the global economy.the global economy.

Documents

History of Laws on Insolvency and FRIA