FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 (R.A. NO.

10142)
Corporate rehabilitation contemplates a continuance of corporate life and activities
Dean Nilo T. Divina in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency, the purpose being to enable the company to gain
a new lease on life and allow its creditors to be paid their claims out of its earnings.
1. Debt reliefs or remedies available to a juridical insolvent debtor (financially Thus, the basic issues in rehabilitation proceedings concern the viability and
distressed enterprises) under FRIA desirability of continuing the business operations of the distressed corporation, all
with a view of effectively restoring it to a state of solvency or to its former healthy
i. Rehabilitation financial condition through the adoption of a rehabilitation plan. Philippine Asset
Growth Two, Inc. and Planters Development Bank vs. Fastech Synergy Philippines Inc.,
a. Court supervised rehabilitation et al. G.R. No. 206528, 28 June 2016
i. Voluntary
ii. Involuntary Given the various stakeholders of the insolvent debtor- shareholders, creditors, the
state, it is better to rehabilitate the debtor than to carry out its liquidation. Is the
b. Pre-negotiated rehabilitation present value recovery better than if the debtor is to go under liquidation within
120 days from filing of the petition?
c. Out of court or informal restructuring agreement or Rehabilitation
Plan In the recent case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc.,the
Court took note of the characteristics of an economically feasible rehabilitation plan.
i. Petition for liquidation
ii. Voluntary a. The debtor has assets that can generate more cash if used in its daily
iii. Involuntary operations than if sold.
b. Liquidity issues can be addressed by a practicable business plan that will
2. Reliefs or remedies available to OR AGAINST individual debtor generate enough cash to sustain daily operations.
i. Suspension of payments c. The debtor has a definite source of financing for the proper and full
ii. Voluntary liquidation implementation of a Rehabilitation Plan that is anchored on realistic
iii. Involuntary Liquidation assumptions and goals.

3. What do you mean by insolvent debtor?
Insolvent 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
4. What is the objective of rehabilitation?
5. How do we distinguish voluntary from involuntary liquidation of individual
debtors?
Voluntary liquidation is filed by the debtor whose assets are less than liabilities.
Involuntary liquidation is filed by three or more creditors whose aggregate claim is at
least 500,000 if the debtor commits an act of insolvency (basically fraudulent act to
defeat the rights of creditor/creditors)

©2017 Dean Nilo T. Divina, All Rights Reserved 1


6. Who can file petition for rehabilitation?
a. sole proprietorship
b. Partnership when the filing is approved by at least a majority of the partners
c. Corporation when approved by at least 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.
7. What is the procedure for debtor initiated rehabilitation?
The procedure is as follows:
i. File a petition for rehabilitation in the RTC of the city where the debtor has
principal office. It shall be verified to establish the insolvency of the debtor and
the viability of its rehabilitation. It shall include, among others, a rehabilitation
plan and names of at least three nominees to the position of rehabilitation
receiver ( who will implement the rehabilitation plan).
ii. If the court finds the petition to be sufficient in form and substance, it shall
issue within five working days a commencement order. Otherwise, the court,
at its discretion, give petitioner time to amend the petition to make it sufficient
in form and substance.
iii. The rehabilitation proceedings shall commence upon issuance of the
commencement order. The commencement order, among others, appoints
the rehabilitation receiver and sets the case for initial hearing. It shall also
include a stay order which shall suspend all actions or proceedings for the
enforcement of claims against the debtor, as well as actions to enforce any
judgment or attachment or provisional remedy against the debtor; prohibits
disposition or encumbrance of property except in the ordinary course of
business and prohibit debtor from making any payment except when
authorized by the rules.
The stay order does not include, among others, cases on appeal with the sc,
cases falling with a specialized court or quasi-judicial agency, enforcement of
claims against surety and other persons solidarily liable with the debtor and
third party or accommodation mortgagors as well as issuers of letter of credit,
unless the property subject of third party mortgage is necessary for the
rehabilitation of the debtor as determined by the court; criminal action against
the debtor.
iv. At the hearing, court will direct creditors to give their comments to the
petition and rehab plan and the rehab receiver to submit report to the court
on whether debtor can be rehabilitated.
v. Receiver submits report to the court on whether debtor can be rehabilitated.
vi. Within ten days from submission of the report, the court may give due course
to the petition or convert the proceedings into one for liquidation (if debtor is
insolvent and no substantial likelihood for rehabilitation.
vii. If the petition is given due course, the court shall direct receiver to review,
revise and/or recommend action on the rehab plan.
viii. Receiver consults with debtor and creditors.
ix. Receiver submits rehab plan to the court.
x. Court directs creditors to give comments to the rehab plan.
xi. Court approves rehab plan upon recommendation of receiver and even over
the objection of creditors if objection is manifestly unreasonable.
xii. The court has one year from filing of petition to approve rehab plan.
xiii. Proceedings terminated by order of the court declaring successful
implementation of the rehab plan or a failure of rehab.
8. What is the rationale for the Stay Order?
Answer:
The stay order is a recognition that all assets of a corporation under rehabilitation are
held in trust for the equal benefit of all creditors under the doctrine of “equality is
equity”. As all the creditors ought to stand on equal footing, not any one of them
should be paid ahead of others. Furthermore, the stay order will enable the
management committee or the rehabilitation receiver to effectively exercise its or
his powers free from judicial or extrajudicial interference that might unduly hinder or
prevent the “rescue” of the distressed company, rather than to waste its/his time,
effort and resources in defending claims against the corporation. (BAR 2006)
©2017 Dean Nilo T. Divina, All Rights Reserved 2
NB The stay order is now referred to under FRIA as commencement order. The
commencement order includes a stay order
IMPORTANT POINTS
a. Stay order covers claims of pecuniary nature
b. It does not cover surety, issuers of l/c and third party mortgagors except if
property of latter needed for rehab of the debtor
c. The court not bound by the report of the receiver
d. The court may terminate rehab if there is no material financial commitment of
the debtor to make it work
The Regional Trial Court correctly dismissed petitioner's rehabilitation plan. It found
that petitioner's assets are non-performing. Petitioner admitted this in its Amended
Petition when it stated that its vessels were no longer serviceable. In Wonder Book
Corporation v. Philippine Bank of Communications, a rehabilitation plan is infeasible
if the assets are nearly fully or fully depreciated. This reduces the probability that
rehabilitation may restore and reinstate petitioner to its former position of successful
operation and solvency.
The plan of selling properties of petitioner's sister company to generate cash flow
cannot be a basis for the approval of the rehabilitation plan. As pointed out by the
Regional Trial Court, this plan requires conformity from the sister company. Even if
the two companies have the same directorship and ownership, they are still two
separate juridical entities. VIVA SHIPPING LINES, INC., Petitioner, v. KEPPEL
PHILIPPINES MINING, INC., METROPOLITAN BANK & TRUST COMPANY, PILIPINAS
SHELL PETROLEUM CORPORATION, CITY OF BATANGAS, CITY OF LUCENA, PROVINCE
OF QUEZON, ALEJANDRO OLIT, NIDA MONTILLA, PIO HERNANDEZ, EUGENIO
BACULO, AND HARLAN BACALTOS, Respondents.
G.R. No. 177382, February 17, 2016, LEONEN, J.
e. Equality is equity principle
f. Mortgagee and pledgee cannot foreclose
g. Commencement order retroacts to date of petition
h. Affects even objecting creditors
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim
Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a
rehabilitation plan may be approved even over the opposition of the creditors holding
a majority of the corporation’s total liabilities if there is a showing that rehabilitation
is feasible and the opposition of the creditors is manifestly unreasonable. Also known
as the "cram-down" clause, this provision, which is currently incorporated in the FRIA,
is necessary to curb the majority creditors’ natural tendency to dictate their own
terms and conditions to the rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the
terms and conditions of the rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery.
It is within the parameters of the aforesaid provision that the Court examines the
approval of Sarabia’s rehabilitation. Bank of the Philippine Islands v. Sarabia Manor
Hotel Corporation, G.R. No. 175844, 29 July 2013, J. Perlas-Bernabe
9. When may creditor/s commence involuntary Proceedings?
Any creditor or group of creditors with a claim of, or the aggregate of whose claims
is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%)
of the subscribed capital stock or partners' contributions, whichever is higher, may
initiate involuntary proceedings against the debtor by filing a petition for
rehabilitation with the court if: (a) there is no genuine issue of fact on 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 or that the debtor has failed generally to
meet its liabilities as they fall due; or (b) a 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 due or will render it insolvent.
©2017 Dean Nilo T. Divina, All Rights Reserved 3

10. What do you understand by pre-negotiated rehabilitation plan?
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
which has been endorsed or approved by creditors holding at least two-thirds (2/3)
of the total liabilities of the debtor, including secured creditors holding more than
fifty percent (50%) of the total secured claims of the debtor and unsecured
creditors holding more than fifty percent (50%) of the total unsecured claims of
the debtor. The petition shall include the pre-negotiated Rehabilitation Plan,
including the names of at least three (3) qualified nominees for rehabilitation
receiver.
Example. 180 million liabilities to five creditors – a, b, c, d and e. The obligations
due to a, b, and c amount to 120 million but all of them are secured. The
obligations due to d and e amounting to 80 million are unsecured.
The plan has to be approved by the creditors holding at least 120m liabilities. Of
the secured creditors who gave the approval, they should hold at least 60 million
and one peso and of the unsecured creditors who gave the approval, they should
hold at least 40 million and one peso.
11. What are the requirements for an Out of Court or Informal restructuring
agreement or rehab plan?
a. The debtor must agree to the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan;
b. It must be approved by creditors representing at least sixty-seven (67%) of
the secured obligations of the debtor;
c. It must be approved by creditors representing at least seventy-five percent
(75%) of the unsecured obligations of the debtor; and
d. It must be approved by creditors holding at least eighty-five percent (85%) of
the total liabilities, secured and unsecured, of the debtor.
It means that among the secured and unsecured creditors and total number
of creditors, there is a threshold percentage of liabilities. The approval is
based on the amount of liabilities and not based on number of creditors.
12. When may an insolvent juridical debtor file a petition for voluntary liquidation?
An insolvent debtor may apply for liquidation by filing a petition for liquidation with
the court. The petition shall be verified, shall establish the insolvency of the debtor
and shall contain (a) a schedule of the debtor's debts and liabilities including a list of
creditors with their addresses, amounts of claims and collaterals, or securities, if any;
(b) an inventory of all its assets including receivables and claims against third parties;
and (c) the names of at least three (3) nominees to the position of liquidator.
If the petition is sufficient in form and substance, the court shall issue a Liquidation
Order.
13. Is the issuance of an order, declaring a petitioner in a Voluntary Insolvency
proceeding insolvent, mandatory upon the court?
Answer:
Assuming that the petition was in due form and substance and that the assets of the
petitioner are less than his liabilities, the court must adjudicate the insolvency. (BAR
1991)
14. Who may file petition for involuntary liquidation?
Three (3) or more creditors the aggregate of whose claims is at least either One
million pesos (Php1,000,000,00) or at least twenty-five percent (25%0 of the
subscribed capital stock or partner's contributions of the debtor, whichever is higher,
may apply for and seek the liquidation of an insolvent debtor by filing a petition for
liquidation of the debtor with the court if (a) there is no genuine issue of fact or law
on the claims/s of the petitioner/s, and that the due and demandable payments
thereon have not been made for at least one hundred eighty (180) days or that the
debtor has failed generally to meet its liabilities as they fall due; and (b) there is no
substantial likelihood that the debtor may be rehabilitated.
©2017 Dean Nilo T. Divina, All Rights Reserved 4

15. When may an individual debtor file a petition for Suspension of Payments?
An individual debtor who, possessing sufficient property to cover all his debts but
foreseeing the impossibility of meeting them when they respectively fall due, may file
a verified petition that he be declared in the state of suspension of payments by the
court of the province or city in which he has resided for six (6) months prior to the filing
of his petition. He shall attach to his petition, as a minimum: (a) a schedule of debts
and liabilities; (b) an inventory of assess; and (c) a proposed agreement with his
creditors.
The suspension order shall lapse when three (3) months shall have passed without the
proposed agreement being accepted by the creditors or as soon as such agreement is
denied.
16. Who are not covered by the court order and proceedings on suspension of
payments?
a. those creditors having claims for personal labor, maintenance, expense of last
illness and funeral of the wife or children of the debtor incurred in the sixty
(60) days immediately prior to the filing of the petition; and
b. secured creditors
c. creditors whose claims are not listed in the petition.
17. What are the requisites for the approval of the petition by the court?
The presence of creditors holding claims amounting to at least three-fifths (3/5) of
the liabilities shall be necessary for holding a meeting.
The creditors and individual debtor shall discuss the propositions in the proposed
agreement and put them to a vote;
To form a majority, it is necessary:
1. that two-thirds (2/3) of the creditors voting unite upon the same proposition;
and
2. that the claims represented by said majority vote amount to at least three-
fifths (3/5) of the total liabilities of the debtor mentioned in the petition; and
If the decision of the majority of the creditors to approve the proposed agreement or
any amendment thereof made during the creditors' meeting is upheld by the court,
or when no opposition or objection to said decision has been presented, the court
shall order that the agreement be carried out and all parties bound thereby to comply
with its terms.
NB for petition for suspension of payments, the number of creditors is important.
The total amount of liabilities owing to 6 creditors, a, b, c, d, e and f is 25o million.
The amount due to each of a, b and c is 150 million. In the creditors meeting, the
three agreed to the petition but not the remaining creditors. The petition cannot be
approved by the court because a, b and c while representing at least 3/5 of total
liabilities do not represent at least 2/3s of number of creditors.
18. When may an individual debtor file a petition for liquidation?
An individual debtor whose properties are not sufficient to cover his liabilities, and
owing debts exceeding Five hundred thousand pesos (Php500,000.00), may apply to
be discharged from his debts and liabilities by filing a verified petition with the court
of the province or city in which he has resided for six (6) months prior to the filing of
such petition. He shall attach to his petition a schedule of debts and liabilities and an
inventory of assets. The filing of such petition shall be an act of insolvency.
If the court finds the petition sufficient in form and substance it shall, within five (5)
working days issue the Liquidation Order.
19. When may creditor/s file a petition for involuntary liquidation against an
individual debtor?
©2017 Dean Nilo T. Divina, All Rights Reserved 5
Any creditor or group of creditors with a claim of, or with claims aggregating at least
Five hundred thousand pesos (Php500, 000.00) may file a verified petition for
liquidation with the court of the province or city in which the individual debtor resides
alleging that the debtor commited an act of insolvency.

20. What will guide the liquidator in carrying the liquidation of the insolvent
debtor?

The Liquidator shall submit to the court a Liquidation Plan. The Plan shall take into
account the rules on concurrence and preference of credit unless a preferred creditor
voluntarily waives his preferred right. Once approved the Plan shall be carried out to
settle the claims against the individual debtor?

CONGRATULATIONS IN ADVANCE PANEROS AND PANERAS

©2017 Dean Nilo T. Divina, All Rights Reserved 6