The new Rehabilitation and Insolvency Act

After 101 years, the Philippines finally has a new law to address presentday rehabilitation and insolvency issues. Republic Act No. 10142 or The
Financial Rehabilitation and Insolvency Act of 2010 (FRIA) took effect on
August 31, 2010, replacing Act No. 1956 or the Insolvency Law which was
enacted on May 20, 1909.
The FRIA governs debtors that are generally unable to pay their liabilities
as they are due in the ordinary course of business or have liabilities that
are greater than their assets, but excludes banks, insurance companies,
pre-need companies and national and local government agencies or units
which shall be governed by other special laws. 'Debtors' under the FRIA are
individuals who are citizens and residents of the Philippines as well as sole
proprietorships, partnerships and corporations organised and authorised to
do business under Philippine laws.
The FRIA provides for the following processes:

Rehabilitation for sole proprietorships, partnerships and

corporations
Suspension of Payments for individuals
Insolvency for all types of covered debtors

Rehabilitation
Rehabilitation may be voluntary or involuntary and voluntary rehabilitation
can take place under court supervision or undertaken out-of-court.
Court-supervised voluntary rehabilitation is initiated upon the filing by a
debtor of a petition for rehabilitation. Out-of-court rehabilitation or informal
restructuring requires the agreement of the debtor and a requisite number
of its creditors. Though an informal restructuring does not involve the
courts, an agreed-upon restructuring or rehabilitation plan has the same
cram-down effect as if approved by a court.
Involuntary rehabilitation, on the other hand, can be initiated by a creditor
or creditors with a single or aggregate claim of (i) at least P1 million
(approximately $23,900 at time of writing) or (ii) at least 25% of the
subscribed capital stock or partners' contribution of the debtor.
The FRIA also allows a hybrid of a voluntary and involuntary rehabilitation
in the form of a pre-negotiated Rehabilitation Plan. A debtor, by itself or
with any of its creditors, may file a petition for approval of a pre-negotiated
Rehabilitation Plan, which has been approved by a required number of its
creditors.

Stay order
For court-supervised rehabilitations, the court has the power to issue a
Suspension or Stay Order. A Stay Order suspends all actions for the
enforcement of claims (with some exceptions) and of judgments or
attachments against the debtor. It also prevents the debtor from selling,
disposing or otherwise transferring any of its properties except in the
ordinary course of business, and, unless provided in the Rehabilitation
Plan, from paying any outstanding liabilities. The Stay Order can remain
effective for the duration of the rehabilitation proceedings. The lien or
security rights of secured creditors, however, remain intact although they
cannot enforce their lien against the property of the debtor unless the
property is not necessary for the latter's rehabilitation.
Management
A Rehabilitation Receiver is appointed by the court to determine claims
and implement a creditor-approved or court-confirmed Rehabilitation Plan.
Generally, management of the debtor remains with the existing
management, but the court may direct the Rehabilitation Receiver to
either take over the management of the debtor or constitute a
management committee to assume such management.
Existing contracts
The Rehabilitation Plan can provide for a new interest rate to be charged,
from the commencement of the proceedings, on all claims, whether
secured or unsecured, thereby amending contractually agreed interest
rates. Contracts of the debtor may also be considered terminated
automatically if the counterparty does not confirm the contract upon its
receipt of the debtor's request to confirm the contract. Damages arising
from such termination shall form part of the claims existing prior to the
commencement of the rehabilitation.
Suspension of payments
An individual debtor that has sufficient properties to cover all his debts
but who cannot meet his liabilities as they fall due may avail itself of the
process for Suspension of Payments by filing a verified petition in court
with a proposed repayment plan.
The court may issue an order similar to a Stay Order in a rehabilitation
proceeding, which can remain in force for the duration of the proceedings.
The repayment plan is subjected to a vote by the creditors and once
approved by the required number of creditors, the court confirms such
approval and the plan becomes binding on all creditors whose claims are
included in the plan. Of note is that secured creditors are not subject to

any suspension order and those that did not vote on the repayment plan
are not bound by it.

Congress passes Financial Rehabilitation and Insolvency Act to

help ailing firms
Congress has passed into law the Financial Rehabilitation and Insolvency
Act (FRIA), which will provide for the rehabilitation or liquidation of
financially distressed companies and individuals.

Liquidation
Liquidation may likewise be voluntary or involuntary. For liquidation of
individual and juridical debtors, the voluntary process is similarly initiated,
that is, by filing of a verified petition by the affected debtor.
Involuntary liquidation for juridical debtors can be initiated by three or
more creditors whose aggregate claims is at least P1 million or 25% of the
capital of the debtor, whichever is higher. The petition need only to allege
that there is no genuine issue on the existence of the debt, which is due
and demandable but unpaid for at least 180 days.
Creditors of individual debtors, on the other hand, who wish to initiate
involuntary liquidation proceedings must allege the existence of at least
one act of insolvency enumerated in the FRIA.
Also, at any time during the pendency of a rehabilitation proceeding, the
process can be converted into a liquidation proceeding. Once the court
finds the petition meritorious, it shall issue a Liquidation Order and appoint
a Liquidator.
The rights of secured creditors are preserved and are not affected by the
Liquidation Order.
Right of set-of
The FRIA allows parties that are mutually debtor-creditor to set-off each
other's debts.
Rules of procedure
The rules of procedure for proceedings under the FRIA have been left for
the Supreme Court to promulgate and, at time of writing, the Supreme
Court has not issued such rules.

The new legislation was adopted by Congress before ending its 14th
session on February 2, 2010 to replace the more than century-old
Insolvency Law of 1909 or Act No. 1956.
Philippine Stock Exchange (PSE) President Francis Lim lauded the
legislative support for FRIA saying we are enormously grateful to
Congress led by Senator Edgardo Angara and Congressmen Juan Edgardo
Sonny Angara, Ramon Durano VI, Exequiel Javier, Jaime Lopez and
Roman Romulo for helping pass this breakthrough legislation after almost
a decade in the legislative mill.
He noted that the approval of the bill is a significant leap forward in our
goal to recover value for shareholders of listed firms that may have gone
underwater because our vintage 1909 insolvency law was simply
obsolete.
Among the significant features of the bill is the court-supervised
rehabilitation which is available if the debtor is able to get more than 50
percent but less than 67 percent creditor approval for its rehabilitation
plan.
It also provides for pre-packaged or pre-negotiated rehabilitation for cases
where the debtor gets at least 67 percent but less than 85 percent
creditor approval for its rehabilitation or restructuring plan.
Another option is the out-of-court or informal rehabilitation which applies
when the debtor secures at least 85 percent creditor approval, with at
least 67 percent of secured creditors and 75 percent of unsecured
creditors agreeing to the plan.
Also provide is debt forgiveness if the amount by which the debt is
reduced will not be subject to any tax on the part of either the creditor or
the debtor.
If the debtor can no longer be rehabilitated, the debtor goes into
liquidation for an orderly settlement of debts and liabilities.
Lim said the law will not be limited to corporations as partnerships and
natural persons doing business as sole proprietorships can also avail of
rehabilitation.
Senator Edgardo J. Angara noted the lack of a modern insolvency
legislation caused untold damage to our economy.

Mere liquidity problems nearly spelled the death knell for businesses. Our
vintage 1909 Insolvency Law was simply not responsive to the 21st
century needs of our financially distressed companies.
BY SEN. EDGARDO ANGARA: FINANCIAL REFORMS
MANILA, NOVEMBER 9, 2011 (MANILA BULLETIN) MORE CRITICAL
THAN EVER, BY SEN. EDGARDO ANGARA - In its latest Doing Business
2012 report, the International Finance Corporation (IFC) commended the
Philippines for putting in place the legal framework for liquidating and
reorganizing financially distressed companies the sole reform instituted
over the last year to improve the ease of doing business in the country.
The Financial Rehabilitation and Insolvency Act of 2010 (FRIA) was passed
into law on July 18, 2010. I authored and filed this measure in 2007, and
subsequently sponsored it on the floor in 2009, in response to the urgent
need to update our antiquated Insolvency Law circa 1909.
Before the FRIA became law, insolvency proceedings were severely
unresponsive and inadequate. This was felt acutely during the 1997
financial crisis when protracted proceedings exacerbated corporate failures
to the point of threatening the survival of the companies concerned. The
process of liquidating failed businesses used to take so long that assets get
dissipated or become non-performing for an indefinite period.

consumers and self-employed individuals, by enabling lenders to better

assess risk based on shared and centrally managed credit data.
By proof of a good track record, the cost of financing for responsible
borrowers will go down in terms of both interest rates and required
collateral. It will also lessen Filipinos reliance on more costly informal
credit. In short, the CCIC will help institutionalize credit discipline.
It is unfortunate when red tape, or lack of political resolve, hold up muchneeded reforms. As a result, the Philippines barely enhanced its overall
business climate. We ranked 136th among 183 economies in terms of the
ease of doing business, even dropping from last years 134th place.
Among 10 indicators, the Philippines slipped in seven (starting a business,
dealing with construction permits, registering property, getting credit,
protecting investors, paying taxes, and resolving insolvency) and only
improved in three (getting electricity, trading across borders, and
enforcing contracts).
Over the last year, 125 economies implemented 245 reforms that made it
easier to do business, 13 percent more than in the previous year. The
Philippines is counted among these nations for having at least one reform.

According to the IFC, the private sector funding arm of the World Bank
Group, the reform will help significantly improve the investment climate in
the Philippines. However, there remains a huge room for improvement.

But around the world, nations are executing reforms more aggressively. In
fact, the top 10 reformers, save for Korea, are all developing, middleincome nations: Morocco, Moldova, Macedonia, So Tom and Prncipe,
Latvia, Cape Verde, Sierra Leone, Solomon Islands, Armenia, and
Colombia.

Laws passed to improve the regulatory environment must be implemented

completely and more quickly for greater impact. For instance, the IFC said
the establishment of the Central Credit Information Corporation (CCIC)
must be fast-tracked.

The world is in the throes of another financial crisis. Easing the process of
doing business will not only help businesses cope, but also jump-start
rapid recovery. In our case, it can revitalize sluggish growth but only if
we act fast enough.

The CCIC was created under the Credit Information System Act (CISA),
another measure I authored and sponsored. It was signed into law back in
2008. However, the CCIC is hardly operational to this day.

Philippines adopts new corporate rehabilitation and insolvency

framework

The implementing rules and regulations of the CISA were only promulgated
late last year. In addition, President Benigno Aquino III only appointed a
CCIC president, Baltazar N. Endriga, in May this year. And the CCIC has yet
to complete its total seed budget of P125 million, of which P75 million will
come from government and P50 million from the private sector.

August 2010 - Finance . Legal Developments by SyCip Salazar Hernandez

& Gatmaitan.
More articles by this firm.
The availability of credit depends to a large extent on whether a workable,
reliable framework that provides reasonable assurances that debts will be
paid and distressed borrowers rehabilitated in a timely fashion is in place.

The CISA is critical in improving access to financing a major obstacle in

doing business in the country, especially for small- and medium-sized
entrepreneurs. It will unlock financing for entrepreneurs, as well as capable

On 2 February 2010, the Philippine Congress adopted Republic Act No.

10142, entitled the Financial Rehabilitation and Insolvency Act of 2010 (or
Fria). The Fria lapsed into law and became effective on 18 July 2010.

The Fria replaces and repeals the Insolvency Law (Act No. 1956), which was
enacted in 1909 and was almost universally acknowledged as outdated
and obsolete. The Fria also impliedly amends the Interim Rules on
Corporate Rehabilitation first issued by the Supreme Court in 2000 (and
amended in 2008), given several inconsistencies between those rules and
the new Fria. It is expected that the Supreme Court will issue new rules on
procedure to govern corporate rehabilitation in conformity with the Fria.
Under the Fria, a debtor is considered "insolvent" if it 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." The Fria provides
for the following modes of rehabilitating an insolvent corporate debtor:

Court-supervised rehabilitation proceedings - These may be

commenced by either the debtor (or a group of affiliated debtors)
or by creditors representing a specified minimum amount of
claims. The court conducts the rehabilitation proceedings, appoints
a receiver and determines which claims against the debtor are
valid, with the goal of putting a rehabilitation plan in place. A plan
must be approved by the debtor and creditors representing more
than 50% of the claims of each class of creditors. The rehabilitation
plan must be agreed upon, and the court must approve such plan,
within one year from the date of commencement of the
proceedings. If the plan is not finalized or the court does not
approve the plan within such period, the matter will proceed to
liquidation of the debtor. All claims against the debtor are
suspended while rehabilitation proceedings are pending in court.

Pre-negotiated rehabilitation - In these proceedings, a debtor

files a petition with the court for the approval of a rehabilitation
plan which has been previously agreed upon by the debtor and its
creditors representing at least 2/3 of the debtor's total liabilities
(and at least 67% and 75% of the debtor's secured and unsecured
obligations, respectively). The court is required to approve the plan
within 120 days from the date the petition if filed, failing which, the
plan shall be deemed approved. The court may also order that the
matter proceed to the liquidation of the debtor if it finds that the
plan is not meritorious or the parties acted in bad faith. All claims
against the debtor are suspended while rehabilitation proceedings
are pending in court.

Out-of-court or informal restructuring agreements or

rehabilitation plans - In this scenario, the debtor and creditors
representing at least 85% of the debtor's total liabilities (and at
least 67% and 75% of the debtor's secured and unsecured
obligations, respectively) agree on a restructuring or rehabilitation
plan. As long as these thresholds are met, the plan is binding on
the parties (and on the debtor's other creditors) even without
court approval. A standstill period may be enforced during the
negotiations, provided that such standstill is approved by
creditors representing more than 50% of the debtor's total
liabilities. The standstill period may not, however, exceed 120
days.
One change introduced by the Fria is the option granted to the debtor to
choose which of its contracts it wishes to "confirm," by delivering written
notice of confirmation to the relevant counterparties. Any contract that is
not so confirmed by the debtor within a period of 90 days from the
commencement of the rehabilitation proceedings shall be considered
terminated. Damages arising therefrom will be considered a claim arising
prior to the commencement of the proceedings.

Another notable change is that while court-supervised proceedings are

pending, all taxes and fees due from the debtor to the national and local
governments shall be considered waived. Similarly, the amount by which
any indebtedness or obligation of the debtor is reduced or forgiven shall
not be subject to any tax.
Banks, insurance companies and pre-need companies are not covered by
the Fria. The rehabilitation of such entities is governed by other laws.