Republic Act No.

10142, the Financial Rehabilitation and Insolvency Act (FRIA) of

2010, which was passed by the House of Representatives on February 1, 2010 and
the Senate on February 3, 2010.

The FRIA expressly repealed the Insolvency Law (Act No. 1956) as amended, and
impliedly repealed, to the extent that they are inconsistent with the provisions of
the Act, all other laws, orders, rules and regulations. The FRIA is significant because
it covers the rehabilitation of sole proprietorships, partnerships and corporations,
provides the legal basis for our procedural rules on corporate rehabilitation (the
latest of which is A.M. No. 00-8-10-SC, promulgated by the Supreme Court en banc
on December 2, 2009, and took effect on January 16, 2009), and consolidates the
laws on insolvency and rehabilitation. The FRIA shall take effect 15 days after its
complete publication in the Official Gazette or in at least two national newspapers of
general circulation.

I will not venture to summarize the 150-section FRIA, but will just endeavour to
discuss provisions which, to my mind, are significant, particularly in connection with
rehabilitation proceedings.

The FRIA provides for different types of rehabilitation proceedings for sole
proprietorships, partnerships and corporations. The Court-Supervised Rehabilitation
(see Chapter II of the FRIA) includes:

(a) Voluntary Proceedings which is a rehabilitation petition initiated by the sole

proprietor, by a majority of the partners, or by a majority of the board of
directors/trustees and authorized by the corporations stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of the members, and

(b) Involuntary Proceedings which is a rehabilitation petition initiated by creditors

with an aggregate claim of at least P1 Million or at least 25% of the subscribed
capital stock or partners contribution, whichever is higher. The Pre-Negotiated
Rehabilitation (see Chapter III of the FRIA) is initiated by the insolvent debtor, by
itself or jointly with any of its creditors, and seeks the approval of a pre-negotiated
Rehabilitation Plan endorsed or approved by creditors holding at least 2/3 of the
debtors total liabilities, including secured creditors holding more than 50% of the
secured claims, and unsecured creditors holding more than 50% of the unsecured
claims.

The Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plans (see

Chapter IV of the FRIA) must be agreed upon by the debtor, and approved by
creditors holding at least 85% of the debtors total liabilities, including secured
creditors holding at least 67% of the secured obligations and unsecured creditors
holding at least 75% of the unsecured obligations.

A liquidator or rehabilitation receiver may be a juridical entity, provided that it

designates as a representative a natural person who possesses all the qualifications
and none of the disqualifications. The juridical entity and the representative are
solidarily liable for all obligations and responsibilities of a liquidator or rehabilitation
receiver.

The Rehabilitation Plan may include various means to restore the financial well-
being and viability of an insolvent debtor, including but not limited to debt
forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en
pago, debt-to-equity conversion, sale of business (or parts of it) as a going concern,
or setting up of a new business entity, or other similar arrangements as may be
approved by the rehabilitation court or creditors. The FRIA however does not specify
limitations on the scope of these means, such as the amount or percentage of debt
that may be forgiven, or the maximum period of time when debts may be
rescheduled.

The FRIA expressly allows for rehabilitation proceedings for a group of debtors,
which should be (a) corporations that are financially related to one another as
parent corporation, subsidiaries or affiliates, (b) partnerships that are owned more
than 50% by the same person, and (c) single proprietorships that are owned by the
same person. The group of debtors may jointly file a rehabilitation petition when
one or more of its members foresees the impossibility of meeting debts when they
respectively fall due, and the financial distress will likely adversely affect the
financial condition and/or operations of the other members of the group, and/or the
participation of the other members is essential under the terms and conditions of
the proposed Rehabilitation Plan. In this connection however, the assets and
liabilities of a debtor may not be commingled or aggregated with those of another,
unless the latter is a related enterprise that is owned or controlled, directly or
indirectly, by the same interest, and only where (i) there was commingling in fact of
assets and liabilities prior to the commencement of the rehabilitation proceedings,
(ii) they have common creditors and it will be more convenient to treat them
together rather than separately, (iii) the related enterprise voluntarily accedes to
join the debtor as party petitioner and to commingle its assets and liabilities with
the debtors, and (iv) the consolidation of assets and liabilities is beneficial to all
concerned and promotes the objectives of rehabilitation.

The FRIA punishes an individual debtor, a sole proprietor, partners, or directors and
officers of a debtor, having notice of the commencement of the proceedings, or
having reason to believe that rehabilitation or liquidation proceedings are about to
be commenced, or in contemplation of these proceedings, (a) dispose of or caused
to be disposed 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 (b) conceal, or
authorize or approve the concealment of, from the creditors, or embezzles or
misappropriates, any property of the debtor. They shall be liable for double the
value of the property sold, embezzled, or disposed of, or double the amount of the
transaction involved, whichever is higher.
The FRIA authorizes any bank, whether universal or not, to acquire and hold an
equity interest in the debtor or its subsidiaries, pursuant to an approved
Rehabilitation or Liquidation Plan, subject to the ownership limits applicable to
universal banks for equity investments, and provided that such equity investment or
interest shall be disposed of by the bank within a period of 5 years or as may be
prescribed by the Monetary Board.

Involuntary Proceedings may be initiated by creditors if (a) there is no genuine issue

of fact or law on the claims of the petitioners, and the due and demandable
payments have not been made for at least 60 days or that the debtor has generally
failed to meet its liabilities as they fall due, or (b) a creditor, other than petitioners,
has initiated foreclosure proceedings against the debtor that will prevent the debtor
from paying its debts as they become due or will render it insolvent.

If the court finds the rehabilitation petition sufficient in form and substance, it shall,
within 5 working days from the filing of a petition, issue a Commencement Order,
which shall include a Stay or Suspension Order. If the petition is deficient, the
rehabilitation court may, in its discretion, grant petitioner a reasonable period to
amend or supplement the petition, or to submit such documents as may be
necessary or proper to put the petition in order, in which case, the 5 working days
shall be counted from the date of such filing or submission.

The rehabilitation proceedings are declared commenced upon the issuance of the
Commencement Order. The FRIA clarifies, among others, that the Commencement
Order (a) prohibits and renders null and void extrajudicial process or activity 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 FRIA, (b) renders null and void any set-off, after the commencement date,
of any debt owed to the debtor by any of the debtors creditors, and (c) renders null
and void the perfection, after the commencement date, of any lien against the
debtors properties. The FRIA also declares that attempts to seek legal or other
recourse against the debtor outside the rehabilitation proceedings shall be sufficient
to support a finding of indirect contempt of court.

The FRIA enumerates the exceptions to the Stay or Suspension Order, i.e., where
the order shall not apply, including but not limited to (a) cases already pending
appeal in the Supreme Court as of commencement date, (b) cases pending or filed
in a specialized court or quasi-judicial agency which the court, in its discretion, may
determine, is capable of resolving the claim more quickly, fairly, and efficiently than
the rehabilitation court, (c) 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
mortgage is necessary for the rehabilitation of the debtor, and (d) any criminal
action against the individual debtor, owner, partner, director or officer of the debtor.
The FRIA declares that, upon the issuance of the Commencement Order, up to the
approval of the Rehabilitation Plan or the dismissal of the petition, whichever is
earlier, the imposition of all taxes and fees, including penalties, interests, and
charges, due to the national government and the local government unit, shall be
considered waived, in the furtherance of the objectives of rehabilitation.

The FRIA provides shorter periods for the different stages of the rehabilitation
proceedings. For example, (a) the Commencement Order shall be published in a
newspaper of general circulation once a week for at least 2 consecutive weeks, with
the first publication being made within 7 days from its issuance; (b) copies of the
petition shall be personally served on creditors holding at least 10% of the total
liabilities of the debtor (or on the debtor, in creditor-initiated rehabilitation
proceedings) within 5 days from the issuance of the Commencement Order; (c)
creditors shall file their claims with the court, and nominate any other person as
rehabilitation receiver, at least 5 days before the initial hearing; (d) the initial
hearing shall be set not more than 40 days from the filing of the petition; (e)
creditors shall file their comment on the petition and the Rehabilitation Plan within a
period of not more than 20 days from the initial hearing; (f) the rehabilitation
receiver shall submit to the court a report on his preliminary findings and
recommendations within 40 days from the initial hearing; (g) the court shall give
due course to the petition, dismiss the petition, or convert the petition into a
liquidation proceedings, within 10 days from receipt of the rehabilitation receivers
report; (h) if the petition is given due course, the rehabilitation receiver shall review,
revise and/or recommend action on the Rehabilitation Plan, and submit the same or
a new one to the court, within 90 days from the due course order; (i) the
rehabilitation receiver shall have 20 days from assumption of office within which to
establish a preliminary registry of claims, which may be challenged by the debtor,
creditors, stakeholders and other interested parties within 30 days from the
expiration of the 20-day period; (j) the rehabilitation receiver shall submit the
registry of claims (which shall include undisputed claims not subject of any
challenge) upon expiration of the 30-day period; (k) within 20 days from notice by
the rehabilitation receiver that the Rehabilitation Plan is ready for examination, the
rehabilitation receiver shall convene the creditors for purposes of voting on the
Rehabilitation Plan; (l) within the same 20-day period, a creditor may file an
objection to the Rehabilitation Plan on limited grounds; and (m) the court shall have
a maximum period of 1 year from the filing of the petition to confirm the
Rehabilitation Plan and, if no Rehabilitation Plan is confirmed within said period, the
proceedings may, upon motion or motu proprio, be converted into liquidation
proceedings.

Under the FRIA, all valid and subsisting contracts of the debtor with creditors and
other third parties as at the commencement date shall continue in force, unless
cancelled by virtue of a final judgment of a competent court prior to the issuance of
the Commencement Order or at any time thereafter by the rehabilitation court. The
debtor, with the consent of the rehabilitation receiver, shall, within 90 days
following the commencement date, inform its contractual counter-party whether or
not it is confirming the particular contract. Contractual obligations of the debtor
arising or performed during this period, and afterwards for confirmed contracts,
shall be considered administrative expenses. Contracts not confirmed within the
deadline shall be considered terminated. Any contract of the debtor may be
cancelled or terminated for any ground provided by law.

For Pre-Negotiated Rehabilitation, (a) any creditor or other interested party may
submit to the court a verified objection to the petition or the Rehabilitation Plan on
specified grounds within 8 days from the date of the second publication of the
Commencement Order; (b) if there is no such objection, the court shall approve the
Rehabilitation Plan within 10 days from the date of said second publication; (c)
hearings on any objection shall be held not earlier than 20 days, and not later than
30 days, from the date of said second publication; and (d) the court shall have a
maximum period of 1 year from the filing of the petition to approve the
Rehabilitation Plan although, if the court fails to act within said period, the
Rehabilitation Plan shall be deemed approved.

For Out-of-Court or Informal Restructuring Agreements or Rehabilitation Plans, a

standstill period agreed upon the parties pending negotiation and finalization of the
Restructuring Agreement or Rehabilitation Plan shall be effective and enforceable
also against other creditors if (a) such agreement is approved by creditors
representing more than 50% of the total liabilities of the debtor, (b) notice of the
agreement is published in a newspaper of general circulation once a week for at
least 2 consecutive weeks, and (c) the standstill period does not exceed 120 days
from the date of effectivity. The approved Restructuring Agreement or Rehabilitation
Plan is granted a cram-down effect such that it shall have the same legal effect as a
court-confirmed Rehabilitation Plan. The notice thereof shall be published in a
newspaper of general circulation once a week for at least 3 consecutive weeks, and
the Restructuring Agreement or Rehabilitation Plan shall be effective 15 days from
the date of the last publication of the notice.

To end, let me just say that the FRIA also provides for the liquidation of insolvent
juridical debtors (see Chapter V of the FRIA). The Voluntary Liquidation is initiated
by the debtor via a verified petition, or a verified motion in court-supervised or pre-
negotiated rehabilitation proceedings. In this connection, rehabilitation proceedings
may also be converted into liquidation proceedings, when the rehabilitation court
finds that the debtor is insolvent and there is no substantial likelihood for the debtor
to be successfully rehabilitated, or when the Rehabilitation Plan is not confirmed by
the rehabilitation court within 1 year from filing of the petition, or when the
rehabilitation proceedings is terminated due to failure of rehabilitation or dismissal
of the rehabilitation petition for reasons other than technical grounds, or at any time
upon the recommendation of the rehabilitation receiver that the rehabilitation of the
debtor is not feasible. The Involuntary Liquidation is initiated by 3 or more creditors
whose aggregate claims amount to at least P1 Million or at least 25% of the
subscribed capital stock or partners contribution, whichever is higher, also via a
verified petition or a verified motion in a court-supervised or pre-negotiated
rehabilitation proceedings.

On the other hand, for insolvent individual debtors (see Chapter VI of the FRIA), the
FRIA provides for (a) the suspension of payments, when the debtor possesses
sufficient properties to cover all his debts but foresees the impossibility of meeting
them when they respectively fall due, (b) voluntary liquidation, initiated by the
debtor who does not have sufficient properties to cover his liabilities and owes
debts exceeding P500 thousand, and (c) involuntary liquidation, initiated by
creditors with claims aggregating at least P500 thousand.