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FINANCIAL REHABILITATION

AND INSOLVENCY ACT


(FRIA) OF 2010
NATURE; PURPOSE OF
FRIA
 To encourage debtors and their creditors to collectively and
realistically resolve and adjust competing claims and
property rights
 Equality in Equity – once the corporation threatened by
bankruptcy is taken over by a receiver, all the creditors
ought to stand in equal footing. Not anyone of them should
be paid ahead of the others.
 --- reason for suspending all pending claims against the
corporation under receivership.

 If rehabilitation is not feasible, there should be a speedy and


orderly liquidation of debtor’s assets and settlement of
obligations
EXCLUDED DEBTORS
Because they are governed by separate rules

 BANKS
 PRE-NEED COMPANIES
 INSURANCE COMPANIES
THREE TYPES OF
PROCEEDINGS
 SUSPENSION OF PAYMENTS
 REHABILITATION
 Court Supervised
 Voluntary
 Involuntary
 Pre-Negotiated
 Out-of Court
 LIQUIDATION
 Voluntary
 involuntary
SUSPENSION OF
PAYMENTS
 WHO? Individual debtor (juridical persons not allowed; creditors
not allowed)
 WHY? Technical insolvency or illiquidity (sufficient assets to cover
liabilities but foresees difficulty in paying them as they fall due
 WHERE? RTC of the province / city in which he resides for six (6)
months prior to the filing of petition
 HOW? (1) File a verified petition.
 (2) Creditors Meeting – Approval by 2/3 (#) and 3/5 (P)
 If no approval by creditors? Cram Down rule? NO. Proceedings
terminated. Creditors can enforce their claims at will.
BAR QUESTION
Hortencio owned a modest grocery business in Laguna. Because of
the economic downturn, he incurred huge financial liabilities. He
remained afloat only because of the properties inherited from his
parents who had both come from landed families in Laguna. His main
creditor was Puresilver Company (Puresilver), the principal supplier of
the merchandise sold in his store. To secure his credit with Puresilver,
he executed a real estate mortgage with a dragnet clause involving
his family's assets worth several millions of pesos.

Nonetheless, Hortencio, while generally in the black, now faces a


situation where he is unable to pay his liabilities as they fall due in the
ordinary course of business. What will you advise him to do to resolve
his dire financial condition? Explain your answer. (5%) (2017 BAR
EXAM)
REHABILITATION
 WHAT? 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
that creditors can recover more if the corporation
survives than if liquidated.
 WHY? Insolvency – assets are less than liabilities
 HOW?
 Court-Supervised (Voluntary / Involuntary)
 Pre- Negotiated
 Out of Court
REHABILITATION; COURT
SUPERVISED
 WHERE? RTC (Special Commercial Court) with
jurisdiction over principal office of the debtor

 WHO?
IF VOLUNTARY -
 SOLE PROPRIETORSHIP – Owner / Proprietor
 (Sole Proprietor is one registered with the DTI; individual
debtor is not allowed)
 PARTNERSHIP – Majority of the partners
 CORPORATION – Majority of the directors / trustees +
2/3 OCS
BAR QUESTIONS
Wyatt, an internet entrepreneur, engaged in a sideline business
of creating computer programs for selected clients on a per
project basis and for servicing basic computer problems of his
friends and family members. His main job was being an IT
consultant at Futurex Co., a local computer company.
Because of his ill-advised investments in the stock market and
the fraud perpetrated against him by his trusted confidante,
Wyatt was already drowning in debt, that is, he had far more
liabilities than his entire assets.
What legal recourse remained available to Wyatt? Explain your
answer. (5%) (2017 BAR EXAM)
BAR QUESTIONS
Under the Financial Rehabilitation and Insolvency Act (FRIA), the filing of a
petition for voluntary rehabilitation must be approved by:

(A) a majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding capital stock

(B) a majority vote of the Board of Directors and authorized by the vote of the
stockholders representing at least two-thirds of the outstanding capital stock

(C) two-thirds vote of the Board of Directors and authorized by the vote of the
stockholders representing at least a majority of the outstanding capital stock

(D) two-thirds vote of the Board of Directors and authorized by the vote of the
stockholders representing at least two-thirds of the outstanding capital stock (1%)
(2014 BAR EXAM)
REHABILITATION; COURT
SUPERVISED
 WHO?
IF INVOLUNTARY -
 CREDITORS with an aggregate claim of at least
P 1Million or at least 25% SCS or partner’s
contributions, whichever is higher
REHABILITATION; COURT-
SUPERVISED
HOW?

1. File a verified petition (attach a Rehabilitation Plan,


among others)

2. If the court finds the petition sufficient, the Court will


issue a Commencement Order, which already
includes a Stay Order, plus appointment of a
Rehabilitation Receiver, retroactive to the filing of the
petition.
REHABILITATION; COURT-
SUPERVISED
 COMMENCEMENT ORDER / STAY ORDER
 Suspends all actions or proceedings in court or otherwise
for the enforcement of claims against the debtor
 Suspends all actions to enforce any judgment,
attachment or other provisional remedies
 Prohibits the debtor from selling, disposing assets except
in the ordinary course of business
 Prohibits the debtor from paying liabilities as of the
commencement date except as provided in the Order
REHABILITATION; COURT
SUPERVISED
 WHAT CLAIMS ARE SUSPENDED?
 All claims of whatever nature or character against the debtor or
its property, whether
 for money or otherwise,
 liquidated or unliquidated
 Fixed or contingent
 Matured or unmatured,
 Secured or unsecured
 Disputed or undisputed,
 INCLUDING: (1) all claims of the govt, including taxes, etc. (2)
claims against directors and officers arising from acts done in
the discharge of their functions within the scope of authority
REHABILITATION; COURT
SUPERVISED
 WHAT CLAIMS ARE NOT STAYED / SUSPENDED
BY THE STAY ORDER?
 Cases pending appeal in the Supreme Court as of
commencement date (when final and executory, referred
to rehabilitation court)
 Pending before specialized court which can resolve
claims more quickly (i.e., small claims court)
 Solidary debtors, accommodation mortgagors, issuers of
letters of credit
 Certain securities transactions
 Criminal actions against owner, partner, director, officer of
debtor
BAR QUESTIONS
Procopio, a Director and the CEO of Parisian Hotel Co., Inc. (Parisian),
was charged along with other company officials with several counts
of estafa in connection with the non-remittance of SSS premiums the
company had collected from its employees. During the pendency of the
cases, Parisian filed a petition for rehabilitation. The court, finding the
petition to be sufficient in form and substance, issued a commencement
order together with a stay or suspension order.

Citing the commencement order, Procopio and the other officers facing
the criminal charges moved to suspend the proceedings in
the estafa cases.

(a) What is a commencement order, and what is the effect of its


issuance? Explain your answer. (4%)

(b) Suppose you are the trial judge, will you grant the motion to suspend
of Procopio, et al.? Explain your answer. (4%) (2017 BAR)
BAR QUESTIONS
DMP Corporation (DMP) obtained a loan of P20 million from National Bank (NB)
secured by a real estate mortgage over a 63,380-square-meter land situated in
Cabanatuan City. Due to the Asian Economic Crisis, DMP experienced liquidity
problems disenabling it from paying its loan on time. For that reason, NB sought
the extra judicial foreclosure of the said mortgage by filing a petition for sale on
June 30, 2003. On September 4, 2003, the mortgaged property was sold at public
auction, which was eventually awarded to NBas the highest bidder. That same
day, the Sheriff executed a Certificate of Sale in favor of NB.

On October 21, 2003, DMP filed a Petition for Rehabilitation before the Regional
Trial Court (RTC). Pursuant to this, a Stay Order was issued by the RTC on
October 27, 2003.

On the other hand, NB caused the recording of the Sheriff’s Certificate of Sale on
December 3, 2003 with the Register of Deeds of Cabanatuan City. NB executed
an Affidavit of Consolidation of Ownership and had the same annotated on the
title of DMP. Consequently, the Register of Deeds cancelled DMP’s title and
issued a new title in the name of NB on December 10, 2003.
BAR QUESTIONS
NB also filed on March 17, 2004 an Ex-Parte Petition for
Issuance of Writ of Possession before the RTC of
Cabanatuan City. After hearing, the RTC issued on
September 6, 2004 an Order directing the Issuance of the
Writ of Possession, which was issued on October 4, 2004.
DMP claims that all subsequent actions pertaining to the
Cabanatuan property should have been held in abeyance
after the Stay Order was issued by the rehabilitation court.
Is DMP correct? (4%) (2014 BAR EXAM)
BAR QUESTIONS
Yellow Fin Tuna Corporation (Yellow Fin), a domestic corporation, applied for a
credit facility in the amount of PhP 50 million with Yengzi Financial Corporation
(YFC). The application was approved and the Credit Agreement was signed and
took effect. Ysko and Yuan, Yellow Fin Chairman and President, respectively,
executed a Continuing Suretyship Agreement in favor of YFC wherein they
guaranteed the due and full payment and performance of Yellow Fin's guarantee
obligations under the credit facility. YFC soon discovered material inconsistencies
in the financial statements given by Yellow Fin, drawing YFC to conclude that
Yellow Fin committed misrepresentation. Under the Credit Agreement, any
misrepresentation by Yellow Fin or its sureties will constitute an event of default.
YFC thus called an event of default and filed a complaint for sum of money
against Yellow Fin, Ysko, and Yuan. Immediately thereafter, Yellow Fin filed a
petition for rehabilitation. The court suspended the proceedings in YFC's
complaint until the rehabilitation court disposed of the petition for rehabilitation.
YFC posits that the suspension of the proceedings should only be with respect to
Yellow Fin but not with respect to Ysko and Yuan.

Is YFC correct? (2.5%) (2018 BAR)


BIR v. Lepanto Ceramics, G.R.
No. 224764, 24 April 2017 (Bernabe
ponencia)
ABC Corporation filed a petition for corporate rehabilitation
pursuant to RA 10142, alleging that, due to its financial
difficulties, it had entered into a state of insolvency, with its
liabilities exceeding its assets. ABC admitted its liabilities to the
Bureau of Internal Revenue (BIR) for taxes. At that point, the
BIR has not yet commenced assessment and collection
proceedings against ABC Corporation. The Rehabilitation Court
issued a Commencement Order which suspended all actions or
proceedings for the enforcement of claims against ABC
Corporation, and directed its creditors, including the BIR to
submit a comment or opposition to the petition.
Comment on whether or not the collection of taxes may be
stayed by the Commencement Order.
REHABILITATION; COURT-
SUPERVISED
3. Creditor’s Meeting
4. Approval of Rehabilitation Plan
 Decision Liability: 50% of the total claims
 If decision liability is not reached, resort to Cram Down
Rule
 What happens if Rehabilitation Plan is not approved
within one year?

5. Discharge from Rehabilitation OR Conversion to


Liquidation
REHABILITATION: OTHERS
 PRE-NEGOTIATED
 WHO? Debtor AND at least 2/3 total creditors (with more
than 50% secured [P], 50% unsecured[P])

 OUT-OF COURT
 WHO? Debtor AND at least 85% total liabilities (
comprising of at least 67% secured, 75% unsecured)
 STANDSTILL PERIOD – Not exceeding 120 days
 CRAM DOWN RULE
LIQUIDATION
 VOLUNTARY
 Individual debtor with at least 500K debt who does not have
sufficient assets to cover liabilities
 Insolvent debtor

 INVOLUNTARY
 Individual debtor – 1 or more creditors with total claim of
at least 500K
 Sole Proprietor, partnership, corporation –
 3 or more creditors, aggregate claim of at least 1M, or at
least 25% SCS, whichever is higher
LIQUIDATION
 Claims are filed with the Liquidator;
 the assets of the insolvent debtor are disposed,
 The proceeds are divided among the creditors.
LIQUIDATION ORDER
 Declares the debtor insolvent
 Declares juridical person as dissolved
 Orders liquidation of the debtor
 Prohibit payments and/or transfers of property to the
debtor

 Direct all claims to be filed with the liquidator

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