Financial Rehabilitation

and Insolvency Act

(FRIA); RA 10142
Part 1: Rehabilitation
Rehabilitation Defined
• It refers to the restoration of the debtor to a condition of successful
operation and solvency, if it shown that its continuance of operation is
economically feasible, and its creditors can recover by way of the
present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated.
Who are debtors?
1. Sole proprietorship;

2. Partnership;

3. Corporation; or

4. Individual debtor – natural person who is a resident and citizen of

the Philippines that has become insolvent as defined therein.
Who are debtors?
• The term debtor does not include banks, insurance companies, pre-
need companies, and national and local government agencies or units.

• Provided, That government financial institutions other than banks and

GOCC shall be governed by this Act, unless their special charter
provides otherwise.
Who are creditors?
• It refers to a natural or juridical person which has a claim against the
debtor that arose on or before the commencement date.
What is Claim?
• It refers to all claims or demands of whatever nature or character against
the debtor or its property, whether for money or otherwise, liquidated or
unliquidated, disputed or undisputed, including but not limited to;
(1) all claims of the government, whether national or local,
including taxes, tariffs, and custom duties;

(2) claims against directors and officers of the debtor arising

from acts done in the discharge of their functions falling within the
scope of their authority; Provided, xxx does not prohibit the creditors
or third parties from filing cases against the directors and officers
acting in their personal capacities.
What is Commencement Date?
• Commencement date – date which the court issues Commencement
Order, which shall be retroactive to the date of filing of the petition for
voluntary or involuntary proceedings.
Nature of Rehabilitation Proceedings
• The proceedings shall be in rem. Jurisdiction over all persons affected
by the proceedings is acquired upon publication of the notice of the
commencement of the proceedings and the commencement order or
any similar proceedings in one (1) newspaper of general circulation in
the Philippines for two (2) consecutive weeks.

• The proceedings shall be summary and non-adversarial in nature.

The court may decide matters on the basis of affidavits, counter
affidavits and other documentary evidence and conduct clarificatory
hearings, when necessary.
 Liability of Individual Debtor, Owner of a Sole
Proprietorship, Partners in a Partnership, or
Directors and Officers
• Double the value of the property sold, embezzled or disposed of or
double the amount of the transaction involved, whichever is higher to
be recovered for benefit or the debtor and the creditors, having notice
of commencement of the proceedings or having reason to believed that
proceedings are about to be commenced, or in contemplation of the
proceedings, willfully commit the following acts:
 Liability of Individual Debtor, Owner of a Sole
Proprietorship, Partners in a Partnership, or
Directors and Officers
1. Dispose or cause to be disposed of any property of the debtor other
than in the ordinary course of business or authorize or approve any
transaction in fraud of creditors or in a manner grossly
disadvantageous to the debtor and/or creditors; or

2. Conceal or authorize or approve the concealment, from the creditors,

or embezzles or misappropriates, any property of the debtor.
Types of Rehabilitation Proceedings
1. Court Supervised
a. Voluntary proceedings;
b. Involuntary proceedings.

2. Pre-negotiated Rehabilitation; and

3. Out of Court or Informal Restructuring Agreement or Rehabilitation

Plan (OCRA).
 Two-Pronged Purpose of Rehabilitation
Proceedings
• Rehabilitation proceedings have equitable and rehabilitative
purposes.

• On the one hand, they attempt to provide for the efficient and
equitable distribution of an insolvent debtor’s remaining assets to its
creditors; and

• On the other, to provide debtors with a “fresh start” by relieving them

of the weight of their outstanding debts and permitting them to
reorganize their affairs.
Court Supervised Rehabilitation
Voluntary Proceedings
• It may be initiated by an insolvent debtor or group of debtors by
filing an petition for rehabilitation with the court when: (1) one
or more of its members foresee the impossibility of meeting debts
when they respectively fall due, and (2) the financial distress would
likely adversely affect the financial condition and/or operations of
the other members if the group or the participation of the other
members of the group is essential under the terms and conditions of
the proposed Rehabilitation Plan.
Who are group of debtors?
• It refers to and can cover only:

(1) corporations that are financially related to one and another

as parent corporations, subsidiaries or affiliates;

(2) partnerships that are owned more than 50% by the same
person; and

(3) single proprietorship that are owned by the same person.

Court Supervised Rehabilitation
Voluntary Proceedings – it must be approved by:

• the owner, in case of a sole proprietorship;

• majority of the partners, in case of partnership;

• majority vote of the BOD and 2/3 vote of the outstanding capital
stock or members, in case of a corporation.
Court Supervised Rehabilitation
Involuntary Proceedings
• It may be initiated by any creditor or group of creditors with a
claim of, or the aggregate of whose claim is at least P 1,000,000
or at least 25% of the subscribed capital stock or partner’s
contribution, whichever is higher.
Pre-negotiated Rehabilitation
• An insolvent debtor, by itself or jointly with any of its creditors,
may file a verified petition with the court for the approval of a
Pre-Negotiated Rehabilitation Plan. The petition shall be
supported by an affidavit showing the written approval or
endorsement of creditors holding at least 2/3 of the total liabilities
of the debtor. This must include secured creditors holding more
than 50% of the total secured claims of the debtor and unsecured
creditors holding more than 50% of the total unsecured creditors.
Out of Court or Informal Restructuring
Agreement or Rehabilitation Plan (OCRA)
• Requirements:
• Approval by the debtor;
• Creditors representing at least 67% of the secured obligation of the debtor;
• Creditors representing at least 75% of the unsecured obligation of the debtor;
• Creditors holding at least 85% of the total liabilities, secured and unsecured,
of the debtor; and
• Publication of the notice of the out-of-court or informal restructuring
agreement or rehabilitation plan once a week for at least 3 consecutive weeks
in a newspaper of general circulation in the Philippines.
Court Supervised Rehabilitation
• The petition must allege that there is:

(1) no genuine issue of fact or law on the claim/s of the creditor/s, and
that the due and demandable payments thereon have not been made for
at least 60 days; or

(2) the debtor has failed generally to meet its liability as they fall
due; or

(3) at least one creditor, other than the petitioner/s has initiated
foreclosure proceedings against the debtor that will prevent the debtor from
paying its debts as they become fall due or will render it insolvent.
Commencement Order
• If the court finds the petition for rehabilitation to be sufficient in form
and substance, it shall, within 5 working days from the filing of the
petition, issue a Commencement Order;

• If within the same period, the court finds the petition deficient in form
or substance, the court may, in its discretion, give the petitioner/s a
reasonable period of time within which to amend or supplement
the petition, or to submit such documents as may be necessary or
proper to put the petition in proper order.
Question:
• When shall a rehabilitation proceedings commence?
Content of Commencement Order
• xxx
(h) appoint of rehabilitation receiver who may or may not be
from among the nominees of the petitioners xxx;

(q) includes Stay or Suspension Order which shall:

Purpose of Stay or Suspension Order
• Suspend all actions or proceedings in court or otherwise, for the enforcement of
all claims against the debtor;

• Suspend all actions to enforce any judgement, attachment, or other provisional

remedies against the debtor;

• Prohibit the debtor from selling, encumbering, transferring, or disposing in any

manner any of its properties except in the ordinary course of business; and

• Prohibit the debtor from making any payment of its liabilities outstanding as of
commencement date.
Exceptions to the Stay or Suspension
Order
• The said Order shall not apply to:
(1) cases already pending appeal in the Supreme Court as of
commencement date;
(2) cases pending or filed with a specialized court or quasi-
judicial agency;
(3) claims against sureties and other persons solidary liable
with the debtor, and third party or accommodation mortgagors as
well as issuers of letter of credit;
(4) Any action of customers or clients of a securities market
participant to recover or otherwise claim moneys and securities entrusted
to the latter in the ordinary course of the latter’s business;
Exceptions to the Stay or Suspension
Order
• The said Order shall not apply to:
(5) action of a licensed broker or dealer to sell pledged securities of a
debtor pursuant to a securities pledged or margin agreement for the settlement of
securities transactions;
(6) transactions through the facilities of a clearing agency or similar entities
duly authorized, registered and/or recognized by the appropriate regulatory
agency like the BSP and the SEC, as well as any form of actions of such agencies or
entities to reimburse themselves for any transactions settled for the
debtor ; and
(7) any criminal action against individual debtor or owner, partner, director
or officer of a debtor.
However, the civil liability arising from the offense charged, deemed
instituted with the criminal action, shall be covered by the Stay Order.
 Waiver of Taxes and Fees Due to the
National Government and LGUs
• Upon issuance of the Commencement Order by the court, and until the
approval of the Rehabilitation Plan or dismissal of the petition,
whichever is earlier, the imposition of all taxes and fees including
penalties, interest and charges thereof due to the national government
or to LGUs shall be considered waived, in furtherance of the
objectives of rehabilitation.
 Effectivity and Duration of
Commencement Order
• Unless lifted by the court, the Commencement Order shall be effective
for the duration of the rehabilitation proceedings as long as there is a
substantial likelihood that the debtor will be successfully rehabilitated.
Rehabilitation Receiver
• It refers to the person or persons, natural or juridical appointed as such
by the court and which shall be entrusted with such powers and duties
as set forth in RA 1042.

• Where the rehabilitation receiver is a juridical entity, the term includes

the juridical entity’s designated representative.

• The juridical entity and the representative shall be solidary liable for
all obligations and responsibilities of the rehabilitation receiver.
 Minimum Qualifications of
Rehabilitation Receiver
1. A citizen of the Philippines or a resident of Philippines in the six months
immediately preceding his nomination;
2. Of good moral character and with acknowledged integrity, impartiality
and independence;
3. Has the requisite knowledge of insolvency and other relevant commercial
laws, rules, and procedures, as well as the relevant commercial laws, rules
and procedures, as well as relevant training and/or experience that may be
necessary to enable him to properly discharge the duties and obligations
of a rehabilitation receiver; and
4. Has no conflict of interest: Provided, That such conflict of interest may be
waived, expressly or impliedly, by a party who may be prejudiced thereby.
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• The rehabilitation receiver shall be deemed an officer of the court with
the principal duty of preserving and maximizing the value of the
assets of the debtor during the rehabilitation proceedings, determining
the viability of the rehabilitation of the debtor, preparing and
recommending a Rehabilitation Plan to the court, and implementing
the approved Rehabilitation Plan.
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To verify the accuracy of the petition, and correct, if necessary, the annexes
such as the Schedule of Debts and Liabilities and the Inventory of Assets
submitted in support of the petition;

• To accept and incorporate, when justified, amendments to the Schedule of

Debts and Liabilities;

• To evaluate the validity, genuineness, and true amount of all the claims
against the debtor and to recommend to the court the disallowance of claims
and rejections of amendments to the Schedule of Debts and Liabilities that
lack sufficient proof and justification;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To submit to the court, and make available for the creditor’s review, a revised
schedule of Debts and Liabilities;

• To investigate the acts, conduct, properties, liabilities and financial condition of

the debtor, the operation of this business and the desirability of the continuance
thereof, and any other matter relevant to the proceeding or to the formulation of a
Rehabilitation Plan;

• To sue and recover, with the approval of the court, all amounts owed to, and all
properties pertaining to the debtor, including all property or money of the debtor
paid, transferred or disbursed in fraud of the debtor or its creditors, or which
constitute undue preference of creditors.
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To examine under oath the directors and officers of the debtor and any other
witnesses that he may deem appropriate;

• To make available to the creditors the documents and notices necessary for
them to follow and participate in the proceedings;

• To report to the court any fact ascertained by him to pertain to the causes of
the debtors’ problems, fraud, preferences, dispositions, encumbrances,
misconduct, mismanagement and irregularities committed by the
stockholders, directors, management, or any other person against the debtor;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To employ such specialized professionals and other experts such as
lawyers, accountants, auditors, appraisers, and staff, with the approval
of the court, whose services are necessary in assisting the
rehabilitation receiver in performing his duties and functions;

• To monitor the operations of the debtor and to immediately report to

the court any material adverse change in the debtor’s business;

• To evaluate the existing assets and liabilities, earnings and operations

of the debtor;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To determine and recommend to the court the best way to salvage and
protect the interest of the creditors, stockholders, and the general public;

• To study the Rehabilitation Plan proposed by the debtor or any

Rehabilitation Plan submitted during the proceedings, together with any
comments made thereon;

• To prohibit and report to the court any encumbrance, transfer or

disposition of the debtor’s property outside of the ordinary course of
business or what is allowed by the court;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To prohibit and report to the court any payments made by the debtor
outside the ordinary course of business;

• To have unlimited access to the debtor’s employees; premises, books,

records and financial documents during business hours;

• To inspect, copy, photocopy or photograph any document, paper,

book, account or letter, whether in the possession of the debtor or
other persons, that pertain to the business of the debtor;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To gain entry into any property owned by the debtor for the purpose of
inspecting, measuring, surveying or photographing it or any
designated relevant object or operation thereon;

• To take possession, control and custody, and to preserve the value of

all the debtor’s assets;

• To notify counterparties and the court as to contracts that the debtor

has decided to confirm;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To be notified of and to attend all meetings of the BOD and
stockholders of the debtor;

• To recommend any modification of an approved Rehabilitation Plan as

he may deem appropriate;

• To bring to the attention of the court any material change affecting the
debtor’s ability to meet the obligations under the Rehabilitation Plan;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To recommend the appointment of a management committee in appropriate
cases;

• Within the soonest possible time, to submit a report to the management

committee, if one has been constituted on the status and condition of the
debtor and on the actions taken by the receiver with regard to the
proceedings;

• To recommend the termination of the proceedings and dissolution of the

debtor if he determines that the debtor’s continuance in business is no longer
feasible or profitable or no longer works to the best interest of the
stockholders, parties-litigants, creditors or the general public;
 Powers, Duties and Responsibilities of the
Rehabilitation Receiver
• To apply to the court for any order or directive that he may deem
necessary or desirable to aid him in the exercise of his powers and
performance of his duties and functions;

• To make quarterly reports on the status and progress of the

rehabilitation, or as often as may be required by the court; and

• TO EXERCISE SUCH POWERS AS MAY FROM TIME TO TIME

BE CONFERRED UPON HIM BY THE COURT. The court may limit
the powers and functions of the rehabilitation receiver, as may be
appropriate.
Removal of the Rehabilitation Receiver
• The rehabilitation receiver may be removed at any time by the court
either motu proprio or upon motion by any creditor/s holding more
than fifty percent (50%) of the total obligations of the debtor, on such
grounds as the rules of procedure may provide which shall include, but
are not limited to, the following:
Removal of the Rehabilitation Receiver
(a) Incompetence, gross negligence, failure to perform or failure to exercise the proper
degree of care in the performance of his duties and powers;

(b) Lack of a particular or specialized competency required by the specific case;

(c) Illegal acts or conduct in the performance of his duties and powers;

(d) Lack of qualification or presence of any disqualification;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of the stakeholders.
What is Rehabilitation Plan?
• It is a plan by which the financial well-being and viability of an
insolvent debtor can be restored using various means including but not
limited to debt forgiveness, debt restructuring, reorganization or quasi-
reorganization, dacion en pago, debt-equity conversion and sale of the
business a going concern, or setting up new business entity, or other
similar arrangement as may be approved by the court of creditors.