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Credit Transactions - G01

Burce, Zerrudo


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) of R.A. No. 10142,
also known as the Financial Rehabilitation and
Insolvency Act of 2010

In the context of insolvency, rehabilitation is
the process of reorganizing a debtors financial
o Purpose: Enables an insolvent debtor to
gain a new lease on life
Helps the debtor continue to exist as a
financial entity
Benefits its employees, creditors,
owners, and even the general public

Triggered by a crisis that unduly strains a
debtors financial affairs
It contemplates a continuance of financial life
and activities to reinstate a debtor to its
former position of successful operation and

Provides for the equitable distribution of an
insolvent debtors remaining assets to its
Assets of the debtor are held in trust for the
equal benefit of all creditors
Precludes undue preference of one creditor
over another
Insolvent debtor gets a fresh start by relieving it
of its outstanding debts and permitting it to
reorganize its affairs

Conditions for rehabilitation to be allowed
o Economic feasibility; and
o Present value recovery
If there is non-compliance with any of these
conditions, the recourse to be taken should be

Three Modes
1. Court-supervised rehabilitation
2. Pre-negotiated rehabilitation
3. Out-of-court rehabilitation


Judicial insolvency proceedings
May be voluntary or involuntary

Rehabilitation Proceedings
Instituted by the insolvent debtor
o Debtor may be a sole proprietorship,
partnership, or corporation

Rehabilitation Proceedings
When is the debtor considered insolvent?
Under the illiquidity concept
Debtor possesses sufficient property to cover all its
liabilities, but foresees the impossibility of meeting them
when they fall due

Under the balance sheet concept

Assets are insufficient to cover its liabilities

Note: Regardless of the concept used, rehabilitation

should be economically feasible and result in better
present value recovery for the creditors

Rehabilitation Proceedings
Judicial insolvency proceedings instituted by a
creditor or group of creditors against an
insolvent debtor

Involuntary Rehabilitation
Proceedings: Conditions
1. Complies with the number of creditors or
value of claims required by law, or both
Value of claims: Should at least be P1 Million or at least
25% of the subscribed capital stock or partners
contributions, whichever is higher

Involuntary Rehabilitation
Proceedings: Conditions
2. Circumstance requiring rehabilitation is
alleged and established
No genuine issue of fact or law on the claims of the
creditors, and that the due and demandable payments
have not been made for at least 60 days, or
Debtor has failed generally to meet its liabilities as they
fall due (illiquidity concept), or
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 (illiquidity concept) or will render it
insolvent (balance sheet concept).

Commencement Order
Order issued by the court which vests to the
Rehabilitation Receiver the powers and functions
granted to it by law, with emphasis on its right to
review and obtain all records of the debtor
Commencement date: Date of issuance of the
commencement order
Retroacts to the date of filing of the petition
All extrajudicial attempts to collect or enforce a claim,
all setoffs of claims, and all liens sought to be
perfected, are voided.

Stay or Suspension Order

Contains two orders
1. Stay order

Issued against the creditors

Suspends all actions or proceedings, in court or otherwise, for

the enforcement of claims against the debtor, and
Suspends all actions to enforce any judgment, attachment or
other provisional remedies against the debtor

2. Injunction

Issued against the debtor

Prohibits the sale, encumbrance, transfer or disposal in any

manner of any of its properties, except in the ordinary course of
business; and
Prohibits payment of liabilities outstanding as of the
commencement date, except as provided in the FRIA.

Stay or Suspension Order

Through it, the Rehabilitation Receiver gets a
chance to effectively exercise its powers free
from any judicial or extrajudicial interference that
might prevent the rescue of the debtor
As long as the debtor is under a receiver, all
actions or proceedings for the enforcement of
claims against it must yield to the greater
imperative of rehabilitation.
The injunction ensures that the debtor will not
commit any act of fraud against its creditors, or
exercise undue preference among its creditors.

Exceptions to
Stay or Suspension Order
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 court for appropriate action;

Subject to the discretion of the court, cases pending or filed at a specialized court
or quasi-judicial agency which, upon determination by the court 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;
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;
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;

Exceptions to
Stay or Suspension Order
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;
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
Any criminal action against individual debtor or owner, partner, director or
officer of a debtor shall not be affected by any proceeding commend
under this Act.

Exceptions to
Stay or Suspension Order
All claims for administrative expenses are excepted from the
application of the stay or suspension order.
[Sec. 4] Administrative expenses shall refer to those reasonable and
necessary expenses:
(1) incurred or arising from the filing of a petition under the provisions of this
(2) arising from, or in connection with, the conduct of the proceedings under
this Act, including those incurred for the rehabilitation or liquidation of the
(3) incurred in the ordinary course of business of the debtor after the
commencement date;
(4) for the payment of new obligations obtained after the commencement
date to finance the rehabilitation of the debtor;
(5) incurred for the fees of the rehabilitation receiver or liquidator and of the
professionals engaged by them; and
(6) that are otherwise authorized or mandated under this Act or such other
expenses as may be allowed by the Supreme Court in its rules.

Subsequent Actions
At the initial hearing, the Court shall take the following
Determine the creditors who have made timely and proper filing
of their notice of claims;
Hear and determine any objection to the qualifications of the
appointment of the rehabilitation receiver and, if necessary
appoint a new one;
Direct the creditors to comment on the petition and the
Rehabilitation Plan, and to submit the same to the court and to
the rehabilitation receiver within a period of not more than
twenty (20) days; and
Direct the rehabilitation receiver to evaluate the financial
condition of the debtor and to prepare and submit to the court
within forty (40) days from initial hearing the report provided in
Section 24 hereof.

Subsequent Actions
Report of the Rehabilitation Receiver
Done within 40 days from the initial hearing
May be with or without the comments of the creditors or any of them
Shall contain his preliminary findings and recommendations on
the debtor is insolvent
if so, the causes and any unlawful or irregular act or acts committed by the
owner/s of a sole proprietorship partners of a partnership or directors or
officers of a corporation in contemplation of the insolvency of the debtor or
which may have contributed to the insolvency of the debtor;

the underlying assumptions, the financial goals and the procedures to

accomplish stated in the Rehabilitation Plan are realistic, feasible and
there is a substantial likelihood for the debtor to be successfully
the petition should be dismissed; and
the debtor should be dissolved and/or liquidated.

Subsequent Actions
Within 10 days from the receipt of the report made by
the rehabilitation receiver, the court may:
Give due course to the petition
Dismiss the petition if:
Debtor is not insolvent;
Petition is merely intended to delay enforcement of the creditors claims;
Petition, Rehabilitation Plan and its attachments contain materially false
or misleading statements; or
Debtor committed acts of misrepresentation or in fraud of its creditors

Convert the proceedings into one for liquidation

Debtor is insolvent, AND
No substantial likelihood for debtor to be successfully rehabilitated.

Rehabilitation Receiver
Who may be a rehabilitation receiver?
Natural or juridical person
If the rehabilitation receiver is a juridical entity, it must
designate a natural person/s who possess/es all the
qualifications and none of the disqualifications as its
representative, it being understood that the juridical
entity and the representative/s are solidarily liable for
all obligations and responsibilities of the rehabilitation

Rehabilitation Receiver
[Sec. 29] Qualifications
A citizen of the Philippines or a resident of the Philippines
in the six (6) months immediately preceding his
Of good moral character and with acknowledged integrity,
impartiality and independence;
Has the requisite knowledge of insolvency and other
relevant commercial laws, rules and procedures, as well as
the relevant training and/or experience that may be
necessary to enable him to properly discharge the duties
and obligations of a rehabilitation receiver; and
Has no conflict of interest
Provided, such conflict of interest may be waived, expressly or
impliedly, by a party who may be prejudiced thereby.

Rehabilitation Receiver
[Sec 30] Initial Appointment
Court shall initially appoint the rehabilitation receiver,
who may or may not be from among the nominees of
the petitioner.
At the initial hearing of the petition, the creditors and
the debtor who are not petitioners may nominate
other persons to the position.
In case the debtor is a securities market participant,
the court shall give priority to the nominee of the
appropriate securities or investor protection fund.

Rehabilitation Receiver
[Sec. 31] Powers, Duties and Responsibilities
Preserve and maximize the value of the debtors assets during the
Determine the viability of the rehabilitation;
Prepare and recommend a rehabilitation plan; and
Implement the rehabilitation plan.

Rehabilitation Receiver
May be removed motu proprio or upon motion by any creditor/s
holding more than fifty percent (50%) of the total obligations of the
Grounds for removal
Incompetence, gross negligence, failure to perform or failure to exercise the
proper degree of care in the performance of his duties and powers;
Lack of a particular or specialized competency required by the specific case;
Illegal acts or conduct in the performance of his duties and powers;
Lack of qualification or presence of any disqualification;
Conflict of interest that arises after his appointment; and
Manifest lack of independence that is detrimental to the general body of the

Note: The above grounds for removal are not exclusive.

Creditors Committees
The creditors may, as a body, agree to form a creditors'
committee composed of a representative from each class of
creditors, such as the following:

Secured creditors;
Unsecured creditors;
Trade creditors and suppliers; and
Employees of the debtor.

The rehabilitation receiver shall extend the appropriate

assistance as may be defined in the procedural rules.

Creditors Committees
Purpose: Shall assist the rehabilitation receiver in
communicating with the creditors. The committee shall be the
primary liaison between the rehabilitation receiver and the
The committee cannot exercise or waive any right or give any consent
on behalf of any creditor unless specifically authorized in writing by
such creditor.

Management Committee
General Rule: The Rehabilitation Receiver does not take
over control and management of the debtor
Exception: The Rehabilitation Receiver or Management
Committee may assume powers of management when
there is clear and convincing evidence of:
Actual or imminent danger of dissipation, loss, wastage or
destruction of the debtors assets or other properties; or
Paralyzation of the business operations of the debtor; or
Gross mismanagement of the debtor, or fraud, or other
wrongful conduct on the part of, or gross or willful
violation of the FRIA by existing management of the debtor
or the owner, partner, director, officer or representatives in
management of the debtor.