FRIA

• The I in FRIA stands for "Inclusion" and promotes the idea that all individuals should have equal opportunities to participate in society.
• Financial Rehabilitation and Insolvency Act (RA No. 10142)
• Declaration of Policy:

  • State encourages debtors and creditors to resolve and adjust competing claims and property rights collectively and realistically
  • State ensures timely, fair, transparent, effective, and efficient rehabilitation or liquidation of debtors
  • Rehabilitation or liquidation aims to maintain certainty and predictability in commercial affairs, preserve and maximize debtor assets, recognize creditor rights, and ensure equitable treatment of creditors
• Nature of Proceedings:

  • In rem, binds the whole world
  • Jurisdiction acquired upon publication of notice of commencement in a newspaper
  • Proceedings are summary and non-adversarial
• Purpose:

  • Encourage debtors and creditors to resolve claims through rehabilitation
  • Facilitate speedy and orderly liquidation if rehabilitation is not feasible
• Debtors:

  • Insolvent sole proprietorships, partnerships, corporations, and individual debtors who are residents and citizens of the Philippines
• Excluded Debtors:

  • Banks, pre-need companies, insurance companies, and government agencies or units governed by special laws
• Insolvent:

  • Unable to pay liabilities as they fall due or has liabilities greater than assets
• Creditors:

  • Natural or juridical persons with claims against the debtor, secured or unsecured
  • Unsecured creditors have claims not secured, preferred, or subordinated
  • Secured creditors have claims secured by a lien
• Proceedings Covered by the PRIA:

  • Rehabilitation (voluntary or involuntary)
  • Pre-negotiated rehabilitation
  • Liquidation (voluntary or involuntary)
  • Suspension of payments
• Suspension of Payments:

  • Involves proposing a payment schedule and preventing debtor from making unnecessary payments
  • Coverage: only individual debtors
  • Purpose is to suspend or delay debt payments without affecting the amount of indebtedness
• Distinction with Rehabilitation:

  • Suspension of Payments applies only to individual debtors, while Rehabilitation applies to business organizations
  • Secured debtors are not affected in Suspension of Payments, but they are affected in Rehabilitation
• Suspension Order:

  • Court may issue an order suspending any pending execution against the individual debtor
  • Creditors are prohibited from suing the debtor during the proceedings, with exceptions for specific claims
• Prohibited Acts of the Debtor:

  • Cannot sell, transfer, or dispose of property except those used in ordinary business operations
  • Cannot make payments outside necessary business expenses
• Creditors' Meeting:

  • Debtor must attach a proposed agreement with creditors to the petition
  • Approval requires a double majority of creditors voting
• Rehabilitation:

  • Restoration of the debtor to successful operation and solvency
  • Types: Voluntary (initiated by debtor) and Involuntary (initiated by creditors)
  • Criteria for filing differ based on debtor type
• Commencement/Stay Order:

  • Court issues a Commencement Order with a Stay Order to suspend actions against the debtor
  • Stay Order prohibits debtor from selling or disposing of properties except in the ordinary course of business
• Claims:

  • Include all claims against the debtor, whether for money or other demands
  • Creditors or third parties can file cases against directors and officers acting in their personal capacities
• Effect of Stay Order on Secured Credits:

  • Preference of creditors is retained, but enforcement is suspended
• Exceptions to the Stay Order:

  • Cases pending appeal in the SC
  • Enforcement of claims against sureties and other persons solidarily liable
  • Actions of customers or clients of a securities market participant, among others
• Court Action:

  • Court may give due course to the petition if debtor is insolvent and has a substantial likelihood of successful rehabilitation
  • Court may deny the petition if debtor is not insolvent or if the petition is a sham filing
• Grounds for conversion to liquidation:

  • No substantial likelihood for the debtor to be successfully rehabilitated
• Who will manage the business of the debtor during rehabilitation:

  • Existing Board and/or management
  • Upon motion, the court may appoint a Rehabilitation Receiver or Management Committee
• Grounds for appointment of a Rehabilitation Receiver/Management Committee:

  • Actual or eminent danger of dissipation, loss, wastage or destruction of the debtor's assets or properties
  • Paralyzation of the business operations of the debtor
  • Gross mismanagement of the debtor, fraud, or other wrongful conduct by existing management
• Qualifications for a Rehabilitation Receiver:

  • Citizen of the Philippines
  • Resident of the Philippines in the 6 months immediately preceding the nomination
  • Knowledge of insolvency and commercial laws
  • No conflict of interest
• Role of a Rehabilitation Receiver:

  • Preserve the value of the assets of the debtor during rehabilitation proceedings
  • Determine the viability of the rehabilitation of the debtor
  • Prepare and recommend a Rehabilitation Plan to the court
  • Implement the approved Rehabilitation Plan
• Acts that may subject debtors/owners/partners/directors or officers to liability:

  • Dispose of any property of the debtor in fraud of creditors or in a manner disadvantageous to the debtor/creditors
  • Conceal, embezzle, or misappropriate any property of the debtor
• Extent of Liability:

  • Whichever is higher between double the value of the property sold, embezzled, or disposed, or double the value of the transaction involved
• Rehabilitation Plan:

  • A plan to restore the financial well-being and viability of an insolvent debtor
  • Includes debt forgiveness, debt rescheduling, reorganization, debt-equity conversion, and other similar arrangements
  • Approval required from creditors representing more than 50% of total claims and the court, or court approval alone in specific cases
• Submission and Confirmation of the Rehabilitation Plan:

  • Rehabilitation receiver submits the plan to the court for confirmation
  • Court confirms the plan if no objections are filed within the relevant period or if objections are found lacking in merit
• Cram Down Effect:

  • The court-approved rehabilitation plan is binding on the debtor and all affected parties, including creditors
• Pre-negotiated (Out-of-court) Rehabilitation Requirements:

  • Debtor must agree to the out-of-court restructuring/workout agreement or rehabilitation plan
  • Approval required from creditors representing specific percentages of obligations
• Liquidation:

  • Proceeding where claims are filed, assets are disposed, and proceeds are divided among creditors
  • Liquidator appointed by the court or creditors facilitates the proceedings
• Difference between Voluntary and Involuntary Liquidation:

  • Voluntary: Debtor files the petition, no acts of insolvency need to be alleged
  • Involuntary: Creditor or group of creditors files the petition, acts of insolvency must be proved
• Conditions that may lead to conversion of rehabilitation proceedings to liquidation proceedings:

  • Debtor is indeed insolvent but there is no substantial likelihood for successful rehabilitation
  • No rehabilitation plan confirmed within 1 year from filing of the petition
  • Failure of rehabilitation or dismissal of the petition on technical grounds
  • Verified motion of the debtor during the proceedings
• Rights of secured creditors:

  • Liquidation order does not affect the right of a secured creditor to enforce his lien
  • Secured creditor may waive the security or lien, prove the claim in liquidation proceedings and share in asset distribution
  • Secured creditor may maintain rights under the security or lien
  • Options for secured creditor if value of property is less or exceeds the claim
• Election of Liquidator:

  • Only creditors who filed claims within the set period and not barred by statute of limitations can vote
  • Secured creditor can vote if waives security or lien or fixes property value with liquidator
  • Liquidator appointed based on highest number of votes cast in terms of amount of claims
• Determination of Claims:

  • Liquidator prepares preliminary registry of secured and unsecured creditors' claims within 20 days
  • Secured creditors who waived security or lien or fixed property value considered unsecured
  • Liquidator resolves disputed claims and submits findings to court for approval
• Liquidation Plan:

  • Liquidator must submit plan to court within 3 months
  • Plan must enumerate all debtor assets, schedule of asset liquidation, and payment of claims
• Exempt Property:

  • Court may exempt and set apart real and personal property exempt from execution and a homestead
  • Sale of unencumbered assets at public auction, private sale allowed under specific conditions