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VOLUNTARY INSOLVENCY

for CREDIT TRANSACTION

SUBMITTED BY:
OCO, NEIL CHRISTIAN A.
ORAN, PASTOR III
AZNAR, JOSE RAFAEL
PALANAN, ARNOLD
MONTILLA, DINO

SUBMITTED TO:
ATTY. JERLIE LUIS-REQUERME
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VOLUNTARY INSOLVENCY

INSOLVENCY – State of a person whose liabilities are more than his assets. It is
the inability of a person to pay his debts as they become due in the ordinary course
of business.

Balance Sheet Test – relative condition of a man’s assets and liabilities that the
former if all made immediately available, would not be sufficient to discharge the
latter.

Equity Test – a person may be insolvent although he may be able to pay his debts
at some future time on a settlement and winding up of his affairs.

INSOLVENCY vs. BANKRUPTCY

 The only distinction between insolvency and bankruptcy is a matter of
terminology and the source of the laws relating thereto.

 Either a bankruptcy or insolvency statute may operate to discharge a debt as

well as release the debtor from imprisonment, and either may operate on the
petition of the debtor or that of his creditors.

INSOLVENCY PRIMARILY GOVERNED BY THE CIVIL CODE

 Insolvency shall be governed by special laws insofar as they are not
inconsistent with the Civil Code. Insolvency is thus primarily governed by
the Civil Code and subsidiarily by the Insolvency Law.

 The Insolvency Law is intended to cover the entire subject of insolvency and
bankruptcy and must be treated as a complete body of law upon the subject.

PURPOSES OF INSOLVENCY LAW:

1. To effect an equitable distribution of the bankrupt’s property among his

creditors; and
2. To benefit the debtor in discharging him from his liabilities and enabling him
to start fresh with the property set apart to him as exempt.
3. The regulatory and unifying influence of the law on credit transactions and
business usage throughout the country.

WHAT MAY BE PERMITTED OF A DEBTOR BY THE INSOLVENCY LAW

1. Petition the court to suspend payments;

2. To be discharged from his debts and liabilities by voluntary or involuntary
insolvency proceedings.

SUSPENSION OF PAYMENTS
– Postponement, by court order, of the payment of debts of one who, while
possessing sufficient property to cover his debts, foresees the impossibility of
meeting them when they respectively fall due.

PURPOSE:
 To suspend or delay the payment of debts the amount of which is not
affected although a postponement is declared.
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VOLUNTARY INSOLVENCY

BASIS:
 Probability of the debtor’s inability to meet his obligations when they
respectively fall due, despite the fact that he has sufficient assets to
cover all his liabilities.

REQUISITES OF PETITION FOR SUSPENSION OF PAYMENTS:

1. Petition is filed by a debtor;
2. Possessing sufficient property to cover all his debts;
3. Foreseeing the impossibility of meeting them when they respectively fall due;
and
4. Petitioning that he be declared in the state of suspension of payments

RULE ON DOUBLE MAJORITY IN THE MEETING OF CREDITORS

Majority shall be:
1. Two thirds (2/3) of the creditors voting upon the same proposition, which
2. Represents at least three fifths (3/5) of the total liabilities of the debtor.

KINDS OF INSOLVENCY

VOLUNTARY INSOLVENCY – an insolvent debtor owing debts exceeding the

amount of P1, 000.00 may apply to be discharged from his debts and liabilities by
petition to the RTC of the province or city in which he has resided for six months
next preceding the filing of the petition.

DISTINCTIONS BETWEEN SUSPENSION OF PAYMENTS AND INSOLVENCY

SUSPENSION INSOLVENCY
OF PAYMENTS
Purpose Suspend or delay the
Discharge the debtor
payment of debtsfrom the payment of
debts
Sufficiency of Debtor has sufficient Debtor does not have
property property to pay his Sufficient property to
debts pay all his debts
Effect on amount of Amount of indebtedness The creditors receive
debt is not affected less than their credits,
and in case where there
are preferences, some
creditors may not
receive any amount at
all
Number of creditors Number of creditors is In case of involuntary
required immaterial insolvency, three or
more creditors are
required

INVOLUNTARY INSOLVENCY – an adjudication of insolvency may be made on

the petition of three or more creditors, residents of the Philippines, whose credits or
demands accrued in the Philippines, and the amount of which credits or demands
are in the aggregate of not less than P1,000.00.

DISTINCTIONS BETWEEN VOLUNTARY INSOLVENCY AND INVOLUNTARY

INSOLVENCY
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VOLUNTARY INSOLVENCY

VOLUNTARY INVOLUNTARY
INSOLVENCY INSOLVENCY
Number of creditors One creditor is sufficient Three or more creditors
are required
Who may petition Filed by the insolvent Filed by three or more
debtor creditors who possess the
Qualifications required by
law
Acts of insolvency Debtor must not be guilty Debtor must have
of committed
any of the acts of one or more of such acts
insolvency of
(Sec. 20) insolvency
Amount of debt The amount of Amount must not be less
indebtedness Than P1,000.00
s must exceed P1,000.00 (aggregate)
Posting of bond Bond is not required Petition must be
accompanied by a bond
Ex parte adjudication An order of adjudication An order of adjudication
may be granted ex parte granted only after a
hearing
Residency duration to Petition is filed in the RTC Length of residence is
Vest jurisdiction in of the province or city immaterial
courts where
the debtor has resided for
six
months
Requirement of hearing Court issues the order of The debtor is not
Adjudication declaring the adjudicated
Petitioner insolvent upon insolvent until after
the hearing
filing of the voluntary of the case
petition

STEPS IN VOLUNTARY INSOLVENCY

1. Filing of the petition by the debtor praying for the declaration of

insolvency ;
2. Issuance of order of adjudication declaring the petitioner insolvent;
3. Publication and service of the order;
4. Meeting of the creditors to elect the assignee in insolvency;
5. Conveyance of the debtor’s property by the clerk of court to the assignee;
6. Liquidation of the debtor’s assets and payment of his debts;
7. Composition, if agreed upon;
8. Discharge of the debtor on his application, except a corporation;
9. Objection, if any, to the discharge;
10. Appeal to the SC in certain cases

REQUISITES OF PETITION FOR VOLUNTARY INSOLVENCY, THE PETITION

WHICH MUST BE VERIFIED, IS TO BE FILED

1. By an insolvent debtor;
2. Owing debts exceeding in amount of the sum of P1000;
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3. In the RTC of the province or city in which he has resided for 6 months next
preceding the filing of such petition;
4. Setting forth in his petition the following:
a. His place of residence;
b. The period of residence therein immediately prior to filing said
petition;
c. His inability to pay all his debts in full ;
d. His willingness to surrender all his property, estate, and
effects not exempt from execution for
the benefit of creditors;
e. An application to be adjudged an insolvent

EFFECT OF FILING OF PETITION

 Once the petition is filed, it ipso facto takes away and deprives
the debtor petitioner of the right to do or commit any act of
preference as to creditors, pending the final adjudication.

DOCUMENTS TO ACCOMPANY THE PETITION

1. A verified schedule must contain:

a. A full and true statement of all debts and liabilities of the insolvent
debtor;
b. An outline of the facts giving rise or which might give rise to
a cause of action against such insolvent debtor.
2. A verified inventory which must contain:
a. An accurate description of all the personal and real property of the
insolvent exempt or not from
execution including a statement as of its value, location and
encumbrances thereon;
b. An outline of the facts giving rise or which might give rise to a
right of action in favor of the insolvent debtor.

FILING OF SCHEDULE AND INVENTORY, JURISDICTIONAL

 On filing a petition for a discharge from his debts, an insolvent

is required to present a verified schedule of liabilities and a
verified inventory of his properties.
 The presentation of such documents stating the amount of each
creditor’s claim is a jurisdictional requirement, without the
proper performance of which his subsequent discharge will be of no
avail.

EFFECT OF ERRORS IN DESCRIPTION OR OMISSION OF PROPERTY IN

INVENTORY

 That the property is erroneously or ambiguously described in the

insolvent’s inventory will not affect the title of purchasers in the
insolvency proceedings. All the property of the insolvent passes to his
assignee and is administered in the insolvency proceedings regardless of
errors in the insolvency.
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 If the insolvent omits property from his inventory, through either mistake
or fraud, it is the duty of the assignee to have the inventory
amended so as to include it and take possession and administer it.
 Even property exempt from execution must be included in order to preclude
possible fraudulent omissions under the pretext that such property is
exempt. But where the petitioner didn’t attach an inventory to its
petition for insolvency, alleging under oath that it had no property to
inventory, the lack of inventory was held not fatal to the petition
because it was assumed, until proven otherwise, that the petitioner was
stating the truth.

EFFECT OF COURT ORDER DECLARING DEBTOR INSOLVENT

1. All the assets of the debtor not exempt from execution are taken
possession of by the sheriff until the appointment of a receiver or
assignee.
2. The payment to the debtor of any debts due to him and the delivery to the
debtor or to any person for him of any property belonging to him and the
transfer of any property by him are forbidden.
3. All civil proceedings pending against the insolvent debtor shall be stayed.
4. Mortgages or pledges, attachments or executions on property of the debtor
duly recorded and not dissolved are not affected by the order.

ASSIGNEE – person elected by the creditors or appointed by he court to whom an

insolvent debtor makes an assignment of all his property for the benefit of his
creditors.

CREDITORS NOT ENTITLED TO VOTE IN THE ELECTION OF ASSIGNEE

1. Those who did not file their claims at least two days prior to the time
appointed for such election
2. Those whose claims are barred by the statute of limitations
3. Secured creditors unless they surrender their security or lien to the sheriff or
receiver or unless they shall first have the value of such security fixed
4. Holders of claims for unliquidated damages arising out of pure tort.

EFFECTS OF ASSIGNMENT
1. Assignee takes the property in the plight and conditions that the insolvent
held it.
2. Upon appointment, the legal title to all the property of the insolvent is
vested in the assignee, and the control of the property is vested in the
court.
3. All actions to recover all the estate, debts, and effects of the insolvent shall
be brought by the assignee and not by the creditors.
4. The assignment shall:
a. Dissolve any attachment levied within one month next
preceding the commencement of insolvency proceedings;
b. Vacate and set aside judgment entered in any action
commenced within 30 days immediately prior to the
commencement of insolvency proceedings;
c. Vacate and set aside execution issued thereon;
d. Vacate and set aside any judgment entered by default or consent of
the debtor within 30 days prior to the commencement of insolvency
proceedings
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SERVICEWIDE v. CA: Assignment of Credit/Consent: As provided in Article 2096 in

relation to Article 2141 of the Civil Code, a thing pledged may be alienated by the pledgor or
owner with the consent of the pledgee. This provision is in accordance with Act No. 1508
which provides that a mortgagor of personal property shall not sell or pledge such property, or
any part thereof, mortgaged by him without the consent of the mortgagee in writing on the
back of the mortgage and on the margin of the record thereof in the office where such
mortgage is recorded.
A mortgage credit may be alienated or assigned to a third person. Since the assignee
of the credit steps into the shoes of the creditor-mortgagee to whom the chattel is mortgaged,
it follows that the assignee’s consent is necessary in order to bind him of the alienation of the
mortgaged thing by the debtor-mortgagor This is tantamount to a novation.

BOND OF THE ASSIGNEE

 After his election, the assignee is required to give a bond for
the faithful performance of his duties.

Purpose:
1. To establish his official character
2. To establish his right to sue in that capacity

 The bond is solely for the benefit of the creditors of the insolvent, and
that third persons have no remedy against the sureties if the assignee,
purporting to be as such, wrongfully takes property from such third
persons and converts it to his own use.

PROPERTIES OF INSOLVENT THAT PASS TO THE ASSIGNEE

1. All real and personal property, estate, and effects of the debtor,
including all deeds, books, and papers in relation thereto;
2. Properties fraudulently conveyed;
3. Right of action for damages to real property
4. The undivided share or interest of the insolvent debtor in property held
under co-ownership

PROPERTIES OF INSOLVENT THAT DO NOT PASS TO THE ASSIGNEE

1. Property exempt from execution;
2. Property held in trust;
3. Property of the conjugal partnership or absolute community except
insofar as the debtor’s obligations redounded to the benefit of the family.
4. Property to which a mortgage or pledge exists unless the creditor
surrenders his security or lien.
5. After-acquired property except fruits and income of property owned by the
debtor
6. Non-leviable assets like life insurance policy which do not have any cash
surrender value
7. Right of action for tort which is purely personal in nature.

POWERS OF THE ASSIGNEE

1. To sue and recover all the estate, debts, and claims belonging to or due to
the debtor;
2. To take into his possession all the estate of the debtor except property
exempt from execution;
3. In case of non-resident or absconding or concealed debtor, to demand
and receive of every sheriff all the property and money in his possession
belonging to the debtor.
4. To sell, upon order of the court, any estate of the debtor which has come
into his possession;
5. To redeem all mortgages and pledges and to satisfy any judgment
which may be an encumbrance on any property sold by him.
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6. To settle all accounts between the debtor and his debtors subject to
the approval of the court;
7. To compound, under the order of the court, with any person indebted to
such debtor;
8. To recover any property fraudulently conveyed by the debtor.

When Sec. 37 does not apply:

 Not applicable where what has been disposed of is the creditor’s own
credit and not the insolvent’s property.

DIVIDENDS IN INSOLVENCY
Dividends in insolvency – parcel if the fund arising from the assets of the estate,
rightfully allotted to a creditor entitled to share in the fund, whether in the same
proportion with other creditors or in a different proportion. It is paid by the
assignee only upon order of the court.

ORDER OF DISTRIBUTION
1. Equitable claims under Sec. 48;
2. Preferred claims with respect to specific movable property and specific
immovable property under Art. 2241 and 2242 of the CC.
3. Preferred claims as to unencumbered property of the debtor which shall be
paid in the order named in Art. 2244 of the CC.
4. Common or ordinary credits which shall be paid pro rata regardless of dates
under Art. 2245 of the CC.

COMPOSITION
 An agreement, made upon a sufficient consideration, between an
insolvent or embarrassed debtor and his creditors, whereby the latter
for the sake of immediate or sooner payment, agree to accept a
dividend less than the whole amount of their claims, to be distributed
pro rata, in discharge and satisfaction of the whole debt.

DISCHARGE
 The formal and judicial release of an insolvent debtor from his debts with the
exception of those expressly reserved by law.

WHEN AN INSOLVENT DEBTOR MAY APPLY FOR A DISCHARGE

 General rule: A debtor may apply to the RTC for a discharge at three
months to one year after the adjudication of insolvency.
 Exception: The property of the insolvent has not been converted into
money without his fault, thereby delaying the distribution of dividends
among the creditors in which case the court may extend the period.

DEBTS RELEASED BY A DISCHARGE

1. All claims, debts, and liabilities, and demands set forth in the schedule; and
2. All claims, debts, liabilities and demands which were or might have been
proved against the estate in insolvency

DEBTS NOT RELEASED BY DISCHARGE

1. Taxes or assessments due the Government;
2. Any debt created by the fraud or embezzlement of the debtor;
3. Any debt created by the defalcation of the debtor as a public officer or while
acting in a fiduciary capacity;
4. Debt of any person liable for the same debt, for or with the insolvent debtor,
either as a partner, joint contractor, indorser, surety or otherwise;
5. Debts of a corporation (Reason: Corporation is not granted a discharge)
6. Claim for support (Reason: It will make the law a means of avoiding the
enforcement of the obligation)
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7. Discharged debt but revived by a subsequent new promise to pay (Reason:

Discharge does not end the moral obligation to pay)
8. Debts which have not been duly schedules in time for proof and allowance.

 Exception: The creditors had notice or actual knowledge of the

insolvency proceedings
9. Claims for:
a. Unliquidated damages;
b. Secured creditors;
c. Not in existence or not mature at the time of the discharge;
d. Contingent at the time of the discharged.

LEGAL EFFECTS OF DISCHARGE

 Discharge takes effect from the commencement of the proceedings in
insolvency.
1. Releases the debtor from all claims, debts, liabilities and demand set forth in
the schedule or which were or might have been proved against his estate in
insolvency.
2. Operates as a discharge of the insolvent and future acquisitions but permits
mortgages and other lien
3. It is a special defense which may be pleaded and be a complete bar to all
suits brought on any such debts, claims, liabilities or demands.
4. It does not operate to release any person liable for the same debts, for or
with the debtor, either as partner, joint contractor, indorser, surety, or
otherwise.
5. The certificate of discharge is prima facie evidence of the fact of release, and
the regularity of such discharge.

Remedy of guarantor or surety when debtor declared judicially insolvent:

 File a contingent claim in the insolvency proceeding, if his rights as
such guarantor or surety are not to be barred by the subsequent
discharge of the insolvent debtor from all his liabilities.

WHEN DISCHARGE MAY BE REVOKED

 Discharge may be revoked by the court which granted it upon
petition of any creditor:
1. Whose debt was proved or provable against the estate in
insolvency, on the ground that the discharge was fraudulently
obtained; and provided,
2. The petition is filed within one year after the date of the discharge.

EFFECT OF DEATH OF INSOLVENT DEBTOR

1. Death after the order of adjudication – the proceedings shall be
continued and concluded in like manner and with like validity and effects as if
he had lived.
2. Death before the order of adjudication – the proceedings shall be
discontinued.

 Remedy: File claims in the proper testate or intestate proceedings

WHEN RECEIVER MAY BE APPOINTED

 Anytime before the election of an assignee, when it appears by the
verified petition of a creditor:
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1. That the assets of the insolvent or a considerable portion thereof

have been pledged, mortgaged, transferred, assigned, conveyed, or
seized on legal process in violation of Sec. 70;
2. That it is necessary to commence an action to recover the same;

 The receiver shall deliver all the property, assets, or effects remaining
in his hands to the assignee who shall be substituted for him in all
pending actions or proceedings.

WHEN PETITION MAY BE DISMISSED

 At anytime before the appointment of an assignee:
1. Voluntary petition – upon the application of the debtor, if no creditor files
written objections;
2. Involuntary petition –
a. Upon the application of the petitioning creditors; or
b. By written consent of all creditors filed in court, in which case, the
proceedings may be dismissed at any time.

 After the appointment of an assignee, dismissal is not allowed without

the consent of all parties interested in or affected thereby.

WHEN APPEAL MAY BE TAKEN TO THE SUPREME COURT

From an order granting or refusing:

1. An adjudication in insolvency and in the latter case, from the order fixing the
amount of costs, expenses, damages, and attorney’s fees allowed the debtor;
2. A creditor’s claim when the amount in dispute exceeds P300.00
3. A claim for property not belonging to the insolvent, presented under Sec. 48
(equitable claims)
4. Settling an account of an assignee;
5. Setting apart homestead or other property claimed as exempt from
execution.
6. A discharge to the debtor.