M E M O R A N D U M
What is Insolvency?
Insolvency shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. (Sec. 4(p), FRIA)
With the declaration of insolvency of the debtor, insolvency courts “obtain full and complete jurisdiction over all property of the insolvent and of all claims by and against it.” (Metropolitan Bank and Trust Company v. S.F. Naguiat Enterprises, Inc. G.R. No. 178407, March 18, 2015)
What are the types of Insolvency?
1. Actual insolvency – where the corporation’s assets are not enough to cover its liabilities; and
2. Technical insolvency – where the corporation has enough assets but it foresees its inability to pay its obligations for more than one year. (Philippine National Bank v. Court of Appeals, G.R. No. 165571, January 20, 2009)
Who is a Debtor?
Debtor shall refer to a sole proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership duly registered with the Securities and Exchange Commission (SEC), a corporation duly organized and existing under Philippine laws, or an individual debtor who has become insolvent. (Sec. 4(k), FRIA)
What is Rehabilitation?
Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. (Sec. 4(gg), FRIA)
The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because "assets . . . are often more valuable when so maintained than they would be when liquidated." Rehabilitation assumes that assets are still serviceable to meet the purposes of the business. The corporation receives assistance from the court and a disinterested rehabilitation receiver to balance the interest to recover and continue ordinary business, all the while attending to the interest of its creditors to be paid equitably. These interests are also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation. (Viva Shipping Lines, Inc. v. Keppel Philippines Marine, Inc., G.R. No. 177382, February 17, 2016)
What are the types of Rehabilitation Proceedings?
1. Court Supervised Rehabilitation Proceedings
a. Voluntary Proceedings – Voluntary proceedings shall refer to proceedings initiated by the debtor. (Sec. 4(rr), FRIA)
How to file the Petition for Voluntary Rehabilitation Proceedings?
The petition must be approved by: (a) the owner in case of a sole proprietorship; (b) by a majority of the partners in case of a partnership: or (c) in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds hereinafter specifically provided. (Sec. 12, FRIA)
What are the grounds for Voluntary Rehabilitation?
1. A debtor foresees 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 debtor. (Sec. 1, Rule 2, A.M. 12-12-11-SC)
b. Involuntary Proceedings – Involuntary proceedings shall refer to proceedings initiated by creditors. (Sec. 4(r), FRIA)
Who may file the Petition for Involuntary Rehabilitation Proceedings?
Any creditor or group of creditors with a claim of, or the aggregate of whose claims: (a) is at least One Million Pesos (P1,000,000.00); or (b) at least twenty-five per cent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings under this Rule by filing a petition for rehabilitation of a debtor with the court and on the grounds hereinafter specifically provided. (Sec. 13, FRIA; Sec. 4, Rule 2, A.M. 12-12-11-SC)
What are the grounds for Involuntary Rehabilitation?
1. There is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days;
2. The debtor has failed generally to meet its liabilities as they fall due; or
3. At least one creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor from paying its debts as they become due or will render it insolvent. (Sec. 5, Rule 2, A.M. 12-12-11-SC)
2. Pre-Negotiated Rehabilitation
In a 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.
What are the requirements for Pre-negotiated Rehabilitation?
The Pre-Negotiated Rehabilitation Plan must be endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including: (a) secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor; and (b) unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. (Sec. 76, FRIA)
3. Out-of-Court or Informal Restructuring Agreement or Rehabilitation
In addition to the existing court-supervised and pre-negotiated rehabilitation, the FRIA likewise introduces the system of Out-of-Court or Informal Restructuring/Workout Agreement or Rehabilitation Plan.
What are the requirements for Out-of-Court or Informal Restructuring Agreement or Rehabilitation?
1. The debtor must agree to the out-of-court or informal restructuring/workout agreement or rehabilitation plan;
2. It must be approved by creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor;
3. It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and
4. It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor. (Sec. 84, FRIA)
What is a Commencement Order?
Commencement Order is the order issued by the court which signifies the beginning of the rehabilitation proceedings which shall retroact to the date of the filing of the petition. It is issued by the court if it finds the petition for rehabilitation to be sufficient in form and substance within five (5) working days from the filing of the petition. (Sec. 15, FRIA)
What are the Effects of Commencement Order?
The issuance of the Commencement Order shall have the following effects which shall retroact to the date of the filing of the petition for rehabilitation:
1. Vest the rehabilitation receiver with all the powers and functions provided under the FRIA, such as the right to review and obtain all records to which the debtor’s management and directors have access, including bank accounts of whatever nature of the debtor, subject to the approval by the court of the performance bond filed by the rehabilitation receiver;
2. Prohibit, or otherwise serve as the legal basis for rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collect on or enforce a claim against the debtor after the commencement date unless otherwise allowed under the law;
3. Serve as the legal basis for rendering null and void any set-off after the commencement date of any debt owed to the debtor by any of the debtor’s creditors;
4. Serve as the legal basis for rendering null and void the perfection of any lien against the debtor’s property after the commencement date;
5. Consolidate all legal proceedings by and against the debtor to the court, provided, however, that the court may allow the continuation of cases in other courts where the debtor had initiated the suit;
6. Exempt the debtor from liability for taxes and fees, including penalties, interests and charges thereof due to the national government or the LGU (Sec. 17, FRIA; Sec. 9, Rule 2, A.M. 12-12-11-SC);
7. Include Stay or Suspension Order (Sec. 16(q), FRIA); and
8. Authorize the payment of Administrative Expenses as they become due. (Sec. 16(l), FRIA).
What is a Stay or Suspension Order?
Stay or Suspension Order shall refer to an order issued in conjunction with the commencement order that shall: (a) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (b) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (c) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (d) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except in the ordinary course of business. (Sec. 16(q), FRIA; Sec. 5(r), Rule 1, A.M. 12-12-11-SC)
What is the extent of the Stay or Suspension Order?
All pending actions, including the execution of the judgment against the corporation, should be suspended pending termination of the rehabilitation proceedings. Jurisprudence is settled that the suspension of proceedings referred to in the law uniformly applies to “all action for claims” filed against a corporation, partnership or association under management or receivership, without distinction, except only those expenses incurred in the ordinary course of business (Molina v. Pacific Plans, Inc., G.R. No. 165476, August 15, 2011). No exception in favor of labor claims is mentioned in the law (Lingkod Manggagawa sa Rubberworld v. Rubberworld [Phils.] Inc., G.R. No. 153882, January 29, 2007) or even maritime claims (Negros Navigation v. CA, G.R. No. 163156, December 10, 2008).
No other action may be taken, including the rendition of judgment during the state of suspension. It must be stressed that what are automatically stayed or suspended are the proceedings of a suit and not just the payment of claims during the execution stage after the case had become final and executory. (Garcia vs. Philippine Airlines, Inc., G.R. No. 164856, August 29, 2007)
When a corporation is taken over by a rehabilitation receiver, all creditors stand on equal footing, not anyone should be given preference by paying ahead of other creditors. This pertains to all claims whether pecuniary or not. The Interim Rules on Corporate Rehabilitation defines a “claim” as referring to all claims, demands of whatever nature or character against the debtor or its properties, whether for money or otherwise. The definition is so encompassing, there are no distinctions or exemptions. (Sobrejuanite v. ASB Development Corp., G.R. No. 165675, September 30, 2005)
What are the limitations to the Stay or Suspension Order?
The Stay or Suspension Order shall not apply:
1. To cases already pending appeal in the Supreme Court as of commencement date: Provided, that any final and executory judgment arising from such appeal shall be referred to the rehabilitation court for appropriate action;
2. Subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the rehabilitation court upon motion made, is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, that any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;
3. To the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;
4. To any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter’s business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;
5. To the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;
6. The clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (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. To any criminal action against the individual debtor or owner, partner, director or officer of a debtor. The enforcement of the civil liability arising from the offense charged, deemed instituted with the criminal action, shall be covered by the Stay Order. (Sec. 10, Rule 2, A.M. 12-12-11-SC)
The rehabilitation of the corporation is not a legal ground for the extinction of petitioners’ criminal liabilities. There is no reason why criminal proceedings should be suspended during corporate rehabilitation, more so, since the prime purpose of the criminal action is to punish the offender in order to deter him and others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or, in general, to maintain social order. It would be absurd for one who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer. The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the corporation, especially since they are charged in their individual capacities. (Panlilio v. RTC, G.R. No. 173846, February 2, 2011)
How does the issuance of the Commencement Order and the Suspension/Stay Order affect Secured Creditors?
The issuance of the Commencement Order and the Suspension or Stay Order and any other provision of the FRIA, shall not in any way diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce the security or lien may be suspended during the term of the Stay Order. The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce his security or lien, or foreclose upon property is not necessary for the rehabilitation of the debtor. (Sec. 59, Rule 2, A.M. 12-12-11-SC)
What are Administrative Expenses?
Administrative Expenses in Rehabilitation shall refer to those reasonable and necessary expenses: (a) incurred or arising from the filing of a petition for rehabilitation; (b) arising from, or in connection with, the conduct of the rehabilitation proceedings, including those incurred for the rehabilitation or liquidation the debtor; (c) incurred in the ordinary course of business; (d) incurred for the payment of new obligations obtained after the commencement date to finance the rehabilitation of the debtor; (e) incurred for the fees of the rehabilitation receiver or liquidator and of the professionals engaged by them; and (f) otherwise authorized or mandated under the FRIA or such other expenses as may be allowed by the Supreme Court in its rules. (Sec. 4(a), FRIA; Sec. 5(a), Rule 1, A.M. 12-12-11-SC)
What is Liquidation?
When rehabilitation will not result in a better present value recovery for the creditors, the more appropriate remedy is liquidation. Liquidation allows corporations to wind up their affairs and equitably distribute its assets among its creditors. In liquidation, corporations preserve their assets in order to sale them. The proceeds of the sale are distributed equitably among creditors, and the surplus is divided or losses are re-allocated. (Viva Shipping Lines, Inc. v. Keppel Philippines Marine, Inc., G.R. No. 177382, February 17, 2016)
What are the types of Liquidation Proceedings?
1. Liquidation Proceedings of Juridical Debtor
a. Voluntary Liquidation of Juridical Debtor – Voluntary liquidation proceedings shall refer to liquidation proceedings initiated by an insolvent juridical debtor. (Sec. 1, Rule 2, A.M. 15-04-06-SC)
How to file the Petition for Voluntary Liquidation Proceedings?
An insolvent juridical debtor may file a verified petition for liquidation in the Regional Trial Court which has jurisdiction over its principal office as specified in its articles of incorporation or partnership. The petition shall include the names of at least three (3) nominees to the position of liquidator. (Sec. 1, Rule 2, A.M. 15-04-06-SC)
b. Involuntary Liquidation of Juridical Debtor – Involuntary liquidation proceedings shall refer to liquidation proceedings initiated by three (3) or more creditors. (Sec. 4, Rule 2, A.M. 15-04-06-SC)
Who may file the Petition for Involuntary Liquidation Proceedings?
Any three (3) or more creditors the aggregate of whose claims: (a) is at least One Million Pesos (P1,000,000.00); or (b) at least twenty-fiver per cent (25%) of the subscribed capital stock or partners’ contributions of the insolvent juridical debtor, whichever is higher, may file a petition for liquidation of an insolvent juridical in the Regional Trial Court which has jurisdiction over the principal office of the debtor as specified in its articles of incorporation or partnership. The petition shall indicate the names of at least three (3) nominees to the position of liquidator. (Sec. 4, Rule 2, A.M. 15-04-06-SC)
2. Liquidation Proceedings of Individual Debtor
a. Voluntary Liquidation of Individual Debtor – Voluntary liquidation proceedings shall refer to liquidation proceedings initiated by an individual debtor: (a) whose liabilities exceed his assets; and (b) whose debts exceed Five Hundred Thousand Pesos (P500,000.00). (Sec. 11, Rule 3, A.M. 15-04-06-SC)
How to file the Petition for Voluntary Liquidation Proceedings?
An insolvent individual debtor may a verified petition for liquidation in the court having jurisdiction over the province or city where he has resided for six (6) months prior to the filing of the petition. The petition shall include the names of at least three (3) nominees to the position of liquidator. (Sec. 11, Rule 3, A.M. 15-04-06-SC)
b. Involuntary Liquidation of Individual Debtor – Involuntary liquidation proceedings shall refer to liquidation proceedings initiated by any creditor or creditors. (Sec. 13, Rule 3, A.M. 15-04-06-SC)
Who may file the Petition for Involuntary Liquidation Proceedings?
Any creditor or creditors with a claim of, or the aggregate of whose claims is, at least Five Hundred Thousand Pesos (P500,000.00) may file a verified petition for liquidation of an individual debtor with the court of the province or city where the debtor resides. (Sec. 13, Rule 3, A.M. 15-04-06-SC)
What are the grounds for Involuntary Liquidation of Individual Debtor?
The petition shall state the particulars of at least one of the following acts of insolvency of the individual debtor:
1. That the debtor is about to depart or has departed from the Philippines, with intent to defraud his creditors;
2. That being absent from the Philippines, with intent to defraud his creditors, he remains absent;
3. That the debtor conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
4. That the debtor conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
5. That the debtor has allowed his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
6. That the debtor has confessed or offered to allow judgment in favor of any creditor for the purpose of hindering or delaying the liquidation or of defrauding any creditor;
7. That the debtor has willfully allowed judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
8. That the debtor has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;
9. That the debtor has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors;
10. That the debtor has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;
11. That being a merchant or tradesman, the debtor has generally defaulted in the payment of his current obligations for a period of thirty (30) days;
12. That for a period of thirty (30) days, the debtor has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; or
13. That an execution having been issued against him on final judgment for money, the debtor shall have been found to be without sufficient property subject to execution to satisfy the judgment.
c. Suspension of Payments
In addition to the voluntary and involuntary liquidation proceedings of an individual debtor, the FRIA likewise includes the remedy of Suspension of Payments.
Who may file for Suspension of Payments?
An individual debtor who has assets that exceed his liabilities but foresees the impossibility of paying his debts when they respectively fall due may file a verified petition for suspension of payments in the court having jurisdiction over the province or city where he has resided for six (6) months prior to the filing of the petition. (Sec. 1, Rule 3, A.M. 15-04-06-SC)
What is a Liquidation Order?
Liquidation Order is the order issued by the court if it finds the petition for liquidation to be sufficient in form and substance within five (5) working days from the filing of the petition for liquidation. (Sec. 104, FRIA)
The Liquidation Order declares the debtor insolvent and orders the liquidation of the debtor, and in case of a juridical debtor, declares it as dissolved. (Sec. 2, Rule 4, A.M. 15-04-06-SC)
What are the Effects of Liquidation Order?
The issuance of the Commencement Order shall have the following effects:
1. The juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;
2. Legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court;
3. All contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the time he takes his oath of office, declares otherwise and the contract counter-party agrees;
4. No separate action for the collection of an unsecured claim shall be allowed. Actions already pending will be transferred to the liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear, and resolve such contest, except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executory judgment therein for a claim against the debtor shall be filed and allowed in court;
5. No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days from the date of the order (Sec. 3, Rule 4, A.M. 15-04-06-SC); and
6. Authorize the payment of Administrative Expenses as they become due. (Sec. 2(h), Rule 4, A.M. 15-04-06-SC).
How does the issuance of the Liquidation Order affect Secured Creditors?
The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law, unless he waives his right. (Sec. 4, Rule 4, A.M. 15-04-06-SC)
What are Administrative Expenses?
Administrative Expenses in Liquidation Proceedings shall refer to those reasonable and necessary expenses: (a) incurred in connection with the filing of a petition for liquidation, including filing and professional fees in preparing the petition; (b) arising from, or in connection with the liquidation proceedings; (c) incurred in the ordinary course of business of the debtor after the commencement date; (d) incurred for the fees of the liquidator/commissioner and/or of the professionals he may engage; and (f) otherwise authorized or mandated under the FRIA or such other expenses as may be allowed by the Supreme Court in its rules. (Sec. 5(a), Rule 1, A.M. 15-04-06-SC)
Insolvency shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. (Sec. 4(p), FRIA)
With the declaration of insolvency of the debtor, insolvency courts “obtain full and complete jurisdiction over all property of the insolvent and of all claims by and against it.” (Metropolitan Bank and Trust Company v. S.F. Naguiat Enterprises, Inc. G.R. No. 178407, March 18, 2015)
What are the types of Insolvency?
1. Actual insolvency – where the corporation’s assets are not enough to cover its liabilities; and
2. Technical insolvency – where the corporation has enough assets but it foresees its inability to pay its obligations for more than one year. (Philippine National Bank v. Court of Appeals, G.R. No. 165571, January 20, 2009)
Who is a Debtor?
Debtor shall refer to a sole proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership duly registered with the Securities and Exchange Commission (SEC), a corporation duly organized and existing under Philippine laws, or an individual debtor who has become insolvent. (Sec. 4(k), FRIA)
What is Rehabilitation?
Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. (Sec. 4(gg), FRIA)
The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because "assets . . . are often more valuable when so maintained than they would be when liquidated." Rehabilitation assumes that assets are still serviceable to meet the purposes of the business. The corporation receives assistance from the court and a disinterested rehabilitation receiver to balance the interest to recover and continue ordinary business, all the while attending to the interest of its creditors to be paid equitably. These interests are also referred to as the rehabilitative and the equitable purposes of corporate rehabilitation. (Viva Shipping Lines, Inc. v. Keppel Philippines Marine, Inc., G.R. No. 177382, February 17, 2016)
What are the types of Rehabilitation Proceedings?
1. Court Supervised Rehabilitation Proceedings
a. Voluntary Proceedings – Voluntary proceedings shall refer to proceedings initiated by the debtor. (Sec. 4(rr), FRIA)
How to file the Petition for Voluntary Rehabilitation Proceedings?
The petition must be approved by: (a) the owner in case of a sole proprietorship; (b) by a majority of the partners in case of a partnership: or (c) in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds hereinafter specifically provided. (Sec. 12, FRIA)
What are the grounds for Voluntary Rehabilitation?
1. A debtor foresees 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 debtor. (Sec. 1, Rule 2, A.M. 12-12-11-SC)
b. Involuntary Proceedings – Involuntary proceedings shall refer to proceedings initiated by creditors. (Sec. 4(r), FRIA)
Who may file the Petition for Involuntary Rehabilitation Proceedings?
Any creditor or group of creditors with a claim of, or the aggregate of whose claims: (a) is at least One Million Pesos (P1,000,000.00); or (b) at least twenty-five per cent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings under this Rule by filing a petition for rehabilitation of a debtor with the court and on the grounds hereinafter specifically provided. (Sec. 13, FRIA; Sec. 4, Rule 2, A.M. 12-12-11-SC)
What are the grounds for Involuntary Rehabilitation?
1. There is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days;
2. The debtor has failed generally to meet its liabilities as they fall due; or
3. At least one creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor from paying its debts as they become due or will render it insolvent. (Sec. 5, Rule 2, A.M. 12-12-11-SC)
2. Pre-Negotiated Rehabilitation
In a 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.
What are the requirements for Pre-negotiated Rehabilitation?
The Pre-Negotiated Rehabilitation Plan must be endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including: (a) secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor; and (b) unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. (Sec. 76, FRIA)
3. Out-of-Court or Informal Restructuring Agreement or Rehabilitation
In addition to the existing court-supervised and pre-negotiated rehabilitation, the FRIA likewise introduces the system of Out-of-Court or Informal Restructuring/Workout Agreement or Rehabilitation Plan.
What are the requirements for Out-of-Court or Informal Restructuring Agreement or Rehabilitation?
1. The debtor must agree to the out-of-court or informal restructuring/workout agreement or rehabilitation plan;
2. It must be approved by creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor;
3. It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and
4. It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor. (Sec. 84, FRIA)
What is a Commencement Order?
Commencement Order is the order issued by the court which signifies the beginning of the rehabilitation proceedings which shall retroact to the date of the filing of the petition. It is issued by the court if it finds the petition for rehabilitation to be sufficient in form and substance within five (5) working days from the filing of the petition. (Sec. 15, FRIA)
What are the Effects of Commencement Order?
The issuance of the Commencement Order shall have the following effects which shall retroact to the date of the filing of the petition for rehabilitation:
1. Vest the rehabilitation receiver with all the powers and functions provided under the FRIA, such as the right to review and obtain all records to which the debtor’s management and directors have access, including bank accounts of whatever nature of the debtor, subject to the approval by the court of the performance bond filed by the rehabilitation receiver;
2. Prohibit, or otherwise serve as the legal basis for rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collect on or enforce a claim against the debtor after the commencement date unless otherwise allowed under the law;
3. Serve as the legal basis for rendering null and void any set-off after the commencement date of any debt owed to the debtor by any of the debtor’s creditors;
4. Serve as the legal basis for rendering null and void the perfection of any lien against the debtor’s property after the commencement date;
5. Consolidate all legal proceedings by and against the debtor to the court, provided, however, that the court may allow the continuation of cases in other courts where the debtor had initiated the suit;
6. Exempt the debtor from liability for taxes and fees, including penalties, interests and charges thereof due to the national government or the LGU (Sec. 17, FRIA; Sec. 9, Rule 2, A.M. 12-12-11-SC);
7. Include Stay or Suspension Order (Sec. 16(q), FRIA); and
8. Authorize the payment of Administrative Expenses as they become due. (Sec. 16(l), FRIA).
What is a Stay or Suspension Order?
Stay or Suspension Order shall refer to an order issued in conjunction with the commencement order that shall: (a) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor; (b) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (c) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (d) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except in the ordinary course of business. (Sec. 16(q), FRIA; Sec. 5(r), Rule 1, A.M. 12-12-11-SC)
What is the extent of the Stay or Suspension Order?
All pending actions, including the execution of the judgment against the corporation, should be suspended pending termination of the rehabilitation proceedings. Jurisprudence is settled that the suspension of proceedings referred to in the law uniformly applies to “all action for claims” filed against a corporation, partnership or association under management or receivership, without distinction, except only those expenses incurred in the ordinary course of business (Molina v. Pacific Plans, Inc., G.R. No. 165476, August 15, 2011). No exception in favor of labor claims is mentioned in the law (Lingkod Manggagawa sa Rubberworld v. Rubberworld [Phils.] Inc., G.R. No. 153882, January 29, 2007) or even maritime claims (Negros Navigation v. CA, G.R. No. 163156, December 10, 2008).
No other action may be taken, including the rendition of judgment during the state of suspension. It must be stressed that what are automatically stayed or suspended are the proceedings of a suit and not just the payment of claims during the execution stage after the case had become final and executory. (Garcia vs. Philippine Airlines, Inc., G.R. No. 164856, August 29, 2007)
When a corporation is taken over by a rehabilitation receiver, all creditors stand on equal footing, not anyone should be given preference by paying ahead of other creditors. This pertains to all claims whether pecuniary or not. The Interim Rules on Corporate Rehabilitation defines a “claim” as referring to all claims, demands of whatever nature or character against the debtor or its properties, whether for money or otherwise. The definition is so encompassing, there are no distinctions or exemptions. (Sobrejuanite v. ASB Development Corp., G.R. No. 165675, September 30, 2005)
What are the limitations to the Stay or Suspension Order?
The Stay or Suspension Order shall not apply:
1. To cases already pending appeal in the Supreme Court as of commencement date: Provided, that any final and executory judgment arising from such appeal shall be referred to the rehabilitation court for appropriate action;
2. Subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the rehabilitation court upon motion made, is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, that any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;
3. To the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;
4. To any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter’s business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;
5. To the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;
6. The clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (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. To any criminal action against the individual debtor or owner, partner, director or officer of a debtor. The enforcement of the civil liability arising from the offense charged, deemed instituted with the criminal action, shall be covered by the Stay Order. (Sec. 10, Rule 2, A.M. 12-12-11-SC)
The rehabilitation of the corporation is not a legal ground for the extinction of petitioners’ criminal liabilities. There is no reason why criminal proceedings should be suspended during corporate rehabilitation, more so, since the prime purpose of the criminal action is to punish the offender in order to deter him and others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or, in general, to maintain social order. It would be absurd for one who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer. The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the corporation, especially since they are charged in their individual capacities. (Panlilio v. RTC, G.R. No. 173846, February 2, 2011)
How does the issuance of the Commencement Order and the Suspension/Stay Order affect Secured Creditors?
The issuance of the Commencement Order and the Suspension or Stay Order and any other provision of the FRIA, shall not in any way diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce the security or lien may be suspended during the term of the Stay Order. The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce his security or lien, or foreclose upon property is not necessary for the rehabilitation of the debtor. (Sec. 59, Rule 2, A.M. 12-12-11-SC)
What are Administrative Expenses?
Administrative Expenses in Rehabilitation shall refer to those reasonable and necessary expenses: (a) incurred or arising from the filing of a petition for rehabilitation; (b) arising from, or in connection with, the conduct of the rehabilitation proceedings, including those incurred for the rehabilitation or liquidation the debtor; (c) incurred in the ordinary course of business; (d) incurred for the payment of new obligations obtained after the commencement date to finance the rehabilitation of the debtor; (e) incurred for the fees of the rehabilitation receiver or liquidator and of the professionals engaged by them; and (f) otherwise authorized or mandated under the FRIA or such other expenses as may be allowed by the Supreme Court in its rules. (Sec. 4(a), FRIA; Sec. 5(a), Rule 1, A.M. 12-12-11-SC)
What is Liquidation?
When rehabilitation will not result in a better present value recovery for the creditors, the more appropriate remedy is liquidation. Liquidation allows corporations to wind up their affairs and equitably distribute its assets among its creditors. In liquidation, corporations preserve their assets in order to sale them. The proceeds of the sale are distributed equitably among creditors, and the surplus is divided or losses are re-allocated. (Viva Shipping Lines, Inc. v. Keppel Philippines Marine, Inc., G.R. No. 177382, February 17, 2016)
What are the types of Liquidation Proceedings?
1. Liquidation Proceedings of Juridical Debtor
a. Voluntary Liquidation of Juridical Debtor – Voluntary liquidation proceedings shall refer to liquidation proceedings initiated by an insolvent juridical debtor. (Sec. 1, Rule 2, A.M. 15-04-06-SC)
How to file the Petition for Voluntary Liquidation Proceedings?
An insolvent juridical debtor may file a verified petition for liquidation in the Regional Trial Court which has jurisdiction over its principal office as specified in its articles of incorporation or partnership. The petition shall include the names of at least three (3) nominees to the position of liquidator. (Sec. 1, Rule 2, A.M. 15-04-06-SC)
b. Involuntary Liquidation of Juridical Debtor – Involuntary liquidation proceedings shall refer to liquidation proceedings initiated by three (3) or more creditors. (Sec. 4, Rule 2, A.M. 15-04-06-SC)
Who may file the Petition for Involuntary Liquidation Proceedings?
Any three (3) or more creditors the aggregate of whose claims: (a) is at least One Million Pesos (P1,000,000.00); or (b) at least twenty-fiver per cent (25%) of the subscribed capital stock or partners’ contributions of the insolvent juridical debtor, whichever is higher, may file a petition for liquidation of an insolvent juridical in the Regional Trial Court which has jurisdiction over the principal office of the debtor as specified in its articles of incorporation or partnership. The petition shall indicate the names of at least three (3) nominees to the position of liquidator. (Sec. 4, Rule 2, A.M. 15-04-06-SC)
2. Liquidation Proceedings of Individual Debtor
a. Voluntary Liquidation of Individual Debtor – Voluntary liquidation proceedings shall refer to liquidation proceedings initiated by an individual debtor: (a) whose liabilities exceed his assets; and (b) whose debts exceed Five Hundred Thousand Pesos (P500,000.00). (Sec. 11, Rule 3, A.M. 15-04-06-SC)
How to file the Petition for Voluntary Liquidation Proceedings?
An insolvent individual debtor may a verified petition for liquidation in the court having jurisdiction over the province or city where he has resided for six (6) months prior to the filing of the petition. The petition shall include the names of at least three (3) nominees to the position of liquidator. (Sec. 11, Rule 3, A.M. 15-04-06-SC)
b. Involuntary Liquidation of Individual Debtor – Involuntary liquidation proceedings shall refer to liquidation proceedings initiated by any creditor or creditors. (Sec. 13, Rule 3, A.M. 15-04-06-SC)
Who may file the Petition for Involuntary Liquidation Proceedings?
Any creditor or creditors with a claim of, or the aggregate of whose claims is, at least Five Hundred Thousand Pesos (P500,000.00) may file a verified petition for liquidation of an individual debtor with the court of the province or city where the debtor resides. (Sec. 13, Rule 3, A.M. 15-04-06-SC)
What are the grounds for Involuntary Liquidation of Individual Debtor?
The petition shall state the particulars of at least one of the following acts of insolvency of the individual debtor:
1. That the debtor is about to depart or has departed from the Philippines, with intent to defraud his creditors;
2. That being absent from the Philippines, with intent to defraud his creditors, he remains absent;
3. That the debtor conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
4. That the debtor conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
5. That the debtor has allowed his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
6. That the debtor has confessed or offered to allow judgment in favor of any creditor for the purpose of hindering or delaying the liquidation or of defrauding any creditor;
7. That the debtor has willfully allowed judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
8. That the debtor has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;
9. That the debtor has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors;
10. That the debtor has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;
11. That being a merchant or tradesman, the debtor has generally defaulted in the payment of his current obligations for a period of thirty (30) days;
12. That for a period of thirty (30) days, the debtor has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; or
13. That an execution having been issued against him on final judgment for money, the debtor shall have been found to be without sufficient property subject to execution to satisfy the judgment.
c. Suspension of Payments
In addition to the voluntary and involuntary liquidation proceedings of an individual debtor, the FRIA likewise includes the remedy of Suspension of Payments.
Who may file for Suspension of Payments?
An individual debtor who has assets that exceed his liabilities but foresees the impossibility of paying his debts when they respectively fall due may file a verified petition for suspension of payments in the court having jurisdiction over the province or city where he has resided for six (6) months prior to the filing of the petition. (Sec. 1, Rule 3, A.M. 15-04-06-SC)
What is a Liquidation Order?
Liquidation Order is the order issued by the court if it finds the petition for liquidation to be sufficient in form and substance within five (5) working days from the filing of the petition for liquidation. (Sec. 104, FRIA)
The Liquidation Order declares the debtor insolvent and orders the liquidation of the debtor, and in case of a juridical debtor, declares it as dissolved. (Sec. 2, Rule 4, A.M. 15-04-06-SC)
What are the Effects of Liquidation Order?
The issuance of the Commencement Order shall have the following effects:
1. The juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;
2. Legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court;
3. All contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the time he takes his oath of office, declares otherwise and the contract counter-party agrees;
4. No separate action for the collection of an unsecured claim shall be allowed. Actions already pending will be transferred to the liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear, and resolve such contest, except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executory judgment therein for a claim against the debtor shall be filed and allowed in court;
5. No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days from the date of the order (Sec. 3, Rule 4, A.M. 15-04-06-SC); and
6. Authorize the payment of Administrative Expenses as they become due. (Sec. 2(h), Rule 4, A.M. 15-04-06-SC).
How does the issuance of the Liquidation Order affect Secured Creditors?
The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law, unless he waives his right. (Sec. 4, Rule 4, A.M. 15-04-06-SC)
What are Administrative Expenses?
Administrative Expenses in Liquidation Proceedings shall refer to those reasonable and necessary expenses: (a) incurred in connection with the filing of a petition for liquidation, including filing and professional fees in preparing the petition; (b) arising from, or in connection with the liquidation proceedings; (c) incurred in the ordinary course of business of the debtor after the commencement date; (d) incurred for the fees of the liquidator/commissioner and/or of the professionals he may engage; and (f) otherwise authorized or mandated under the FRIA or such other expenses as may be allowed by the Supreme Court in its rules. (Sec. 5(a), Rule 1, A.M. 15-04-06-SC)
