Republic Act No.

10142 is a law providing for the to cash or his properties can generate more cash Rehabilitation proceedings are available as well
rehabilitation or liquidation of financially if used in business than disposing of them. to MSMEs and individual debtors doing business
distressed enterprises and individuals as single proprietorships.
Actual insolvency – debtor’s assets are less than
The new law contains three main parts. liabilities.

A. Rehabilitation, whose purpose is to Procedural Rules

restore the financial health of insolvent
Three modes of Rehabilitation: A. Financial Rehabilitation Rules of
debtors
Procedure (FR Rules), adopted in 2013,
B. Liquidation, which provides for the A. Court-supervised Rehabilitation -
that implement FRIA’s provisions on
orderly liquidation of the debtor’s assets requires the approval of creditors
rehabilitation.
and liabilities, once it has been representing more than 50% of the
B. Financial Liquidation and Suspension of
determined that operations can no debtor’s total liabilities. It also requires
Payments Rules of Procedure (FLSP) that
longer be successfully restored. the approval of a rehabilitation plan by
implement the provisions of the FRIA on
C. Cross-border insolvency (liquidation in the court, which is mandated to act upon
suspension of payments and liquidation
insolvency), patterned after the UN it for a maximum period of 1y from the
in insolvency.
Citral Model Law, whose purpose is to filing of the petition.
address insolvency-related matters B. Pre-negotiated Rehabilitation - the The FLSP Rules applies to liquidation in times of
involving foreign companies with insolvent debtor is able to get the insolvency. It governs petitions for the
Philippine-based assets or foreign-based approval of its creditors representing at liquidation of insolvent juridical and individual
assets of Philippine companies. least 67% of its total liabilities. The court debtors. It also governs petitions for the
is given a maximum of 120 days to act on suspension of payments of insolvent individual
Debtor - shall refer to a sole proprietorship duly
it, otherwise the plan will be deemed debtors.
registered with DTI, a partnership and a
approved.
corporation duly registered with SEC, or an The FLSP Rules applies to proceedings that
C. Out-of-court Rehabilitation or
individual debtor who has become insolvent as started as a rehabilitation proceeding but was
Restructuring - covers a situation where
defined. ( DOES NOT INCLUDE banks, insurance later converted by a rehabilitation court into a
the insolvent debtor is able to get the
companies, pre-need companies, and national liquidation proceeding pursuant to the FRIA and
approval of its creditors representing at
and local government agencies or units) FR Rules.
least 85% of its liabilities and the plan is
Technical insolvency (illiquidity) - a financial binding on all creditors without need of The FLSP Rules also remedies deficiencies in the
condition where the debtor has sufficient court approval. liquidation of entities expressly excluded from
properties to cover all his debts but foresees the the coverage of the FRIA. Examples of these
Liquidation in insolvency is a remedy of last
impossibility of paying them as they fall due. His entities are banks, pre-need companies and
resort envisioned to pay off the debtor’s
assets are not in cash or not readily convertible insurance companies.
liabilities in an orderly fashion in case it is no
longer feasible to rehabilitate its business.
Acts of insolvency

a) that debtor is about to depart or has departed from RP, with intent to h) that he has suffered or procured his property to be taken on legal process
defraud his creditors with intent give a preference to one or more of his creditors and thereby hinder
or delay the liquidation or defraud any one of his creditors
b) that being absent from the Republic of the Philippines, with intent to i) that he has made any assignment, gift, sale, conveyance or transfer of his
defraud his creditors, he remains absent estate, property, rights or credits with intent to hinder or delay the liquidation
or defraud his creditors
c) that he conceals himself to avoid the service of legal process for the purpose j) that he has, in contemplation of insolvency, made any payment, gift, grant,
of hindering or delaying the liquidation or of defrauding his creditors sale, conveyance, or transfer of his estate, property, rights or credits
d) that he conceals, or is removing, any of his property to avoid its being k) that being a merchant or tradesman, he has generally defaulted in the
attached or taken on legal process payment of his current obligations for a period of 30 days
e) that he has suffered his property to remain under attachment or legal l) that for a period of 30 days he has failed, after demand, to pay any moneys
process for three days for the purpose of hindering or delaying the liquidation deposited with him or received by him in a fiduciary; and
or of defrauding his creditors
f) that he has confessed or offered to allow judgement in favor of any creditor m) that an execution having been issued against him on final judgement for
or claimant for the purpose of hindering or delaying the liquidation or of money, he shall have been found to be without sufficient property subject to
defrauding any creditors or claimant execution to satisfy the judgement.
g) that he has willfully suffered judgment to be taken against him by default for a-j, with intent to defraud
the purpose of hindering or delaying the liquidation or defrauding his creditors

INDIVIDUAL DEBTOR

Suspension of Payments (Illiquidity) Voluntary Liquidation INvoluntary Liquidation

Meaning mechanism that enables individual debtors to Liquidation proceedings initiated by the debtor Liquidation proceedings initiated by the
temporarily suspend payments of debts and creditor
restructure the same
Objective Debtor is NOT to be discharged from his debts
but to simply bid for more time to settle his
obligations
mere filing of the petition has the effect of
suspending the enforcement of claims against
the debtor

The petition effectively gives him a new lease

of life and affords him time to attend to his
business undistracted by court suits.
What to do? individual debtor 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 was a resident for 6 months
prior to the filing.
Pieces of (a) a schedule of debts & liabilities
evidence (b) an inventory of assets and
needed (c) a proposed agreement with his creditors
The evidence must show that the individual
debtor has sufficient assets to cover all of his
debts but not the capacity to meeting the
payment of his obligations when they fall due.
due.
The evidence needed for suspension of
payments underscores the importance of
tracking one’s personal finances through the
generation of at least yearly balance sheets and
income statements.
Combined with the use of financial ratios, an
individual can easily say whether trouble is
brewing on the horizon or if financial goals are
being met.
If WITH Court will issue an order
MERIT in a. calling for a meeting of all creditors named
verified in the schedule of debts and liabilities not less
petition than fifteen days and not more than forty days
from the date of the order.
b. additionally, may suspend any pending
execution against the individual debtor except
in situations where the properties are held as
security by secured creditors.
an individual has insufficient assets to cover his
liabilities, >P500k, he 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 was a resident for
six months prior to the filing
(a) a schedule of debts & liabilities
(b) an inventory of assets
Court will issue a liquidation order
the liquidation order involves the liquidation of
the properties of the individual debtor with the
sheriff taking possession and control of all the
properties of the individual debtor, except
those that may be exempt from execution.
any creditor or group of creditors with a
claim or claims totaling at least P 500k may
file a (verified) petition for the liquidation of
the individual debtor with the court of the
province or city in which the individual debtor
resides
*Any creditor/group of creditors with a claim
of or the aggregate of at least Php 1M or at
least 25% of the subscribed capital stock or
partners' contributions
(a) a schedule of debts & liabilities;
(b) an inventory of assets; and
(c) a proposed agreement with his creditors
Among the allegations to be stated in this
petition for involuntary liquidation are that
the individual debtor is a flight risk and/or
intends to defraud his creditors through
various means
Court will issue a liquidation order
A debtor who has been adjudged insolvent is
given his discharge by the court after his
properties have been applied to his debts.
Supposing a year later, with those debts still
not fully paid, he wins in the sweepstakes
lotto and comes into a large fortune, the
creditors can no longer sue him for the
 Among others, the liquidation order involves balance. The suit will no longer prosper on
* suspension of pending execution will lapse the liquidation of the properties of the debts that are properly discharged in
when three months have passed without the individual debtor with the sheriff taking insolvency. There are debts, however, which
proposed agreement being accepted by the possession and control of all the properties of are not discharged despite the adjudication
creditors or as soon as the proposed the individual debtor, except those that may be of insolvency. These are taxes and
agreement is denied by the court exempt from execution. assessments due the government, national or
local; obligation arising from embezzlement
The presence of creditors holding claims The liquidation order basically adjudicates the or fraud; obligations of any person liable to
amounting to at least three-fifths or sixty debtor as insolvent. The court has no authority the insolvent debtor for the same debt;
percent of the liabilities of the individual to refuse the adjudication of insolvency if the alimony or claim for support; in general,
debtor is necessary for holding a creditors’ petition clearly establishes that the individual debts that are not provable against the estate
meeting. debtor is insolvent. In liquidation proceedings, of the insolvent or not listed in the schedule
the assets of the insolvent debtor shall be submitted by the insolvent debtor.
The proposed agreement with creditors will be equitably distributed to his creditors based on
approved if: (a) two-thirds of the creditors the statutory rules on concurrence and
voting agree to the proposition; and (b) the preference of credits.
claims represented those voting in favor of the
proposed agreement amount to at least three-
fifths of the total liabilities of the individual
debtor.
debtor’s proposal, or a modification thereof,
can be sustained if it is approved by at least 2/3
of the creditors representing at least 3/5 of the
total liabilities of the debtor.

Types of Insolvency Proceedings: Basic Procedure Effects of Liquidation Order

(a) voluntary (debtor-initiated) liquidation of (1) filing of a petition for liquidation (1) the juridical debtor is deemed dissolved and its corporate or
insolvent juridical debtors juridical existence is terminated
(b) involuntary (creditor-initiated) liquidation (2) issuance of a liquidation order by the (2) legal title to and control of all the assets of the debtor, except
of insolvent juridical debtors court those that may be exempt from execution, shall be deemed vested
in the liquidator or, pending his election or appointment, with the
court
(c) voluntary liquidation of insolvent individual (3) appointment of the liquidator (3) all contracts of the debtor are deemed terminated and/or
debtor; and breached, unless the liquidator, within 90 days from the time he
takes his oath of office, declares otherwise and the counter-party
agrees
(d) involuntary liquidation
individual debtors.
of insolvent (4) submission of the registry of claims (4) no separate action for the collection of an unsecured claim shall
be allowed
(5) preparation and approval of the (5) actions already pending will be transferred to the liquidator for
liquidation plan him to accept and settle or contest
(6) settlement of the debtor’s debts and (6) if the liquidator contests or disputes the claim, the court shall
liabilities allow, hear, and resolve such contest; and
(7) report of the liquidator & (7) no foreclosure proceeding shall be allowed for a period of 180
days from the date of the order.
(8) termination of the proceeding