FRIA

• Financial Rehabilitation and Insolvency Act (RA No. 10142)


  Law that encourages debtors and creditors to collectively and realistically resolve and adjust competing claims and property rights, and ensures timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors
• Declaration of Policy: It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainly 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. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations.
• Nature of Proceedings


  • In rem (binds the whole world)
  • Jurisdiction over all persons affected acquired upon publication of notice of commencement
  • Proceedings shall be summary and non-adversarial
• Debtors covered


  • Sole proprietorship registered with the DTI
  • Partnership registered with the SEC
  • Corporations organized and existing under the laws of the Philippines
  • Individual debtors which are natural persons who are residents and citizens of the Philippines
• Group of Debtors


  • Financially related corporations – parent, subsidiary or affiliates
  • Partnerships – more than 50% of which is owned by the same person
  • Single Proprietorships – owned by the same individual
• Excluded Debtors


  • Banks
  • Pre-need companies
  • Insurance companies
  • Government agencies or units
• Insolvent


  Financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due, or has liabilities greater than its or his assets
• Creditors


  • Natural or juridical persons with a claim against the debtor that arose on or before commencement date, which can either be secured or unsecured
  • Unsecured creditors - whose claim or a portion thereof is neither secured, preferred nor subordinated
  • Secured creditors - whose claims are secured by a lien (either by law, agreement or by judicial judgment) which legally entitles a creditor to resort the property subject of a lien for payment of his claim
• Claims


  • All claims or demands 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, disputed or undisputed, including claims of the government and claims against directors and officers of the debtor arising from acts done in the discharge of their functions
• Proceedings Covered


  • Rehabilitation
  • Pre-negotiated Rehabilitation
  • Out of Court Rehabilitation
  • Suspension of payments
  • Liquidation
• Rehabilitation


  Restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover more if the debtor continues as a going concern than if it is immediately liquidated
• Types of Rehabilitation


  • Voluntary - initiated by the debtor
  • Involuntary - initiated by creditor/s
• Commencement/Stay Order


  Court issues Commencement Order which includes a Stay Order to suspend actions/proceedings against the debtor, prohibit the debtor from selling/transferring properties and making payments except in the ordinary course of business
• Commencement Date


  Date when the court issues the Commencement Order retroactive to the date of filing of the petition
• Exceptions to the Stay Order

  • Cases already pending appeal in the SC
  • Cases pending or filed at a specialized court or quasi-judicial agency
  • Enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors
  • Actions of customers/clients of a securities market participant to recover moneys/securities
  • Actions of a licensed broker or dealer to sell pledged securities
  • Clearing and settlement of financial transactions through facilities of a clearing agency
  • Criminal action against individual debtor or owner, partner, director, or officer
• Court Action


  1. Give due course to the petition if debtor is insolvent and there is substantial likelihood for successful rehabilitation

  2. Deny the petition if debtor is not insolvent, petition is a sham filing, plan/attachments are materially false/misleading, or debtor has committed fraud

  3. Convert the proceedings to liquidation if no substantial likelihood for successful rehabilitation
• Who will manage the business of the debtor

  • Existing Board and/or management
  • Rehabilitation Receiver appointed by the court
  • Management Committee appointed by the court
• Grounds for appointment of Rehabilitation Receiver/Management Committee

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


  Appointed by the court with principal duties of preserving the value of the debtor's assets, determining the viability of rehabilitation, preparing and recommending a Rehabilitation Plan, and implementing the approved Plan
• Management Committee


  When appointed by the court, shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities
• Creditors' Committee


  • Secured creditors
  • Unsecured creditors
  • Trade creditors and suppliers
  • Employees of the debtor
• Role of Creditors' Committee

  Assist the rehabilitation receiver in communicating with the creditors and be the primary liaison between the rehabilitation receiver and the creditors
• Creditors' Committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor
• Acts of debtors/owners/partners/directors or officers which may subject them to liability: disposing of property other than in the ordinary course of business or in a manner grossly disadvantageous, or concealing/embezzling/misappropriating property
• Extent of Liability


  Double the value of the property sold, embezzled or disposed, or double the value of the transaction involved, whichever is higher
• Means of Rehabilitation Plan


  • Debt forgiveness
  • Debt rescheduling
  • Reorganization or quasi-reorganization
  • Dacion en pago
  • Debt-equity conversion
  • Sale of the business (or parts of it) as a going concern
  • Setting up of new business entity
  • Other similar arrangements
• Approval of Rehabilitation Plan

  1. Creditors representing more than 50% of total claims and the confirmation of the court

  2. The court even without approval of the creditors or even over the objections of the creditors, if the plan complies with the requirements, the rehabilitation receiver recommends confirmation, the shareholders/owners/partners lose at least their controlling interest, and the plan would likely provide the objecting class of creditors with compensation greater than in liquidation
• Submission and Confirmation of Rehabilitation Plan

  1. Rehabilitation receiver submits the approved plan to the court for confirmation

  2. Court notifies creditors and allows them to file objections within 20 days on grounds of fraud, false/misleading documents, or lack of creditor support

  3. Court confirms the plan if no objections are filed, objections are lacking in merit, or the debtor has cured the objection
• Objection of creditors


  1. May be filed within 20 days from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation

  2. On the grounds that: 1) The creditors' support was induced by fraud; 2) Documents or data relied upon in the plan are materially false or misleading; or 3) The plan is in fact not supported by the voting creditors
• Confirmation of the Rehabilitation Plan

  The court shall issue an order confirming the Rehabilitation Plan if: 1) No objections are filed within the relevant period; 2) If objections are filed, the court finds them lacking in merit; 3) The court determines that the basis for the objection has been cured; or 4) The court determines that the debtor has complied with an order to cure the objection
• The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made adequate provisions for paying such claims
• The court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor, provided that the terms thereof are necessary to restore the financial well-being and viability of the insolvent debtor
• Period of Confirmation


  Must be within 1 year from the date of filing the petition
• If no plan is confirmed within the said period

  The proceedings may upon motion, or motu propio, be converted into one for the liquidation of the debtor
• Cram Down Effect


  The rehabilitation plan approved by the court shall be binding upon the debtor and all persons who may be affected by it, including creditors, whether or not such persons have participated in the proceedings, opposed the plan, or whether or not the claims have been scheduled
• Pre-negotiated Rehabilitation


  A pre-negotiated rehabilitation plan may be approved by the court if it is approved or endorsed by: 1) Creditors holding at least 2/3 of the total liabilities, including secured creditors holding at least 50% of the total secured claims and unsecured creditors holding at least 50% of the total unsecured claims
• Who may file a pre-negotiated rehabilitation plan

  The debtor by him/itself; or 2) The debtor with any of its/his creditors
• Issuance of Order for pre-negotiated rehabilitation

  Within five (5) working days, and after determination that the petition is sufficient in form and substance, the court shall issue an Order which shall: 1) Identify the debtor, its principal business of activity/ies and its principal place of business; 2) Declare that the debtor is under rehabilitation; 3) Summarize the ground/s for the filling of the petition; 4) Direct the publication of the Order in a newspaper of general circulation in the Philippines once a week for at least 2 consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance; 5) Direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least 10% of the total liabilities of the debtor, as determined in the schedule attached to the petition, within 3 days; 6) State that copies of the petition and the Rehabilitation Plan are available for examination and copying by any interested party; 7) State that creditors and other interested parties opposing the petition or Rehabilitation Plan may file their objections or comments thereto within a period of not later than 20 days from the second publication of the Order; 8) Appoint a rehabilitation receiver, if provided for in the Plan; and 9) Include a Suspension or Stay Order
• Approval of the pre-negotiated Rehabilitation Plan

  Within 10 days from the date of the second publication of the Order, the court shall approve the Rehabilitation Plan unless a creditor or other interested party submits an objection to it
• Grounds for Objection to pre-negotiated Rehabilitation Plan

  The allegations in the petition or the Rehabilitation Plan or the attachments thereto are materially false or misleading; b) The majority of any class of creditors do not in fact support the Rehabilitation Plan; c) The Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim in not categorically declared as a contested claim; or d) The support of the creditors, or any of them was induced by fraud