TagHirap Corp Restructures Through Creditor Agreement

Financial Rehabilitation
and Insolvency Act of

2010 (R.A. 10142)
Prof. Maria Lulu G. Reyes, LlB, LlM

The case of
TagHirap Corporation
(THC)
• a well-established and
reputable domestic
company
• heavily invested on
research and development
of next generation products
On the Brink Corporation
The case of
• recently announced that it has developed a fuel

saving device that can reduce fuel consumption
by at least 60% when attached to the car’s
engine.
• Registered and patented the same

The case of
• announcement was supported with various

certifications attesting to the effectiveness of
the product
• exhaustive laboratory tests have likewise

supported the claim of the company
The case of
1. Liquidity problems
• THC used almost all of its
resources in developing the
product and is now having
difficulty meeting its debts
and obligations
• Not enough money to

manufacture the products
The case of
2. Threats of foreclosure and

garnishment
• its major creditor, Bankable Credit,

has initiated the proceedings to
foreclose the new machineries and
equipment, which OtBC used as
security for its loan obligation
• other secured creditors are also

threatening to garnish or foreclose
other company assets
The case of
3. Stoppage of work and supplies

delivery
• suppliers of the materials needed
for producing the product has also
withheld delivery and is
demanding immediate payment
before it resumes delivery.
• Workers have also filed labor

cases against OtBC for unpaid
benefits and threatened to strike
The case of
• invention is worth millions of

dollars and company has
great potentials
• the moment any of the

creditors succeeded in
enforcing its claim against
the corporation, its chance
of developing and selling the On the Brink Corporation
product becomes difficult, if

not impossible.
The case of
• What are the options available to TBC?

The case of
TBC can meet with its

creditors to
• Ask for time to find
white knight investor.
The case of

creditors to
• Convince them
to restructure
existing loan
agreements
The case of

creditors to
• Ask for time to find white
knight investor.
• Convince them to
restructure existing loan
agreements
• Invite them to
become part
owners (i.e.
convert loan to
equity)
The case of

creditors to
restructure existing
loan agreements
• Invite them to
become part owners
(i.e. convert loan to
equity)
The case of

creditors to
loan agreements
• Invite them to
become part owners
(i.e. convert loan to Mode 2: Pre-Negotiated
equity) Rehabilitation
The case of

creditors to
Restructuring
loan agreements Agreement/Re
• invite them to habilitation
become part owners
(i.e. convert loan to
Pre-Negotiated Plan
Rehabilitation
equity)
The case of
Approval by the
• debtor;
• creditors representing at least 67% of the secured obligations of the debtor;
• creditors representing at least 75% of the unsecured obligations of the debtor; and, creditors holding at least 85% of the total
liabilities, secured and unsecured, of the debtor; and,
• Publication of the notice of the OCRA

creditors to
restructure existing Restructuring
• invite them to
become part owners habilitation
(i.e. convert loan to Pre-Negotiated Plan
Rehabilitation
equity)
The case of

creditors to
restructure existing Restructuring
• invite them to
become part owners habilitation
(i.e. convert loan to Pre-Negotiated Plan
Rehabilitation
equity)
Approval or endorsement of creditors holding at least 2/3 of the total liabilities or the debtor
• secured creditors holding more than 50% of the total secured claims of the debtor
• unsecured creditors holding more 50% of the total unsecured claims of the debtor
The case of
• TBC met with its

creditors to
loan agreements
• Invite them to
become part owners
✔
Trade creditors/suppliers
(i.e. convert loan to agreed to continue to supply
equity) materials
The case of
• TBC met with its creditors

to
✔
restructure existing Unsecured creditors agreed
loan agreements to convert loan to equity
• Invite them to become
✔
part owners (i.e.
convert loan to equity) agreed to continue to supply
materials
The case of
• TBC met with its

creditors to
white knight
investor.
✔
• Convince them to Unsecured creditors agreed
restructure existing to convert loan to equity
loan agreements
• Invite them to
✔
become part owners agreed to continue to supply
(i.e. convert loan to materials
equity)
The case of
TBC met with its

creditors to
• Ask for time to
find white knight
investor.
restructure Unsecured creditors
existing loan ✔ agreed to convert loan
agreements to equity
• Invite them to
become part Trade Involuntary Petition
✔ creditors/suppliers
owners (i.e.
agreed to continue to
convert loan to supply materials
equity)
Voluntary Petition
The case of
OtBC met with its creditors

to
restructure existing loan Unsecured creditors
agreements ✔ agreed to convert loan
• Invite them to become to equity
part owners (i.e. convert
loan to equity) Trade Involuntary Petition
✔ creditors/suppliers
agreed to continue to
supply materials
Voluntary Petition
The case of
Liquidation Proceedings
• THC can close business and file a petition for Voluntary
Liquidation (Section 90, FRIA)
• THC can wait for a creditor to file Involuntary Petition
for Liquidation (Section 91, FRIA)
The Remedy of Liquidation
• the historical and traditional

method of dealing with the
insolvency of a corporation.
• ultimate objective is to
liquidate asset of debtor to pay
its creditors and terminate
commercial activities
• tends to be universal in its

concept, acceptance and
application
The Remedy of Liquidation: Process
Order of Gather/preserve/sale of Adjudication of

Petition corp assets
Liquidation creditors claims
Appointment of Closure of Termination of

Liquidator Business corp powers Distribution of proceeds (applying
priority of claims principles
Dissolution of
Corporation
Economic theory behind liquidation
• in a competitive market economy, an

enterprise that is unable to compete has no
place in and should be removed from the
market place
• insolvency is the principal identifying mark
of an uncompetitive enterprise
• If business is needed, new investors will
step in to fill the vacuum if insolvent debtor
is removed
Legal Theory Behind Liquidation
• liquidation process can only function

effectively if it is regarded as a collective
process, from the time of its inception up to
distribution of assets and dissolution of the
debtor
• Only way to ensure an orderly, transparent

and predictable distribution of remaining
assets of the debtor
The case of
On the Brink Corporation
Corporate Rehabilitation Proceedings

1. OtBC can file a voluntary petition for Corporate
Rehabilitation
2. A creditor can file a petition for Involuntary

Corporate Rehabilitation
Economic Theory Behind
Rehabilitation Proceedings
• inefficiency is not always

the cause of corporate
failures in the market
place
• remedy of liquidation is not
always appropriate and efficient
• corporation with a reasonable prospect of survival should
be given opportunity if it can be demonstrated that
 there is greater value and greater benefit for creditors in the
long term
 keeping essential business and other component parts of a
corporation together is more cost efficient than liquidation
Legal Justification Behind
Rehabilitation Proceedings
• facilitates quick and easy

access to remedies that
would make rehabilitation
feasible
• provides sufficient protection
for all those involved in the
process
• provides a structure which
permits the negotiation of a
commercial plan
Legal Justification for Rehabilitation
Proceedings
 Enables a majority of creditors to bind all other

creditors by the democratic exercise of voting rights
(cram down);
 Provides for judicial or other supervision to ensure

that the process is not subject to unfair manipulation
or abuse.
 Enables the emphasis on the concept of the

collective nature of the procedure.
Debt Relief Proceedings: Nature
Collective Procedure
• Distinguishes insolvency proceedings from practically
any other legal procedure.
• Endeavors to accommodate all of those who are
affected by or have an interest in the insolvent
debtor.
 insolvent debtor
 directors and shareholders,
 Secured and unsecured creditors
 employees,
 guarantors of the debtor
 Government
 etc.
Debt Relief Proceedings: Nature
• all about deciding who to pay, in what order

to pay, and how much to pay in an efficient
and equitable manner
• efficiency and equity sometimes may be

competing policy goals
• the way a country pursues those goals,

insolvency law says a lot about the attitudes
of its legal system
Development of Philippine Laws and
Rules on Corporate Rehab
Insolvency Law (Act No. 1956)

KINDS OF INSOLVENCY
1. Voluntary insolvency—an insolvent debtor owing debts exceeding in amount in
the sum of P1000, 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 6 months
next preceding the filing of the petition
2. Involuntary insolvency—an adjudication of insolvency may be made by the
petition of 3 or more creditors, residents
of the Philippines, whose credits or demands accrued in
the Philippines, for the amount of which credits or demands are in the
aggregate of not less than P1000.
Section 5 of P.D. 902-A, as amended, vested the SEC with

jurisdiction
“"petitions of corporations, partnerships or associations to be
declared in a state of suspension of payments in cases where the
corporation, partnership or association possess sufficient property
to cover all its debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the management of a
Rehabilitation Receiver or Management Committee created
pursuant to (PD 902-A)."
Section 5 of P.D. 902-A, as amended, vested the SEC with

jurisdiction
“"petitions of corporations, partnerships or associations to be
declared in a state of suspension of payments in cases where the
corporation, partnership or association possess sufficient property
to cover all its debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the management of a
Rehabilitation Receiver or Management Committee created
pursuant to (PD 902-A)."
In order to effectively exercise its jurisdiction, SEC is

granted the power to
a. appoint a rehabilitation receiver" and
b. create and appoint a management committee x x x to
undertake the management of corporations, partnerships or
associations in appropriate cases when there is imminent
danger of dissipation, loss, wastage or destruction of assets
or other properties or paralyzation of business operations of
such corporations or entities which may be prejudicial to the
interest of minority stockholders, parties-litigants or the
general public.
 in addition to proceedings for simple suspension of

payments, P.D. 902-A introduced a variation:
proceedings for suspension of payments where the
petition seeks the appointment of a rehabilitation
receiver or management committee.
Rules of Procedure on Corporate Recovery

 Approved on January 15, 2000
 Sought to rationalize the procedure on corporate
rehabilitation and suspension of payments, the Rules
explicitly provide for an independent action for
rehabilitation, i.e. separate from a proceeding for
suspension of payments.
Securities Regulation Code

 Passed on July 19, 2000
 transferred jurisdiction from the SEC to the regular
courts over cases enumerated in Section 5 of P.D.
902-A, and allowed the Supreme Court to designate
branches of the appropriate Regional Trial Courts to
hear and decide cases of such nature
Interim Rules on Corporate Rehabilitation

 Interim Rules resemble to a large extent the
SEC Rules of Procedure on Corporate Recovery
 Promulgated by the SC on November 2000 and
took effect on December 2000.
 SC designated 60 RTCs as commercial courts
to hear and decide SEC cases.
Republic Act No.10142 -
Financial Rehabilitation and
Insolvency Act
 Passed by Congress in February 2010
 Lapsed into law (not signed by the
President)
 Applicable to existing proceedings unless
court deemed it will cause prejudice
42
Financial Rehabilitation Rules of
Procedure (2013)
 Promulgated by the SC on
August 27, 2013
 apply to petitions for
rehabilitation of corporations,
partnerships, and sole
proprietorships.
 Rules on Liquidation are
currently being drafted by the
Rules
43
Financial Rehabilitation and
Insolvency Act
FRIA
Declared Policy of FRIA
 to encourage debtors and creditors to collectively
and realistically resolve and adjust competing claims
and property rights.
 ensure a timely, fair, transparent, effective and
efficient rehabilitation or liquidation of debtors
 maintain certainty and predictability in commercial
affairs, preserve and maximize the value of the
assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated.
45
Nature of proceedings under
FRIA
 Proceedings initiated are considered in rem,

summary, and non-adversarial in nature.
 Jurisdiction over all persons affected by the
proceedings is acquired upon publication of the
notice of the commencement of the proceedings in
any newspaper of general circulation
 proceedings operate against the whole world and the
orders issued by rehabilitation court are binding not
only upon those parties who appear in such
proceedings but also upon parties who were
summoned by publication but did not appear
46
Nature of proceedings under
FRIA
Rehabilitation proceedings are summary and non‐adversarial in

nature, and do not contemplate adjudication of claims that must
be threshed out in ordinary court proceedings. Adversarial
proceedings similar to that in ordinary courts are inconsistent
with the commercial nature of a rehabilitation case. The latter
must be resolved quickly and expeditiously for the sake of the
corporate debtor, its creditors and other interested parties.
Advent Capital and Finance Corporation v.
Alcantara, G.R. No. 183050, 25, January 2012
47
Rehabilitation Proceeding as a
Remedy
 Rehabilitation is xxx available to a corporation who, while

illiquid, has assets that can generate more cash if used in its
daily operations than sold. Its liquidity issues can be addressed
by a practicable business plan that will generate enough cash
to sustain daily operations, has a definite source of financing
for its proper and full implementation, and anchored on
realistic assumptions and goals.
Wonder Book Corporation v. Philippine Bank of Communications

676 SCRA 489 (July 16, 2012)
48
Rehabilitation Proceeding as a
Remedy
 remedy should be denied to corporations whose insolvency appears

to be irreversible and whose sole purpose is to delay enforcement of
any of the rights of the creditors, which is rendered obvious by the
following:
a. the absence of a sound and workable business plan;
b. baseless and unexplained assumptions, targets and goals;
c. speculative capital infusion or complete lack thereof for the
execution of the business plan;
d. cash flow cannot sustain daily operations; and
e. negative net worth and the assets are near full depreciation or
fully depreciated.
Wonder Book Corporation v. Philippine Bank of Communications
49 676 SCRA 489 (July 16, 2012)
Court Supervised Rehabilitation
Proceedings: Initiation of Petition
Corporate Rehabilitation: Who can
initiate court supervised rehabilitation
Two types of court supervised rehabilitation

proceedings
1. Voluntary petition – filed by the debtor or group of

debtors
2. Involuntary petition – filed by a creditor or group of
creditors
Definition of Debtor
 A “debtor” is a
a. sole proprietorship duly registered with the DTI
b. partnership duly registered with SEC
c. corporation duly organized and existing under Philippine
laws
d. individual debtor who has become insolvent as defined
herein.
52
Definition of Debtor
The following are excluded from FRIA

a. Banks – jurisdiction with BSP;
b. Insurance Companies – jurisdiction with Insurance
Commission;
c. Pre‐Need Companies – jurisdiction with Insurance
Commission;
d. National or Local Government Units
 Note that GOCCs and GFIs other than banks are covered by the FRIA
unless their specific charter provides otherwise
53
The case of
b
a
BestFeels h
Corp. a
y
Devt.
Corp
Group of Debtors
A group of debtors may jointly file a petition for
rehabilitation when:
a. one or more of its members foresee the impossibility
of meeting debts when they respectively fall due;
b. the financial distress would likely adversely affect the
financial condition and/or operations of the other
members of the group; and/or
c. the participation of the other members of the group
is essential under the terms and conditions of the
proposed Rehabilitation Plan.
55
Definition of Creditor
 A “creditor” is a holder of a claim against the debtor that
arose on or before the commencement date.
 modifies Finasia Investments and Finance Corporation vs.
Court of Appeals insofar as it holds that the term “claims” is
limited “to debts or demands of a pecuniary nature” or to an
“assertion of a right to have money paid”.
 adopts the ruling in the earlier case of Jimenez vs. BF
Homes, Inc., et al, (GR No. 76661 [1987]) where the Supreme
Court enunciated the principle that “when the law speaks of
‘all claims’ for actions against corporations under management
or receivership being suspended, the words ‘all claims’ mean
all kinds of claims and is not limited to money claims only”.
56
Definition of Claim under FRIA
 a claim includes all claims or demands of whatever nature or

character against a debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or contingent, matured
or unmatured, disputed or undisputed, including, but not limited to;
1. all claims of the government, whether national or local,
including taxes, tariffs and customs duties; and
2. claims against directors and officers of the debtor arising from
acts done in the discharge of their functions falling within the
scope of their authority: Provided, That, this inclusion does not
prohibit the creditors or third parties from filing cases against
the directors and officers acting in their personal capacities .
57
San Jose Timber, et al. v. SEC, et al., G.R.
No. 162196, 27 February 2012
 Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore
and reinstate the corporation to its former position
of successful operation and solvency. The purpose of
rehabilitation proceedings is to enable the company
to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings.
The rehabilitation of a financially distressed
corporation benefits its employees, creditors,
stockholders and, in a larger sense, the general
public.
Voluntary Petition for Corporate
Rehabilitation
Voluntary Corporate Rehabilitation: Who
can file
If voluntary, petition can be

initiated by any of the
following:
1. Owner of sole
proprietorship
2. majority of the partners
3. stockholders representing
2/3 of outstanding
capital stocks or members.
Minimum Allegations: Voluntary Corporate
Rehabilitation
1. The debtor is insolvent

• it foresees the impossibility of paying its debts as they
fall due in the ordinary course of business, or
• its liabilities are greater than its assets
2. The rehabilitation or continuation of operations is

economically feasible
3. The 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 (w/in 120 days from the
preparation of the rehabilitation plan)
Minimum Allegations: Voluntary Corporate
Rehabilitation
4. Identification of the debtor, its principal activities

and its addresses;
5. Statement of the fact of and the cause of the

debtor’s insolvency;
6. The specific relief sought pursuant to the FRIA;
7. The grounds upon which the Petition is based;
8. Other information as may be required under the FRIA

depending on the form of relief requested;
The following has to be included “as part
and parcel of petition”
Voluntary Corporate Rehabilitation: To
include “as part and parcel of petition”
a. Tax clearance or evidence of compromise with the
BIR;
b. Income tax returns as received by the BIR for the
past 2 years prior to filing of the petition;
c. Audited financial statement of the debtor at the end
of its last fiscal year;
d. Interim financial statement not earlier than 30 days
prior to the date of the filing of the petition duly
certified under oath by the appropriate officer;
e. An inventory of all its assets including receivables
and claims against third parties;
Voluntary Corporate Rehabilitation: To
include “as part and parcel of petition”
f. Schedule of the debtor’s debts and liabilities, including

a list of creditors with their addresses, amounts of
claims and collaterals, if any;
g. Schedule of payments and disposition for the 1 year
prior to the filing of the petition;
h. A Rehabilitation Plan; and
i. The names of at least three (3) nominees to the
position of rehabilitation receiver. [Sec. 12, FRIA; FR
Rule 2, Sec. 2]
Involuntary Petition for
Involuntary Corporate Rehabilitation: Who can
file
Can be initiated by
1. any creditor or
2. group of creditors
with a claim of, or the aggregate of whose claims is, at
least P 1 M or at least 25% of the subscribed capital stock
or partners' contributions, whichever is higher
[Sec. 13, FRIA; FR Rule 2, Sec. 4]

Involuntary Corporate Rehabilitation
Can be initiated by any creditor or group of creditors if
any of the following is present:
1. there is no genuine issue of fact/law on the claim/s of the
petitioner/s and that the due and demandable payments
thereon have not been made for at least 60 days or
2. the debtor has failed generally to meet its liabilities as
they fall due or
3. Another creditor 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
Involuntary Corporate Rehabilitation: Contents
of Petition
a. Identification of the debtor, its principal activities and

its addresses;
b. Circumstances showing that the conditions precedent to
the filing of a Petition for Involuntary Rehabilitation are
satisfied;
c. The specific relief sought pursuant to the FRIA;
d. Other information as may be required under the FRIA
depending on the form of relief requested;
Involuntary Corporate Rehabilitation: Contents
of Petition
f. Exact address at which documents regarding the debtor

and the proceedings may be reviewed and copied; and
g. Documents showing there is substantial likelihood that
the debtor may be rehabilitated.
h. A Rehabilitation Plan; and
i. The names of at least three (3) nominees to the
position of rehabilitation receiver.
Court action on the Petition
71
If sufficient in form and substance, court has to

issue Commencement Order within 5 working days
from filing of petition.
If not
 it may either give the petitioner/s a reasonable period of
time within which to amend or supplement the petition, or
submit such documents as may be necessary or proper
to put the petition in proper order
72
5 days Sufficient in Yes Commencement

Petition form & Order
substance (Suspension Order)
5 days
No Yes
Number of days
based on court’s
discretion Sufficient in
Corrective Order form &
substance
73
Hearing is not required for
issuance of Commencement
Order
 Court is not required to conduct a hearing before issuing a
Commencement Order that includes a Stay Order (Sections 7 and 8,
Rule 2 of the FR Rules)
Pryce Corporation vs. Court of Appeals

G.R. No. 172302 (February 4, 2008)
74
Contents of Commencement
Order
1. Identity of the debtor, its principal business or activity/ies
and its principal place of business;
2. Summary of ground/s for initiating the proceedings;
3. The relief sought
4. The legal effects of the Commencement Order
5. Declaration that the debtor is under rehabilitation
6. Order for the publication of the Commencement Order
7. Order to serve by personal delivery a copy of the petition on
each creditor holding at 10% of total liabilities; or the debtor
75 if petition is involuntary.
Order
8. Appointment of a rehabilitation receiver
9. A summary of the requirements and deadlines for creditors to
establish their claims against the debtor and direct all
creditors to file their claims with the court at least five (5)
days before the initial hearing
10. Order to BIR to file and serve on the debtor its comment on
or opposition to the petition or its claim/s against the debtor
11. Ordering prohibiting debtor's suppliers of goods or services
from withholding the supply of goods and services in the
ordinary course of business
12. Order authorizing the payment of administrative expenses as
76 they become due
Order
13. Set the case for initial hearing (not be more than 40 days
from the date of filing of the petition)
14. Make available copies of the petition and rehabilitation
plan for examination and copying by any interested party
15. Indicate the location or locations at which documents
regarding the debtor and the proceedings under Act may
be reviewed and copied;
16. State that any creditor or debtor who is not the petitioner,
may submit the name or nominate any other qualified
person to the position of rehabilitation receiver at least
five (5) days before the initial hearing
77 17. Issue Stay or Suspension Order
Effects of
Commencement Order
1. vest the rehabilitation receiver with all the powers and
functions (e.g. right to review and obtain records to
which the debtor's management and directors have
access )
2. Serve as basis for rendering null and void the results of

any extrajudicial activity or process to seize property,
sell encumbered property, or otherwise attempt to
collection or enforce a claim against the debtor
78
Effects of
Commencement Order
3. Serve as basis rendering null and void any setoff after
the commencement
4. serve as the legal basis for rendering null and void the
perfection of any lien against the debtor's property
5. consolidate the resolution of all legal proceedings by
and against the debtor to the court
79
Stay/ Suspension Order
 What are stayed or suspended by the

commencement order?
Effects of Stay or
Suspension Order
1. suspend all actions or proceedings, in court or
otherwise, for the enforcement of claims against the
debtor
2. suspend all actions to enforce any judgment,
attachment or other provisional remedies against the
debtor;
3. prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its
properties except in the ordinary course of business
4. prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date
except as may be provided herein
81
Exceptions to Stay Order
1. cases already pending appeal in the Supreme Court as of
commencement date )
2. subject to discretion of 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
3. enforcement of claims against sureties and other persons
solidarily liable with the debtor, and 3rd party or
accommodation mortgagors, as well as issuers of letters of
credit unless the property subject of the 3rd party or
accommodation mortgage is necessary for the rehabilitation
of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;
82
Not covered by Stay Order
4. any form of action of 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; any action of such
securities market participant or the appropriate regulatory agency or
self-regulatory organization to pay or settle such claims or liabilities;
5. 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;
6. clearing and settlement of financial transactions through the facilities
of a BSP registered clearing agency
7. any criminal action against individual debtor or owner, partner,
director or officer of a debtor
83
Panlilio, et al. vs. RTC, et al.
(G.R. NO. 173846, February 2, 2011)
 rehabilitation of SIHI and the settlement of claims against the corporation is

not a legal ground for the extinction of petitioners’ criminal liabilities.
 prosecution of the officers of the corporation has no bearing on the
pending rehabilitation of the corporation, especially since they are charged
in their individual capacities.
 the purpose of the law for the issuance of the stay order is not
compromised, since the appointed rehabilitation receiver can still fully
discharge his functions as mandated by law.
84
Other legal effects of Suspension or
Stay Order
 taxes and fees due to the national government and LGUs are
considered waived upon issuance of Commencement Order
until Rehab plan is approved or petition is dismissed.
 Commencement Order and Stay Order apply even to

government financial institutions despite provisions in their
charter to the contrary
 Commencement Order is effective for the duration of the

rehabilitation proceedings for as long as there is a substantial
likelihood that the debtor will be successfully rehabilitated
85
Duration and condition for continued
effectivity of Commencement Order
 Effectivity is for the duration of the rehabilitation
proceedings for as long as there is a substantial likelihood
that the debtor will be successfully rehabilitated
 Conditions
 Compliance with the prescribed minimum contents by the
proposed Rehabilitation Plan
 sufficient monitoring by the rehabilitation receiver of the
debtor's business for creditors’ protection
 reasonable attempts of debtor to reach consensus with creditors
on Rehab plan
 absence of false or misleading statement
 absence of acts of misrepresentation or fraud on part debtors
86  favorable endorsement of the plan by the receiver
Substantial likelihood of rehabilitation:
Factors to consider
Substantial likelihood of successful rehabilitation is
determined by:
a. Sufficiency of assets with which to rehabilitate the
debtor
b. sufficiency cash flow to maintain the operations of the
debtor
c. Good faith on the part of debtors
d. Not a sham petition
e. Viability of pursuing rehab plan by debtor
87
Actions to be taken after the issuance of
Commencement Order before Initial Hearing
Petition
Commencement Order
W/in 20 days from 7 days
W/in 90 days
assumption into office,
Receiver to Publish Commencement Order in
newspaper of general circulation Debtor to notify each
counterparty of the
Establish 5 days before initial hearing particular contract that is
Preliminary
confirmed; if not
Registry of Filing of Creditors’ claims confirmed, deemed
Claims
terminated
30 days 15 days before initial hearing
Hear Filing of comments by creditors
Opposition/
Challenge to 40 days from the filing of the petition
claim/s
Initial Hearing
Submit
88 undisputed
claim/s
Initial Hearing: Purpose
1. Determine the creditors who have made timely and proper

filing of their notice of claims
 Failure to file notice of claim in accordance with Commencement Order
but belatedly file the same is not entitled to participate in the
proceedings; but entitled to receive distributions
2. hear and determine any objection to the qualifications of

the appointment of the rehabilitation receiver
1. Direct creditors to comment on Petition and Rehab Plan

within 20 days
2. Direct Receiver to evaluate financial condition of debtor

through a Report within 40 days
89
Actions to be taken after the issuance of
Commencement Order
Petition
Commencement Order
W/in 20 days from 7 days
W/in 90 days
assumption into office,
Receiver to Publish Commencement Order in
newspaper of general circulation Debtor to notify each
counterparty of the
Establish 5 days before initial hearing particular contract that is
Preliminary
confirmed; if not
Registry of Filing of Creditors’ claims confirmed, deemed
Claims
terminated
30 days 15 days before initial hearing
Hear Filing of comments by creditors
Opposition/
Challenge to 40 days from the filing of the petition
claim/s
Initial Hearing
Submit 40 days from the termination of initial hearing

90 undisputed Preliminary Report of Receiver
claim/s
Report of Receiver: Contents
a. Whether debtor is insolvent – causes thereof and

any unlawful or irregular act/s by the debtor
b. Feasibility and reasonableness of underlying
assumptions, financial goals and procedures
c. Substantially likelihood of successful rehabilitation
d. Whether petition should be dismissed
e. Whether debtor should be dissolved and/or

liquidated.
91
Siochi Fishery Enterprises, Inc., vs. BPI (G.R. NO.
193872, October 19, 2011
 The most glaring procedural infirmity committed by rehab court is its failure
to petition for rehabilitation and Rehabilitation Plan to the rehabilitation
receiver despite the explicit and clear mandate of the Interim Rules that if the
court is satisfied that there is merit in the petition, it shall give due course to
the petition and “immediately” refer the same and its annexes to the
rehabilitation receiver x x x
 his recommendation bears much weight as it is one of the factors which must
be considered by the court if it were to approve the rehabilitation plan
 Court made an unwarranted procedural shortcut as its finding that there was
merit in respondent corporations’ petition for rehabilitation was made in the
same Order approving Rehabilitation Plan.
92
Action on the Petition
Petition
Commencement Order
Initial Hearing
Receivers Report
10 days from receipt of Receiver’s Report
Give due course to the Convert Proceeding to

Dismiss the Petition
Petition Liquidation
93
Within 10 days from receipt of Receiver’s Report
1. Give due course to the petition
 Debtor is insolvent
 Substantial likelihood of successful rehabilitation
2. Dismiss the petition
 Debtor is not insolvent
 Petition is a sham intended to delay enforcement of creditors’ rights
 There are misleading statements or material misrepresentation in the
petition or attachments
 Debtor has committed acts of misrepresentation or in fraud of creditors
3. Convert proceedings into Liquidation if
 Debtor is insolvent
 No substantial likelihood of substantial rehabilitation
94
Action on the Petition:
Dismissal
 If Petition is dismissed because of intent to defraud,

court in its discretion may order payment of damages
to any creditor or to any person who may have been
injured by such filing.
95
Action on the Petition : Given
Due Course
 Direct Receiver to review, revise and/or

recommend action on the Rehab plan and submit
the same or a new one within 90 days.
 Refer any dispute on rehab plan or proceedings to
ADR for a quick, efficient and fair resolution.
96
Petition
Commencement Order
Initial Hearing
Give due course to

the Petition
97
Petition
Commencement Order
Initial Hearing
Give due course to the

Petition
Receiver to
Review/Revise/ If there are disputes, refer
within 90 days Modify/Replace to ADR
Rehabilitation Plan
98
Rehab Receiver, Management Committee
and Creditors’ Committee
 Natural or juridical person may serve as rehab

receiver
 If juridical person, a natural person
possessing all the qualifications and none
of the disqualifications must be designated
 Liability of rehab receiver (i.e.
corporation) and its representatives are
solidary
99
Rehab Receiver : Qualifications
 Philippine citizen or resident

 Good moral character, with integrity, impartiality
and independence
 Has the requisite knowledge of insolvency and
relevant laws and trainings/experience to enable
to him to discharge his duties and obligations
 No conflict of interest unless waived by those
affected
 Other qualifications that may be set by the SC
later
100
Rehab Receiver, Management Committee
and Creditors’ Committee
Rehabilitation Receiver
 May or may not be be from the nominees of the rehab
plan
 Creditor or debtor may nominate other person during the
initial hearing
 Court may appoint creditors’ nominee if supported by
more than 50% of the secured and general unsecured
creditors.
 If debtor is a securities market participant, court has to
give priority the nominee of the appropriate securities or
investor protection fund.
101
Rehabilitation Receiver :
Power and Duties
1. preserve and maximize value of debtor’s assets during

proceedings
2. Determine viability of rehabilitation of debtor
3. Prepare and recommend Rehab Plan to the court
a. Verify accuracy of factual allegations in petition and annexes
b. Verify and correct inventory of all assets and valuation
c. Verify and correct schedule of debts and liabilities
d. Evaluate validity, genuineness and true amount of all claims
e. Take possession, custody and control and preserve value of all
assets
102
Power and Duties
4. Prepare and recommend Rehab Plan to the

court
f. Sue and recover, with court’s approval, of all amounts owed to
debtor
g. Have access to all needed information re operation and business
of debtor
h. Recover fraudulent conveyances, transfers, payments and
disbursements
i. Monitor operations and business of debtor to ensure that all
payments and transfer of properties are in ordinary course of
business.
103
Power and Duties

court
j. Determine best way to rehabilitate debtor
k. Revise, modify or recommend action on Rehab plan
and recommend action on the same
l. assume and exercise the powers of management of the
debtor
m. other powers as may, from time to time, be conferred
upon him by the court
n. submit a status report on the rehabilitation
proceedings every quarter or as may be required
104
Power and Duties

court
 NOTE: unless appointed by the court, Receiver is not

take over management and control of the debtor; only
recommend appointment of management committee
for specific reasons.
105
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 stakeholders.
106
Compensation
 entitled to compensation for reasonable fees and

expenses from the debtor according to the terms
approved by the court after notice and hearing
 Includes expenses of direct employees and independent
contractors
 Prior to hearing, be entitled to reasonable
compensation based on quantum meruit
 costs shall be considered administrative expenses.
 shall take an oath and file a bond, in such amount to be
fixed by the court, conditioned upon the faithful and
proper discharge of his powers, duties and
107
responsibilities.
Rehabilitation Receiver : Factors for
Determining Compensation
1. the size of the debtor under rehabilitation;

2. the time to be spent on such services;
3. the credentials, experience, skills and reputation
of the receiver, his direct employees or
independent contractors;
4. the benefits accruing to the debtor;
5. the complexity, importance, urgency, and nature
of the problems, issues, or tasks addressed; and
6. the customary compensation charged by
comparably skilled practitioners in other
rehabilitation cases.
108
Displacement of Existing
Management
 court may appoint and direct the rehabilitation receiver

to assume the powers of management of the debtor, or
appoint a management committee that will undertake
the management of the debtor.
a. Actual or imminent danger of dissipation, loss, wastage or
destruction of the debtor’s assets or other properties
b. Paralyzation of the business operations of the debtor
c. Gross mismanagement of the debtor or fraud or other
wrongful conduct on the part of, or gross or willful violation
of this Act by existing management of the debtor
109
Hearing required for creation
of Management Committee
 The creation of a management committee without first conducting an

evidentiary hearing for the purpose is an egregious error that
amounts to bad faith, leading to the conclusion of gross ignorance of
the law, as charged.
 In rehabilitation proceedings, the parties must first be given an
opportunity to prove (or disprove) the existence of an imminent
danger of dissipation, loss, wastage or destruction of the debtor-
company’s assets and properties that are or may be prejudicial to the
interest of minority stockholders, parties-litigants or the general
public.
 the rehabilitation court should hear both sides, allow them to present
proof and conscientiously deliberate, based on their submissions, on
whether the appointment of a management receiver is justified.
(Lorenzana vs. Austria, A.M. No. RTJ-09-2200 (April 2, 2014)
110
Procedure for creation of
Management Committee
 1st member shall be nominated by the debtor; in case the

debtor fails, the court shall appoint the first member;
 2nd member shall be nominated by the creditor/s holding
more than fifty percent (50%) of the total obligations of
the debtor; in case the creditors fail, the court shall
appoint the second member; and
 the third member, who shall act as chairman of the
management committee, shall be nominated by the first
and second members within 10 days from the
appointment.
 In case of disagreement between the first and second
members, or failure to nominate, the court shall appoint
111
the third member.
Role of Management
Committee
 takes the place of the management and the

governing body of the debtor and assume their
rights and responsibilities
 Specific powers and duties are prescribed by Section 33
of the Rules
112
Powers of Management
Committee
1. to investigate the acts, conduct, properties,

liabilities, and financial condition of the debtor
2. to examine under oath the directors and officers of
the debtor
3. to report to the court any ascertained fact
pertaining to the causes of the problems, fraud,
misconduct, mismanagement and irregularities
committed by any other person;
4. to use the services of or employ such person or
persons as are necessary to perform its functions
and duties as management committee;
5. to report to the court any material adverse change
in the business of the entity under management;
113
Committee
6. to evaluate the existing equity, capital, assets and

liabilities, earnings and operations of the entity under
management;
7. to determine and recommend to the court the best way
to salvage and protect the interest of the creditors,
stockholders and the general public, including the
rehabilitation of the entity under management;
8. to prohibit and report to the court any encumbrance,
transfer, or disposition of the debtor's property outside
of the ordinary course of business or beyond what is
allowed by the court;
9. to prohibit and report to the court payments made
114
outside the ordinary course of business;
Committee
10. to have unlimited access to the employees, premises,

hooks, records and financial documents of the entity
under management during business hours;
11. to inspect, copy, photocopy or photograph any
document, paper, book, account or letter, whether in
the possession of the entity or other persons, that
pertain to the business of the debtor;
12. to gain entry into any property owned by the entity
under management for the purposes of inspecting,
measuring, surveying, or taking photos or videos of any
designated relevant object or operation thereon;
13. to bring to the attention of the court any material
change affecting the entity's ability to meet its
obligations;
115
Committee
14. to take the appropriate steps to modify, nullify or revoke
transactions coming to its knowledge which it deems
detrimental or prejudicial to the interest of the entity under
management;
15. to recommend the termination of the proceedings and the
dissolution of the entity if it determines that the continuance
in business of such entity will no longer work to the best
interest of the stakeholders and creditors, in accordance with
the purposes of the Act;
16. to apply to the court for any order or directive that it may
deem necessary or desirable to aid it in the exercise of its
powers and performance of its duties and functions, including
the power to examine parties and witnesses under oath; and
17. to exercise such other powers as the court may, from time to
time confer upon it.
116
Conflicts of Interest: Disqualification
of Receiver/Management Committee
 If a creditor, owner, partner or stockholder of the debtor
 If engaged in a line of business which competes with that
of the debtor;
 If within five (5) years from the filing of the petition, was
a director, officer, owner, partner or employee of the
debtor or any of the creditors, or the auditor or
accountant of the debtor
 If within two (2) years from the filing of the petition, was
an underwriter of the outstanding securities of the
debtor
117
Conflicts of Interest
 related by consanguinity or affinity within the fourth civil

degree to any individual creditor, owners of a sale
proprietorship-debtor, partners of a partnership- debtor
or to any stockholder, director, officer, employee or
underwriter of a corporation-debtor
 If with any other direct or indirect material interest in

the debtor or any of the creditors.
118
Creditors’ Committee
 creditors belonging to a class may formally organize a

committee among themselves
 Secured creditors, unsecured creditors, trade creditors
and suppliers and debtor’s employees
 Receiver must attend meeting for this purpose
 Role is to assist the rehabilitation receiver in
communicating with the creditors and shall be the
primary liaison between the rehabilitation receiver and
the creditors.
 cannot exercise or waive any right or give any consent
on behalf of any creditor unless specifically authorized
in writing by such creditor.
119
Determination of Claims
 Receiver has to establish a preliminary registry of

claims within 20 days from assumption into office
 Has to be made available for public inspection after
publication notice to the debtor, creditors and
stakeholders on where and when they may inspect it
 Ensure that all claims in the register are supported by
sufficient evidence.
120
 Within 30 days, debtor, creditors, stakeholders

and other interested parties has to submit a
challenge to claim/s to the court, serving a
certified copy on the rehabilitation receiver and
the creditor holding the challenged claim.
 Thereafter, receiver has to submit to the court the
registry of claims which shall include undisputed claims
that have not been subject to challenge.
 Receiver’s decision regarding a claim is appealable to
the court.
121
 Within 30 days, debtor, creditors, stakeholders and other

interested parties has to submit a challenge to claim/s to
the court, serving a certified copy on the rehabilitation
receiver and the creditor holding the challenged claim.
 Thereafter, receiver has to submit to the court the registry
of claims which shall include undisputed claims that have not
been subject to challenge.
 Receiver’s decision regarding a claim is appealable to the
court.
122
Treatment of Secured
Creditors
 issuance of the Commencement Order and the

Suspension or Stay Order does not in any way to
diminish or impair the security or lien of a secured
creditor, or the value of his lien or security.
1. except that his right to enforce said security or lien may
be suspended during the term of the Stay Order.
2. a secured creditor may be allowed to enforce his security

or lien, or foreclose upon property of the debtor securing
his/its claim, if the said property is not necessary for the
rehabilitation of the debtor.
123
Lack of Adequate Protection
 court may, on motion or motu proprio, terminate,

modify, or set conditions for the continuance of the
Stay Order, or relieve a claim from the coverage
thereof upon showing that
 a creditor does not have adequate protection over
property securing its claim; or
 the value of a claim secured by a lien on property
which is not necessary for rehabilitation of the debtor
exceeds the fair market value of the said property.
124
Lack of Adequate Protection
A secured creditor lacks adequate protection if it can be

shown that:
 the debtor fails or refuses to honor a pre-existing
agreement with the creditor to keep the property
insured;
 the debtor fails or refuses to take commercially
reasonably steps to maintain the property; or
 the property has depreciated to an extent that the
creditor is undersecured
125
Remedy of Creditor that Lacks Adequate
Protection
Upon showing of a lack of adequate protection, the

court shall order the rehabilitation receiver to
 make arrangements to provide for the insurance or
maintenance of the property,
 make payments or otherwise provide additional or
replacement security such that the obligation is fully
secured.
126
Remedy of Creditor that Lacks Adequate
Protection
 Upon showing of a lack of adequate protection, the court

shall order the rehabilitation receiver to make
arrangements to provide for the insurance or
maintenance of the property; or to make payments or
otherwise provide additional or replacement security
such that the obligation is fully secured
 If not feasible, modify Stay Order to allow the secured
creditor lacking adequate protection to enforce its claim
against the debtor unless such remedies would prevent
the continuation of the debtor as a going concern or
otherwise prevent the approval and implementation of a
127
rehabilitation plan.
Content of a Rehabilitation
Plan
1. specify the underlying assumptions, the financial goals

and the procedures proposed to accomplish such goals
2. compare the amounts expected to be received by the
creditors under the Rehabilitation Plan with those that
they will receive if liquidation ensues within the next
120 days
3. contain information sufficient to give the various
classes of creditors a reasonable basis for determining
whether supporting the Plan is in their financial interest
4. establish classes of voting creditors
5. establish subclasses of voting creditors if prior approval
has been granted by the court
128
Plan
6. specify the treatment of each class or subclass described

in subsections (d) and (e);
7. provide for equal treatment of all claims within the
same class or subclass, unless a particular creditor
voluntarily agrees to less favorable treatment;
8. ensure that the payments made under the plan follow
the priority established under the provisions of the Civil
Code on concurrence and preference of credits and
other applicable laws;
9. maintain the security interest of secured creditors and
preserve the liquidation value of the security unless such
has been waived or modified voluntarily;
129
Plan
10. disclose all payments to creditors for pre-commencement

debts made during the proceedings and the justifications
thereof;
11. describe the disputed claims and the provisioning of funds to
account for appropriate payments should the claim be ruled
valid or its amount adjusted;
12. identify the debtor's role in the implementation of the Plan;
13. state any rehabilitation covenants of the debtor, the breach
of which shall be considered a material breach of the Plan;
14. identify those responsible for the future management of the
debtor and the supervision and implementation of the Plan,
their affiliation with the debtor and their remuneration;
130
Contents of a Rehabilitation
Plan
15. state any rehabilitation covenants of the debtor, the breach of

which shall be considered a material breach of the Plan;
16. identify those responsible for the future management of the debtor
and the supervision and implementation of the Plan, their
affiliation with the debtor and their remuneration;
17. address the treatment of claims arising after the confirmation of
the Rehabilitation Plan;
18. require the debtor and its counter-parties to adhere to the terms of
all contracts that the debtor has chosen to confirm
19. arrange for the payment of all outstanding administrative expenses
as a condition to the Plan's approval unless such condition has been
waived in writing by the creditors concerned;
131
Contents of a Rehabilitation
Plan
20. arrange for the payment of all outstanding taxes and

assessments, or an adjusted amount pursuant to a
compromise settlement with the BlR or other applicable tax
authorities;
21. include a certified copy of a certificate of tax clearance or
evidence of a compromise settlement with the BIR;
22. include a valid and binding r(,solution of a meeting of the
debtor's stockholders to increase the shares by the required
amount in cases where the Plan contemplates an additional
issuance of shares by the debtor;
23. state the compensation and status, if any, of the
rehabilitation receiver after the approval of the Plan; and
24. contain provisions for conciliation and/or mediation as a
prerequisite to court assistance or intervention in the event
of any disagreement in the interpretation or implementation
132 of the Rehabilitation Plan.
Approval by Creditor
 Receiver has to notice creditors and stakeholders

that Plan is ready for examination
 Within 20 days, convene creditors for purpose of
voting on plan’s approval
 deemed rejected unless approved by all classes of creditors
whose rights are adversely modified or affected by the Plan
 if members of the said class holding more 50% of the total
claims of the said class vote in favor of the Plan
 based solely on the amount of their respective claims based
on the registry of claims
133
Petition
Commencement Order
Initial Hearing

Petition
Receiver to
Review/Revise/ If there are disputes, refer
within 90 days Modify/Replace to ADR
Rehabilitation Plan
Present to Creditors for

Approval
134
Petition
Commencement Order
Initial Hearing

Petition
Present to Creditors for

Approval
Rejected Approved
Liquidation Implementation
Hearing of
objections
Cramdown
135
Despite rejection, court can
still approve if:
1. Rehabilitation Plan complies with all the requirements of
FRIA
2. rehabilitation receiver recommends the confirmation
3. shareholders, owners or partners of the juridical debtor lose
at least their controlling interest as a result of the
Rehabilitation Plan
4. Rehabilitation Plan would likely provide the objecting class
of creditors with compensation which has a net present
value greater than that which they would have received if
the debtor were under liquidation
136
When to deny remedy of rehabilitation
(Wonder Book vs. PBCOM (G.R. No. 187316 Jan 16, 2012
If insolvency appears to be irreversible and whose sole

purpose is to delay the enforcement of any of the rights of the
creditor rendered obvious by the following:
1. the absence of a sound and workable business plan;
2. baseless and unexplained assumptions, targets and goals;
3. speculative capital infusion or complete lack thereof for the execution of
the business plan;
4. cash flow cannot sustain daily operations; and
5. negative net worth and the assets are near full depreciation or fully
depreciated.
137
Sole Grounds for Objection to
a Plan
1. creditors' support was induced by fraud

2. documents or data relied upon in the Rehabilitation Plan
are materially false or misleading
3. Rehabilitation Plan is in fact not supported by the voting
creditors
138
Hearing on the Objections
 Objections must be made during the relevant period

 Court issues order setting time and date for the hearing
of objections
 If objection is meritorious, court can either
 Order Receiver to cure the defect, if feasible or
 If court determines that debtor acted in bad faith, or that it is not
feasible to cure the defect, convert the proceedings into one for
the liquidation.
139
Confirmation of Rehab Plan
 Issued if
 no objections are filed within the relevant period
 Even with objections, they lack merit or basis has been
cured
 Court may confirm Rehab plan notwithstanding
unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions
for paying such claims.
140
Termination of Proceedings
 Successful implementation
 Failure of rehabilitation
 Dismissal of the petition by the court
 debtor fails to submit a Rehabilitation Plan
 Even with rehab plan, there is no substantial
likelihood that the debtor can be rehabilitated
within a reasonable period commission of fraud in
securing the approval of the Rehabilitation Plan or
its amendment
 Analogous circumstances.
141
Termination of Proceedings: Failure to
complete rehab proceeding within 1 year
 the RTC erred in giving due course to the petitioner’s action.

 utterly disregarded the Rules on Corp Rehabn in the guise of liberal construction and
granted the petition for rehabilitation based on insufficient evidence.
 NBC inventory did not mention the condition of its listed assets and merely enumerated
certain real properties and their respective sizes and market values.
 Rehab court should have dismissed the petition as it had not approved any
rehabilitation plan within the period specified by law.
 when petitioner declined to comply with the simpler rules of rehabilitation, when the
documentation of its assets were inadequate, and the when the creditors’ opposition
offered insurmountable basis for shelving the entire effort. . . obviously, its continued
operation would no longer be viable.
142 (North Bulacan Corporation vs. PBCOM, G.R. No. 183140, August 2, 2010)
Petition
Commencement Order
Initial Hearing

Petition
Presentation of Rehab Plan to

Creditors
Approval
Implementation
Failure Successful
Liquidation Restored
143
Effects of Confirmation of Rehab
Plan
 binding upon all affected parties – debtor, creditors – whether

they participated in the proceedings or opposed the Plan or
whether or not their claims have been scheduled.
 Debtor has to carry out the plan
 Payments shall be made according to the provisions of the
Rehab Plan
 Contracts and other arrangements between the debtor and its
creditors to be interpreted as continuing to apply to the
extent that they do not conflict with the provisions of the
Rehabilitation Plan
144
Effects of Confirmation of
Rehab Plan
 compromises on amounts or rescheduling of timing of

payments by the debtor shall be binding on creditors
regardless of whether or not the Plan is successfully
implement; and
 claims arising after approval of the Plan that are
otherwise not treated by the Plan are not subject to any
Suspension Order.
145
Rehabilitation Plan
 shall refer to a plan by which the financial well-
being and viability of an insolvent debtor can be
restored using various means including, but not
limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion
en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed
in Section 62 hereof, or other similar
arrangements as may be approved by the court
or creditors.
“CRAMDOWN”
 a restructuring of debt that creditors are
required to accept as part of a bankruptcy.
 legal authority for courts to impose a
restructuring of debt in a bankruptcy despite
objections from creditors.
 the involuntary imposition by a court of a
reorganization plan over the objection of some
classes of creditors
Pacific Wide V Puerto Azul (Nov. 25,
2009)
the rehabilitation plan is contested on the ground that the
same is unreasonable and results in the impairment of the
obligations of contract. PWRDC contests the following
stipulations in PALIs rehabilitation plan:
 fifty percent (50%) reduction of the principal obligation;
 condonation of the accrued and substantial interests and
penalty charges;
 repayment over a period of ten years, with minimal
interest of two percent (2%) for the first five years and
five percent (5%) for the next five years until fully paid,
 and only upon availability of cash flow for debt service.
2009)
 We find nothing onerous in the terms of PALIs
rehabilitation plan. The Interim Rules on
Corporate Rehabilitation provides for means of
execution of the rehabilitation plan, which may
include, among others, the conversion of the
debts or any portion thereof to equity,
restructuring of the debts, dacion en pago, or
sale of assets or of the controlling interest.
 The restructuring of the debts of PALI is part
and parcel of its rehabilitation
2009): The cramdown order
 The court may approve a rehabilitation plan even
over the opposition of creditors holding a majority of
the total liabilities of the debtor if, in its judgment,
the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly
unreasonable.
 The rehabilitation plan, once approved, is binding
upon the debtor and all persons who may be
affected by it, including the creditors, whether or
not such persons have participated in the
proceedings or have opposed the plan or whether or
not their claims have been scheduled.
2009)
 We also find no merit in PWRDCs contention that there is a
violation of the impairment clause. Section 10, Article III of the
Constitution mandates that no law impairing the obligations of
contract shall be passed. This case does not involve a law or an
executive issuance declaring the modification of the contract
among debtor PALI, its creditors and its accommodation
mortgagors. Thus, the non-impairment clause may not be
invoked.
 Even assuming that the same may be invoked, the non-
impairment clause must yield to the police power of the State.
Property rights and contractual rights are not absolute. The
constitutional guaranty of non-impairment of obligations is
limited by the exercise of the police power of the State for the
common good of the general public.
 Successful rehabilitation of a distressed corporation will benefit
its debtors, creditors, employees, and the economy in general.
Express Investments v. BayanTel
(December 5, 2012)
 Rehabilitation is an attempt to conserve and
administer the assets of an insolvent corporation
in the hope of its eventual return from financial
stress to solvency. It contemplates the
continuance of corporate life and activities in an
effort to restore and reinstate the corporation to
its former position of successful operation and
liquidity.
 The purpose of rehabilitation proceedings is
precisely to enable the company to gain a new
lease on life and thereby allow creditors to be
paid their claims from its earnings.
(December 5, 2012)
 “[t]he creditors of Bayantel,
whether secured or unsecured,
should be treated equally and on
the same footing or pari passu
until the rehabilitation proceedings
is terminated
What is “pari passu”?
 The principle of “equality in equity”
•Equal per class?
•Equal regardless of class?
•Pro-rata per class?
•Pro-rata for all?
(December 5, 2012)
 In legal parlance, pari passu is used especially of
creditors who, in marshaling assets, are entitled to
receive out of the same fund without any
precedence over each other
 the stipulation in the Assignment Agreement to the
effect that respondent Bayantel shall pay petitioners
in full and ahead of other creditors out of its cash
flow during rehabilitation directly impinges on the
provision of the approved Rehabilitation Plan that
“[t]he creditors of Bayantel, whether secured or
unsecured, should be treated equally and on the
same footing or pari passu until the rehabilitation
proceedings is terminated…”
Rehabilitation plan
Once appoved or confirmed:
 Operates as a novation of all existing contracts

and obligations to which the debtor is a party;
 Serves to rescind such contracts

BUT: Rehabilitation Plan cannot violate
Constitution (
 under the proposed structure, said creditors shall
own 40% of the outstanding capital stock of the
telecommunications company on a direct basis,
while the remaining 40% of shares shall be registered
to a holding company that shall retain, on a direct
basis, the other 60% equity reserved for Filipino
citizens.
 the debt-to-equity conversion rate of 77.7%, as
proposed by The Bank of New York, violates the
Filipinization provision of the Constitution.
Petitioners explain that the acquisition of shares by
foreign Omnibus and Financial Creditors shall be
done, both directly and indirectly in order to meet
the control test principle under RA 7042 or the
Foreign Investments Act of 1991
Remedies when rehab plan is
approved
 Motion to dismiss in the SC is not appropriate

when rehab plan has already been approved by
rehabilitation court and in fact already being
implemented.
BPI vs. Shemberg Biotech Corporation,

G.R. No. 162291, August 11, 2010
158
Proper Mode of Appeal
 proper mode of appeal is through a petition for certiorari

to the Court of Appeals under Rule 65 of the Rules of
Court within fifteen (15) days from notice of the decision
or order, based on Section 2, Rule 6, FR Rules modifying
the Court’s ruling in New Frontier Sugar Corporation v.
RTC, Branch 39, Iloilo City which previously held that the
proper mode of appeal in cases of corporate
rehabilitation is through a petition for review under Rule
43 of the Rules of Court to be filed within fifteen (15)
days from notice of the decision or final order of the RTC.
China Banking Corporation vs. Cebu Printing and
Packaging Corporation, G.R. No. 172880, August 11, 2010
159
Liquidation vs.
• all about deciding who to pay, in what order to pay,

and how much to pay in an efficient and equitable
manner
• efficiency and equity sometimes may be competing

policy goals
• the way a country pursues those goals, insolvency

law says a lot about the attitudes of its legal system
The Pro Debtor – Pro Creditor
Continuum
• Different countries implement the doctrines

differently.
• how pro-debtor or pro-creditor is the country’s

bankruptcy regime?
• a pro-debtor regime encourages

entrepreneurial risk-taking.
• a pro-creditor regime encourages the provision

of liquidity to business.
Continuum
What is a “pro-debtor” regime?
• one that dwells on increasing the size of the debtor’s

estate by destroying creditor rights.
• every effort is made to maximize the value of the

debtor’s assets for ultimate distribution to creditors.
• debtors and their employees ought to be saved, and if

need be, all creditors ought to contribute to this
rescue.
Continuum
What is a “pro-creditor” regime?
• connotes that creditors ought to be able to avoid

losses that result from the default of a debtor.
• allows creditors to avail themselves of protection

through security interests and set-offs.
• allows a wide class of third party owners to claim

their property held by the bankrupt ahead of other
creditors.
Continuum
• operating at either extreme on the continuum

is problematic.
• credit may be hard to come by for many firms in a

pro-debtor regime, simply because lending
institutions fear the all-too-favorable rules for
debtors.
• rules that are skewed too far in favor of creditors

hardly create an environment friendly for
entrepreneurs.
Continuum
Hong Germany,
Kong Canada
Netherlands,
and and the
Sweden, Belgium and
Singa United Italy Most
Switzerland Luxembourg
pore States
Most 1 2 3 4 5 6 7 8 9 10 Pro-
Debtor
Pro- Australia, Japan, Austria, Greece, France
Korea, New Portugal,
Creditor England,
Zealand,
Denmark,
Spain, and
and and South
Norway, Africa most Latin
Ireland
and America
Scotland countries

TagHirap Corp Restructures Through Creditor Agreement

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Financial Rehabilitation

and Insolvency Act of

Prof. Maria Lulu G. Reyes, LlB, LlM

• recently announced that it has developed a fuel

• Registered and patented the same

• announcement was supported with various

• exhaustive laboratory tests have likewise

• Not enough money to

2. Threats of foreclosure and

• its major creditor, Bankable Credit,

• other secured creditors are also

3. Stoppage of work and supplies

• Workers have also filed labor

• invention is worth millions of

• the moment any of the

product becomes difficult, if

• What are the options available to TBC?

TBC can meet with its

TBC can meet with its

TBC can meet with its

TBC can meet with its

TBC can meet with its

TBC can meet with its

TBC can meet with its

TBC can meet with its

• TBC met with its

• TBC met with its creditors

• TBC met with its

TBC met with its

OtBC met with its creditors

• the historical and traditional

• tends to be universal in its

Order of Gather/preserve/sale of Adjudication of

Appointment of Closure of Termination of

• in a competitive market economy, an

• liquidation process can only function

• Only way to ensure an orderly, transparent

Corporate Rehabilitation Proceedings

2. A creditor can file a petition for Involuntary

• inefficiency is not always

• facilitates quick and easy

 Enables a majority of creditors to bind all other

 Provides for judicial or other supervision to ensure

 Enables the emphasis on the concept of the

• all about deciding who to pay, in what order

• efficiency and equity sometimes may be

• the way a country pursues those goals,

Insolvency Law (Act No. 1956)

Section 5 of P.D. 902-A, as amended, vested the SEC with

Section 5 of P.D. 902-A, as amended, vested the SEC with

In order to effectively exercise its jurisdiction, SEC is

 in addition to proceedings for simple suspension of

Rules of Procedure on Corporate Recovery

Securities Regulation Code

Interim Rules on Corporate Rehabilitation

 Proceedings initiated are considered in rem,

Rehabilitation proceedings are summary and non‐adversarial in

 Rehabilitation is xxx available to a corporation who, while

Wonder Book Corporation v. Philippine Bank of Communications

 remedy should be denied to corporations whose insolvency appears

Two types of court supervised rehabilitation

1. Voluntary petition – filed by the debtor or group of