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Liquidating Debts Amidst the Pandemic (Part 2)

In the previous article, we have defined the concept of Rehabilitation and the protective mechanisms provided for by the Financial Rehabilitation Law for the economically-challenged debtor. What exactly are these mechanisms? Again, There are six (6) proceedings covered by FRIA, namely:

  1. Suspension of Payment Proceedings for Individual Debtors

  2. Court-supervised Corporate Rehabilitation

  3. Pre-negotiated Rehabilitation

  4. Out of Court Rehabilitation

  5. Liquidation of Insolvent Juridical Debtors

  6. Insolvency of Individual Debtors

Suspension of Payment Proceedings for Individual Debtors

The first type of proceeding covered by the FRIA law is the suspension of payment proceedings. This proceeding applies only to individual debtors who are residents and citizens of the Philippines.[1] It does not apply to non resident citizens and aliens and corporate debtors. In order to have the proposition approved, (i) creditors representing 3/5 of the liabilities must attend the meeting and (ii) at least 2/3 of the creditors voting unite on the said proposition and the claims they represent must be at least 3/5 of the debtor’s liabilities. However, no creditor incurring credit within 90 days prior to the petition shall be entitled to vote.[2]

An insolvent individual debtor refers to that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.[3] Among the financial documents to be annexed in filing the petition are the Schedule of Debts and Liabilities, Inventory of Assets and Proposed Agreement with Creditors.[4]

During the proceeding, the debtor cannot convey any of his properties except in the ordinary operations of commerce or industry.[5] • The court may likewise issue an order suspending any execution against the debtor EXCEPT properties held by secured creditors as securities for their claims. The order shall lapse after 3 months without the agreement being accepted by creditors, or when such agreement is denied. Similarly, no creditor may sue to collect his claim from the debtor from the time of the filing of the petition for suspension of payments and for as long as proceedings remain pending except:

(I) Those creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred in the 60 days immediately prior to the filing of the petition; and

(II) The secured creditors.

Court-supervised Corporate Rehabilitation

The second proceeding to be discussed is a court-supervised corporate rehabilitation. It can be voluntary (initiated by the debtor) or involuntary (initiated by the creditor/s). In involuntary or creditor-initiated rehabilitation proceedings, any credit or group of creditors with an aggregate claim, whichever is the higher of, (i) P 1,000,000 or (ii) 25% of the subscribed capital stock, can petition the court for rehabilitation if there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due. Similarly, an involuntary rehabilitation proceeding ay likewise be initiated if a creditor, other than the petitioner/s, 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.

In voluntary or debtor-initiated rehabilitation proceedings on the other hand, the petition shall include the following:

(I) Income tax returns stamped as received by the BIR for the past two (2) years prior to the year of filing;

(II) Audited financial statement of the debtor at the end of its last fiscal year;

(IiI)Interim financial statements not earlier than thirty (30) days prior to the filing of the petition and certified under oath by the appropriate officer, except when the petition is filed within thirty (30) days after the end of the fiscal year;

(IV) Schedule of Debts and Liabilities;

(V) Inventory of Assets which must list with reasonable particularity all the assets of the debtor, and shall include (i) a Schedule of Accounts Receivable and (ii) a Schedule of Existing Claims against third parties; and

(VI) Rehabilitation Plan;

(VII) Schedule of Payments and Disposition of Assets which the debtor effected within one (1) year immediately preceding the filing of the petition;

(VIII)Schedule of Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months

(IX) Statement of Possible Claims by or against the debtor;

(X) Affidavit of General Financial Condition; and

(XI) List containing at least three (3) nominees for the position of rehabilitation receiver as well as their qualifications and addresses.[6]

Whether it be voluntary or involuntary, when the petition is found sufficient, a Commencement Order, which shall include a Stay Order, shall be issued. The effects of the stay order shall retroact to the day of the filing of the petition.[7] No funds shall be used except in the ordinary course of business. Similarly, assets can only be sold only upon showing that it is perishable, costly to maintain or susceptible to devaluation or jeopardy.[8] As for valid and subsisting contracts, within 90 days following the commencement of a rehabilitation proceeding, the debtor, with the consent of Receiver, shall notify each contracting counterparty whether it will push through with the contract. Contracts not confirmed shall be deemed terminated.[9]

A rehabilitation receiver shall then be appointed. All legal proceedings shall be consolidated in the rehabilitation court and taxes, fees and the corresponding penalties thereof, both to the national government and the local government units, shall be deemed waived.[10] The rehabilitation receiver shall then make a report, upon which the court may either give due course to the petition, or deny the same and convert the action into liquidation if there is no likelihood for the debtor to be rehabilitated.[11] A rehabilitation plan may be deemed approved by a particular class of creditors when more than 50% of total claims of a particular class votes in favor of it. Notwithstanding the rejection of a plan however, the court may nonetheless approve it if:

(I) The Rehabilitation Plan complies with the requirements specified in the FRIA.

(II) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

(III) The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the Rehabilitation Plan; and

(IV) The 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.[12]

In addition to the rehabilitation receiver, the court may also appoint a management committee to assume the rights and responsibilities of the management and governing body of the director, especially when there is a clear evidence of dissipation of assets or gross mismanagement.[13] Similarly, the committee may overrule or revoke the actions of the previous management.[14] The creditors belonging to a specific class may also form a “creditors’ committee”, which shall be the primary liaison between the creditors they represent and the rehabilitation receiver.[15]

It must be remembered however that a primary principle under rehabilitation proceedings however is that the issuance of the Commencement Order and the Suspension or Stay Order, and any other provision of this Act, shall not be deemed in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the Stay Order. The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor 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. The secured creditor and/or the other lien holders shall be admitted to the rehabilitation proceedings only for the balance of his claim, if any.[16]

“As between creditors, the key phrase is "equality is equity." When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on an equal footing. Not anyone of them should be given any preference by paying one or some of them ahead of the others. This is precisely the reason for the suspension of all pending claims against the corporation under receivership. Instead of creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with the receiver.[17] However, The Stay or Suspension Order shall not apply:

(I)To 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;

(II)Subject to the discretion of the court, to 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;

(III) To the enforcement of 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;

(IV) To 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;

(V) The 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;

(VI) The 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

(VII) 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.[18]

The rehabilitation proceedings shall subsist for as long as there is substantial likelihood that the debtor shall be successfully rehabilitated.[19] The Court however has a maximum period of 1 year from the date of the filing of the petition to confirm a plan. If no plan is confirmed, proceedings may be converted into liquidation.[20]

Can there be a rehabilitation without invoking the aid of the court, in order to lessen expenses? Please wait for the succeeding article. Again, should you need assistance in liquidation or rehabilitation, we, the Sangalang and Gaerlan, Business Lawyers, provide quality service in ensuring a “win-win” situation for both the debtor and the creditors in these challenging times.

Christian Andrew Labitoria Gallardo recently graduated with a degree of Juris Doctor at the Ateneo School of Law and is currently an associate of the Sangalang & Gaerlan, Business Lawyers. You may reach him at

[1] § 4 (o), RA 10142.

[2] § 4 (s), RA 10142.

[3] § 4 (p), RA 10142.

[4] § 94, RA 10142.

[5] § 95, RA 10142.

[6] § 2 Rule 2 of Financial Rehabilitation Rules.

[7] § 15, RA 10142.

[8] § 49, RA 10142.

[9] § 57, RA 10142.

[10] § 19, RA 10142.

[11] § 25, RA 10142 and § 17, Rule 2, FR Rules.

[12] § 64, RA 10142.

[13] § 37, RA 10142.

[14] § 33, RA 10142.

[15] § 43, RA 10142.

[16] § 60, RA 10142.

[17] Alemars Sibal v Elbinias, 186 SCRA 94 (1990).

[18] § 18, RA 10142.

[19] § 21, RA10142.

[20] § 72, RA 10142.

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