FINANCIAL REHABILITATION INSOLVENCY ACT OR 2010 (FRIA) (d) It must be approved by creditors holding at least eighty-five

percent (85%) of the total liabilities, secured and unsecured, of

— Hypothetic Example — the debtor.
Case of On the Brink Corporation (OBC)
• OBC is registered with the SEC. It is a manufacturing company and If the OCRA is successful, the parties can also enter a so-called pre-
well-established and well-known one. negotiated rehabilitation plan.
• However, as a manufacturing company, it has heavily invested in
research and development because for manufacturers, the core of MODE 2: PRE-NEGOTIATED REHABILITATION PLAN
their business is how to develop and sell new innovative products to
maintain the profit-motive of the company. Difference with OCRA PNRP
OCRA
• OBC’s newest products is a fuel saving device. When tested, it was
shown that it can reduced fuel consumption by 60% when attached Creditors unanimity while there is the unanimity of the
to the engine of the car. With this machine, OBC was able to obtain unanimity of the various creditors also
patents over the same. creditors in implies unanimity in
• The announcement of the new product was supported by various discussing or purpose, that all of
certifications attesting to the effectiveness of the new product itself. negotiating with the them will come up
• Various accrediting private agencies have subjected the product to debtor, there are still with a single plan in
laboratory test in support of the claim of the OBC. separate contracts order to rehabilitate
• However, when OBC developed that product, it used most of its among them; The the debtor.
cash resources for said research and development. That’s why the creditors are treated
company is suffering from cash flow or liquidity problems. still as separate and
• Therefore, it is having difficulty of meeting its debts and obligations. distinct personalities
• Since it is no longer able to pay its obligations, it is facing threats of dealing with the
foreclosure and garnishment of its assets. That threat comes same debtor.
primarily from one of its major creditors, BANKABLE CREDIT, that
has initiated to foreclose the new machineries or prototype which Outcome several novated only one
OBC used as security of its obligations. contracts rehabilitation plan
• The other creditors of the OBC are also threatening to proceed or which is binding
against its assets. may lead to a Pre- upon all of the
• Usually, when facing a short fall in cash, the most likely immediate negotiated creditors
victims of said liquidity problems would be: Rehabilitation Plan
(1) workers
(2) suppliers Minimum required 67% secured 50% secured
• There is potential for OBC to make millions of dollars by reason of creditor 75% unsecured 50% unsecured
that new product. However, the moment that any of the creditor participation 85% total 2/3 of total
proceed against its company assets, the chance of selling the new
product in the market becomes difficult if not impossible at all. The ultimate objective of these extrajudicial remedies:
• to come up with a restructured agreement; or
Options
• a unified rehabilitation plan
OBC can meet the creditors and:
(c) ask for more time to find a white knight investor Requirement for Pre-Negotiated Rehabilitation
• White Knight Investor — a natural or juridical person who - Approval or endorsement of creditors holding 2/3 of the total
agrees to bring in new money liabilities, which includes:
or capital to the company by
• more than 50% of the total secured claims
way of loans or by way of
• more than 50% of the total unsecured claims
new money exchange of
stocks There are three classes of creditors under Preferences and Concurrence
(d) convince the creditors to restructure existing loans voluntarily
of Credits:
(conventional novation) (1) preferred and secured creditors over specific assets
(e) invite them to become owners (debt-for-equity swap) - eg. BIR with respect to imported goods for which the custom
duties were not paid
Extrajudicial Remedies: OCRA and PNRP (2) preferred and secured creditors over the mass of the assets
MODE 1: OCRA - eg. BIR with respect to unpaid income taxes
When the company and its various creditors starts discussion, they are (3) ordinary and unsecured creditors
actually entering into an OCRA under the FRIA — Out of Court
Rehabilitation Agreement (OCRA) or Informal Restructuring The reality is that the ordinary and unsecured creditors are likely to
Agreement negotiate restructuring than secured because they don’t have
preferences and so, they are the last ones to be paid. The ones who
OCRA — is an extrajudicial remedy whereby the debtor and its various are likely to be unwilling are the secured creditors.
creditors agree to negotiate on various means or method by
which to provide debt relief to the debtor. That’s why under the law, for the law and the court to recognize a
PNRP or even an OCRA, there must be critical mass representing all
Under the FRIA, the parties may go into an OCRA for as long as the kinds of creditors.
following are met:
Minimum Requirement of OCRA Illustration:
(a) The debtor must agree to the out-of-court or informal Balance Sheet of the Debtor as of December 2017 shows:
restructuring/workout agreement or Rehabilitation Plan; Total assets 100,000,000
(b) It must be approved by creditors representing at least sixty-seven Total liabilities 1,000,000,000
(67%) of the secured obligations of the debtor; Insolvent by 900,000,000
(c) It must be approved by creditors representing at least seventy-five If the total liabilities is composed of: 500 M secured and 500 M
percent (75%) of the unsecured obligations of the debtor; and unsecured
Secured (500M * 67%) 335 million
Unsecured (550M * 75%) 375 million

FRIA | Page 1 of 13
 Total 710 million The liquidator appointed by the court will step in and take an active
Since 710 M is only 71% of the total liabilities, it did not meet the role by gathering and preserving all assets (inventory) which includes
minimum requirement of 85% for OCRA. Thus, the court will not assist filing of actions in order to recover property belonging to the debtor.
the debtor. - During this period of gathering the assets, the liquidator will also
conduct ex parte hearings to determine who among the creditors are
Reason for the thresholds: entitled to be notified.
- to make the OCRA less controversial and more representative of all
stakeholders. ➡
The creditor must show proof of its claim to the liquidator.
Publication of the OCRA
For an OCRA to bind not just the creditors who participated but all
creditors, the law allows publication of the notice of the OCRA: ➡

We OtBC as well as creditors hereby give notice to The liquidator will prepare the Schedule of Payment. The liquidator has
all interested parties that we have began a out-of-court the authority to determine who are the creditors entitled to payment
rehabilitation agreement, etc. and by how much.
➡
Frequency of Publication: at least twice in a newspaper of general
circulation in the Philippines Actual Payment

Purpose of Notice: To invite all of them to the negotiating table so that ➡

any restructuring agreement can also be
enforced upon them Final Dissolution of the Corporation

This is referred to as collective contracts. One of the principles of Economic Theory behind Liquidation
contracts is that it is binding only between the parties. But in OCRA, it • Liquidation proceedings are founded on some broader economic
becomes binding upon third persons because it is a collective theory because business exists in a highly competitive economy.
contracts. • The hallmark of an uncompetitive business is always insolvency.
• The theory is that since the insolvent company is occupying a
Outcome of the Negotiation, for example: precious and valuable space in that limited economy, being
✓ trade creditors and suppliers continue to supply materials even if competitive, it must be removed in order to make space for a
they agree to defer demands for payment competitive business.
✓ unsecured creditors agreed to convert loan to equity
✘ Bankable Credit, its biggest creditors, the one who has liens over Legal Theory
the assets refuses to meet and is now threatening to pursue • Liquidation can only function effectively if it is regarded as a
foreclosure proceedings collective process with an objective of ensuring transparent and
predictable distribution of the debtor.
What to do in that instance? — go to Mode 3 or Mode 4 • The objective of liquidation is to stop the business, pay creditors and
MODE 3: COURT-SUPERVISED REHABILITATION ultimately extinguish the civil personality of the corporation.
- may either be:
• voluntary petition — initiated by debtor CORPORATE REHABILITATION
• involuntary petition — initiated by creditor However, not all corporation suffering from financial set back should
be liquidated. Therefore, for some companies, their financial set back
MODE 4: LIQUIDATION may be temporary and therefore, liquidation may be a harsh remedy.
• voluntary liquidation (§90) — initiated by debtor That’s why an alternative under the FRIA is corporate rehabilitation.
• involuntary liquidation (§91)— initiated by creditor
Similar to liquidation, corporate rehabilitation may be:
Liquidation is a historical and traditional method of dealing with • voluntary petition — initiated by debtor
insolvency of corporation. Its objective is how to liquidate or convert • involuntary petition — initiated by creditor
its assets into cash in order to pay its various creditors and eventually
terminate all commercial activities (stop engaging in business). Economic Theory
Liquidation tends to be universal in application as well as in • Sometimes there are external factors so strong that the corporation
concept. are tied over without assistance and therefore, the corporation that
has a reasonable prospect of survival should be given an opportunity
Timeline if it can be demonstrated that:
Petition for Liquidation filed in the special commercial court where
- there is greater value and benefits for creditors in the long-
the company has its principal office. term by maintaining the business and by keeping the essential
of the business with other components one would be more
➡ cost-effective and efficient rather than liquidation.
The court will issue an Order of Liquidation, which has three parts: Legal Justification
1. appointed liquidator — one who will oversee the conversion (1) facilitate access to remedies that make rehabilitation feasible
of the assets into cash and pay the various creditors (2) sufficient protection to all creditors and stakeholders
2. close the business of the corporation (3) structure proceeding for a court-supervised negotiation for a
3. terminate all corporate powers commercial plan known as rehabilitation plan
➡ (4) binds all creditors even if not all of them take part
(5) it is a judicial supervision ensuring fair process for all parties
Order of Liquidation is published in a newspaper of general
circulation in the Philippines. Who are considered part and parcel of the rehabilitation proceedings?
➡
- since it is collective in character, it pertains not just to the interest of
the insolvent debtor, its directors and officers, its secured and
unsecured creditors like employees, guarantors of debtor, the

FRIA | Page 2 of 13
 Republic of the Philippines. All of them are required to participate in furtherance thereof, the State shall ensure a timely, fair, transparent,
court-supervised rehabilitation proceedings. effective and efficient rehabilitation or liquidation of debtors. The
rehabilitation or liquidation shall be made with a view to ensure or
Nature of Debt Relief Proceedings maintain certainly and predictability in commercial affairs, preserve
- the court deciding who to pay, in what order and how much to pay and maximize the value of the assets of these debtors, recognize
them creditor rights and respect priority of claims, and ensure equitable
- the goal is always not necessarily equality but equity 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
Development of Philippine Laws and Rules on Corporate Insolvency or orderly liquidation of these debtor's assets and the settlement of their
Rehabilitation (History) obligations.
• Act No. 9056 — Insolvency Law (1908)
- for a long time (hundred years), it was the only insolvency law Nature of Proceedings under FRIA (§3)
until September 2010 • in rem
- under this, failure to pay a debt of 1,000 pesos, creditors can sue - because it affects civil status of corporations
the debtor in court and place him under insolvency. - Notice by publication — jurisdiction over all persons affected by
- it also has voluntary or involuntary the proceedings shall be considered as acquired upon
• PD 902-A — SEC Charter publication of the notice of the commencement of the
- authorized the SEC to promulgate rules and regulations as may proceedings in any newspaper of general circulation in the
be necessary to enforce its statutory authority Philippines
- since it granted SEC with quasi-judicial powers, petitions for - NO summons
insolvency or suspension of payments was placed under the • summary proceedings
jurisdiction of the SEC - evidence is allowed to be presented and received ex parte
• non-adversarial
Petition for Insolvency vs. Suspension of Payments
GR No. 183050
Insolvency Suspension of Payments - proceedings operate against the whole world and the orders issued
a l s o k n ow n a s C l a s s i c also known as Technical by the rehab court are binding not only upon the parties who
Insolvency Insolvency actively take part but even by those who don’t

- legal condition of the - legal condition of the Advent Capital

debtor who has more debtor who has sufficient
liabilities than assets assets to pay for the
liabilities except that the
debtor cannot pay them as
they fall due.
- it is a cash problem
(liquidity problem)
- objective is to distribute - objective is how to defer
the assets payment to the creditors
until such time it realizes
enough cash, thus,
reschedule the debts
- this is a petition for suspension of payments with corporate
rehabilitation and then the court which started hearing thereon
treated it as an adversarial proceeding, used the ordinary rules on
civil procedure, meaning, every motion is heard and litigated which
destroys the summary nature of the proceeding
Wonder Book
- as a remedy, rehabilitation is available only to a corporation who
has assets which can generate more cash if used in its daily
operations than when sold.
- the liquidity issues can be best addressed by practicable business
plan that will generate enough cash to sustain the daily operations
- reha…goods

- SEC’s innovation was the rules on rehabilitation based on its COURT-SUPERVISED REHABILITATION
experience with creditors requesting for restructuring under
Debtor
suspension of payments
Who can be the subject of rehab proceedings?
Included:
(1) sole proprietorship duly registered with the DTI
• Rules of Procedure on Corporate Recovery (2) partnership duly registered with the SEC
- SEC tried to consolidate all rules, it came up with this rules of
(3) corporation duly organized under Philippine law
procedures
(4) individual debtors who has become insolvent
• Securities and Regulation Code GOCCs and GFIs can be placed under the FRIA unless their charter
- reorganize the SEC
- remove the quasi-judicial powers of the SEC and tranferred it to provides otherwise
special commercial courts
A debtor under the FRIA may cover a whole group
Group of debtors 
• Interim Rules on Corporate Rehabilitation - shall refer to and can cover only:
- as well as the UNCTRAL Model came into force with the FRIA
(5) corporations that are financially related to one another as
parent corporations, subsidiaries or affiliates;
• FRIA effective February 2010 (6) partnerships that are owned more than fifty percent (50%)
- it lapsed into law by inaction of the President
- it became applicable to all existing proceedings with the SEC by the same person; and
(7) single proprietorships that are owned by the same person.
unless the SC deems that its transfer will cause prejudice
- those proceedings pending with the SEC, will be maintained by When the petition covers a group of debtors, all reference
under these rules to debtor shall include and apply to the
the SEC while the new cases will have to be filed with the special
group of debtors
commercial court
- A group of debtors may jointly file a petition for rehabilitation
Policy of FRIA (§2)
when one or more of its members foresee the impossibility of
It is the policy of the State to encourage debtors, both juridical and
meeting debts when they respectively fall due, and the financial
natural persons, and their creditors to collectively and realistically
distress would likely adversely affect the financial condition and/
resolve and adjust competing claims and property rights. In

FRIA | Page 3 of 13
 or operations of the other members of the group and/or the (k) The specific relief sought pursuant to this Act;
participation of the other members of the group is essential. (l) The grounds upon which the petition is based;
- Piercing the veil applies (m) Other information that may be required under this Act
depending on the form of relief requested;
FRIA does NOT apply to the following entities even if they are (n) Schedule of the debtor's debts and liabilities including a list of
suffering insolvency or financial distress creditors with their addresses, amounts of claims and
Excluded: collaterals, or securities, if any;
(1) Banks — because it is the BSP which determines how they (o) An inventory of all its assets including receivables and claims
should be rehabilitated against third parties;
(2) Insurance Companies — jurisdiction is with the IC (p) A Rehabilitation Plan;
(3) Pre-need Companies — jurisdiction is with the IC (q) The names of at least three (3) nominees to the position of
(4) National and local government agencies or units rehabilitation receiver; and
(r) Other documents required to be filed with the petition
Creditor pursuant to this Act and the rules of procedure as may be
- refer to a natural or juridical person which has a claim against the promulgated by the Supreme Court.
debtor that arose on or before the commencement date.
Being minimum allegations, lack of one means failure to state
This definition under the FRIA departs from the traditional a cause of action which warrants a motion to dismiss.
definition of SC. In prior SC decision, a creditor is one who has a
claim and that claim is limited to debts and demands pecuniary in Involuntary Petition for Corporate Rehabilitation
character or nature (money claim). - may be initiated by any creditor or group of creditors with a claim
However, under the FRIA, the term “claim” has been of, or the aggregate of whose claims is:
expanded. • at least Php1,000,000.00; or
• at least 25% of the subscribed capital stock or partners'
Claim  contributions,
- shall refer to all claims or demands of whatever nature or whichever is HIGHER
character against the debtor or its property, whether for money
or otherwise, liquidated or unliquidated, fixed or contingent, Grounds:
matured or unmatured, disputed or undisputed, including, but 1. there is no genuine issue of fact or law on the claim/s of the
not limited to; petitioner/s, and that the due and demandable payments thereon
(5) all claims of the government, whether national or local, have not been made for at least sixty (60) days or that the debtor
including taxes, tariffs and customs duties; and has failed generally to meet its liabilities as they fall due; or
(6) claims against directors and officers of the debtor arising 2. a creditor, other than the petitioner/s, has initiated foreclosure
from acts done in the discharge of their functions falling proceedings against the debtor that will prevent the debtor from
within the scope of their authority:  Provided,  That, this paying its debts as they become due or will render it insolvent.
inclusion does not prohibit the creditors or third parties
from filing cases against the directors and officers acting in Contents:
their personal capacities. - petition for rehabilitation shall be verified to establish the
substantial likelihood that the debtor may be rehabilitated
The meaning of claim is important because it is amount those (f) identification of the debtor, its principal activities and its address;
which are suspended. All claims are suspended during the (g) the circumstances sufficient to support a petition to initiate
pendency of the rehabilitation proceedings. involuntary rehabilitation proceedings under Section 13 of this Act;
Suspension of all claims means that it is neither allowed to be (h) the specific relief sought under this Act;
collected nor paid. (i) a Rehabilitation Plan;
(j) the names of at least three (3) nominees to the position of
Eg. Commencement Order has been issued and has been effective. rehabilitation receiver;
Under a promissory note, today is the maturity date. Can the creditor (k) other information that may be required under this Act depending
demand payment? — no, because is a claim suspended on the form of relief requested; and
(l) other documents required to be filed with the petition pursuant to
Voluntary Petition for Corporate Rehabilitation this Act and the rules of procedure as may be promulgated by the
- an insolvent debtor may initiate voluntary proceedings under this Supreme Court.
Act by filing a petition for rehabilitation when approved
(g) by a majority vote of the board of directors or trustees and Court Action on the Petitions (§15)
(h) authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock

Petition for 5 days sufficient yes Issuance of

Case title: In the Matter of the Petition for Corporate Rehabilitation of
Corporate in form and Commencement
OtBC
Rehabilitation substance? Order
If involuntary: Creditor vs. Debtor

Minimum Allegations: 5 days yes

Please read the minimum allegations, although I assure you no
I will not ask you to enumerate it. Just be familiar with
them.
sufficient
(i) Identification of the debtor, its principal activities and its Issuance of in form and
addresses; Corrective Order substance?
(j) Statement of the fact of and the cause of the debtor's
insolvency or inability to pay its obligations as they become
due;
NOTE: The FRIA has blurred the lines between these two. It
does not matter anymore. Rehabilitation is allowed Commencement Order
for either.
- most controversial of the proceedings because it stops payment to
creditors

FRIA | Page 4 of 13

Pryce Corporation v. CBC, GR No. 172302, February 18, 2014
Neither does the Interim Rules require a hearing before the
issuance of a stay order. What it requires is an initial hearing
before it can give due course to or dismiss a petition.
Nevertheless, while the Interim Rules does not require the
holding of a hearing before the issuance of a stay order, neither
does it prohibit the holding of one. Thus, the trial court has
ample discretion to call a hearing when it is not confident that
the allegations in the petition are sufficient in form and
substance, for so long as this hearing is held within the five (5)-
day period from the filing of the petition — the period within
which a stay order may issue as provided in the Interim Rules.
Contents of Commencement Order
(1) identify the debtor, its principal business or activity/ies and its
principal place of business;
(2) summarize the ground/s for initiating the proceedings;
(3) state the relief sought under this Act and any requirement or
procedure particular to the relief sought;
(4) state the legal effects of the Commencement Order, including
those mentioned in Section 17 hereof;
(5) declare that the debtor is under rehabilitation;\direct the
publication of the Commencement Order in a newspaper of 2. prohibit or otherwise serve as the legal basis rendering null and
general circulation in the Philippines once a week for at least two
(2) consecutive weeks, with the first publication to be made within
seven (7) days from the time of its issuance;
(6) If the petitioner is the debtor direct the service by personal
delivery of a copy of the petition on each creditor holding at least
ten percent (10%) of the total liabilities of the debtor as
determined from the schedule attached to the petition within five
(5) days; if the petitioner/s is/are creditor/s, direct the service by
personal delivery of a copy of the petition on the debtor within
five (5) days;
(7) appoint a rehabilitation receiver who may or not be from among 3. serve as the legal basis for rendering null and void any setoff after
the nominees of the petitioner/s and who shall exercise such
powers and duties defined in this Act as well as the procedural
rules that the Supreme Court will promulgate;
(8) summarize the requirements and deadlines for creditors to
establish their claims against the debtor and direct all creditors to
their claims with the court at least five (5) days before the initial
hearing;
(9) direct Bureau of internal Revenue (BIR) to file and serve on the
debtor its comment on or opposition to the petition or its claim/s 4. consolidate the resolution of all legal proceedings by and against
against the debtor under such procedures as the Supreme Court
provide;
(10) prohibit the debtor's suppliers of goods or services from
withholding the supply of goods and services in the ordinary
course of business for as long as the debtor makes payments for
the services or goods supplied after the issuance of the
Commencement Order;
NOTE:
The effect of the Order is: all claims are suspended.
EXCEPT: suppliers of goods and services because they are not
in danger of not getting paid because these are considered
administrative expenses
(11) authorize the payment of administrative expenses as they become
due;
NOTE:
Administrative expenses — those incurred in the ordinary
course of business
Thus, debtor is allowed to pay its suppliers, its lessor for rent,
etc., but he cannot pay a promissory note
(12) set the case for initial hearing, which shall not be more than forty
(40) days from the date of filing of the petition for the purpose of
determining whether there is substantial likelihood for the debtor
to be rehabilitated;
(13) make available copies of the petition and rehabilitation plan for
examination and copying by any interested party;
(14) indicate the location or locations at which documents regarding
the debtor and the proceedings under Act may be reviewed and
copied;
(15) state that any creditor or debtor who is not the petitioner, may
submit the name or nominate any other qualified person to the
position of rehabilitation receiver at least five (5) days before the
initial hearing;
(16) include s Stay or Suspension Order
Effects of the Commencement Order (§17)
1. vest the rehabilitation receiver with all the powers and functions
provided for this Act, such as the right to review and obtain records
to which the debtor's management and directors have access,
including bank accounts or whatever nature of the debtor subject
to the approval by the court of the performance bond filed by the
rehabilitation receiver;
NOTE:
The rehab receiver is not considered as the trustee of the
assets of the corporation and thus acquire legal title over said
property.
void the results of any extrajudicial activity or process to seize
property, sell encumbered property, or otherwise attempt to
collection or enforce a claim against the debtor after
commencement date unless otherwise allowed in this Act, subject
to the provisions of Section 50 hereof;
NOTE:
It is sufficient basis for nullifying all contracts entered into or
activities extrajudicially made that have the effect of
defrauding the creditors. (rescissible contracts)
the commencement date of any debt owed to the debtor by any of
the debtor's creditors;\serve as the legal basis for rendering null
and void the perfection of any lien against the debtor's property
after the commencement date; and
NOTE:
Because contracts made after commencement date are
deemed fraudulent transactions.
the debtor to the court Provided. However, That the court may
allow the continuation of cases on other courts where the debtor
had initiated the suit.
Illustrations
The commencement order took effect after publication on
December 15, 2017.
On December 18, 2017, a creditor demands payment that matures
on that day.
Should the corporation pay?
- no, because it is suspended, unless it is an administrative
expense
On December 20, 2017, there is a foreclosure proceeding that has
been already scheduled by the sheriff
Should the foreclosure proceeding continue?
- no, because it is stopped.
On the same day December 20, the corporation wants to make
voluntary payment to its creditor bank.
Is the payment allowed?
- no, because it is stopped.
The same bank wants to setoff the bank deposit of the debtor
against the outstanding loan.
Is the setoff allowed?
- no, because it is stopped.
As of December 20, there were 7 cases pending in different courts
in the Philippines against the corporation.
What happens to those pending cases?
- they are suspended
FRIA | Page 5 of 13
 - the trial judges cannot continue hearing because the purpose (e) to the actions of a licensed broker or dealer to sell pledged
of the FRIA is to consolidate all the proceedings in one and securities of a debtor pursuant to a securities pledge or margin
the same court — the special commercial court agreement for the settlement of securities transactions in
- but that does not mean that the action for quasi-delict, accordance with the provisions of the Securities Regulation Code
action for breach of contract, recovery of property will be and its implementing rules and regulations;
decided on the merits by the special commercial court; it
will just reserve the amount claim just in case the debtor is (f) the clearing and settlement of financial transactions through the
adjudged to be liable in those pending cases later on facilities of a clearing agency or similar entities duly authorized,
- the only purpose is to include claims in the rehab registered and/or recognized by the appropriate regulatory agency
proceedings because the special commercial court does not like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as
have the capacity to decide those action based on the merits. any form of actions of such agencies or entities to reimburse
themselves for any transactions settled for the debtor; and
Effects of Suspension or Stay Order
(a) suspend all actions or proceedings, in court or otherwise, for the (g) any criminal action against individual debtor or owner, partner,
enforcement of claims against the debtor; director or officer of a debtor shall not be affected by any
(b) suspend all actions to enforce any judgment, attachment or other proceeding commend under this Act.
provisional remedies against the debtor; (thus, NO execution sale) NOTE:
(c) prohibit the debtor from selling, encumbering, transferring or Criminal cases are not covered by FRIA.
disposing in any manner any of its properties except in the
ordinary course of business; and Panlilio v. RTC
(d) prohibit the debtor from making any payment of its liabilities FACTS: Prior to the filing of the Petition for rehabilitation,
outstanding as of the commencement date except as may be Silahis Hotel was already suffering from business losses
provided herein. but the businesses were still maintained. However, it
does not remit the SSS contribution it has withheld from
Exception to the Stay Order its employees for more than 10 years which is a
(a) to cases already pending appeal in the Supreme Court as of criminal violation under SSS Law. Thus, criminal cases
commencement date were filed against all of the directors. While the criminal
Provided, That any final and executory judgment arising from case was pending, the company went to corporate
such appeal shall be referred to the court for appropriate rehabilitation. The directors now raised a prejudicial
action; question — that the criminal case should be suspended
because there is a pending criminal case.
NOTE: ISSUE: Would a corporate rehabilitation proceeding constitutea
The execution of the final judgment will be referred to or prejudicial question for criminal case for violation of
remanded to the court a quo for enforcement. Such the SSS Law
enforcement is stopped because it is covered by the rehab SC:No.
proceedings. • SSS Law is malum prohibitum and by express provision of the
FRIA, criminal cases are excluded.
(b) subject to the discretion of the court, to cases pending or filed at • The rehabilitation of SIHI and the settlement of claims against
a specialized court or quasi-judicial agency which, upon the corporation is not a legal ground for the extinction of
determination by the court is capable of resolving the claim more petitioners’ criminal liabilities. 
quickly, fairly and efficiently than the court: • The prosecution of the officers of the corporation has no
Provided, That any final and executory judgment of such court bearing on the pending rehabilitation of the corporation,
or agency shall be referred to the court and shall be treated as especially since they are charged in their individual
a non-disputed claim; capacities.
• Such being the case, the purpose of the law for the issuance
NOTE: of the stay order is not compromised, since the appointed
Meaning, if it is filed or is pending with a quasi-judicial body, rehabilitation receiver can still fully discharge his functions as
it is automatically STOPPED, UNLESS the special commercial mandated by law.
court WAIVES its authority
Other Legal Effects(§19, §20)
(c) to the enforcement of claims against sureties and other persons • Waiver of taxes and Fees Due to the National Government and to
solidarily liable with the debtor, and third party or Local Government Units
accommodation mortgagors as well as issuers of letters of credit, - Upon issuance of the Commencement Order by the court, and
Unless the property subject of the third party or until the approval of the Rehabilitation Plan or dismissal of the
accommodation mortgage is necessary for the rehabilitation of petition, whichever is earlier, the imposition of all taxes and fees
the debtor as determined by the court upon recommendation including penalties, interests and charges thereof due to the
by the rehabilitation receiver; national government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.
Illustration: - it is as if they have a tax holiday
A creditor of a loan is secured by a real estate mortgage and • Application of Stay or Suspension Order to Government Financial
guaranty. During the effectivity of the commencement order, Institutions.
he cannot file for an action for collection for sum of money, he - it is also applicable to government financial institutions,
cannot also foreclose the mortgage for nonpayment. notwithstanding provisions in their charters or other laws to the
Thus, his remedy is: SUE THE GUARANTOR because it is a contrary.
claim against the guarantor and not the corporation.
Effectivity and Duration of Commencement Order (§21)
(d) to any form of action of customers or clients of a securities market - effective for the duration of the rehabilitation proceedings for as
participant to recover or otherwise claim moneys and securities long as there is a substantial likelihood that the debtor will be
entrusted to the latter in the ordinary course of the latter's business successfully rehabilitated.
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;

FRIA | Page 6 of 13
 NOTE: TIMELINE
When asked: when a petition for rehab should be filed? Buzz Filing of Petition
word: FOR AS LONG AS SUBSTANTIAL LIKELIHOOD that the
debtor will be rehabilitated. ➡
It is NOT certainty but mere LIKELIHOOD that is enough
5 days
Substantial Likelihood means: ➡
(1) there are sufficient assets with/which to rehabilitate the Issuance of Commencement Order
debtor; and Appointment of Receiver
(2) there is sufficient cash flow to maintain the operations of
the debtor; ➡
(3) the debtor's, partners, stockholders, directors and officers
have been acting in good faith and which due diligence; Publication of the
(4) the petition is not s sham filing intended only to delay the Commencement Order
enforcement of the rights of the creditor's or of any group
of creditors; and ➡
(5) the debtor would likely be able to pursue a viable Filing of Notice of
Rehabilitation Plan; Claims by Creditors
Report of the Rehabilitation Receiver (§24) ➡
- Within forty (40) days from the initial hearing and with or without
the comments of the creditors or any of them, the rehabilitation Initial Hearing
receiver shall submit a report to the court stating his preliminary
findings and recommendations on whether: (a) determine the creditors who have made timely and proper filing
(a) the debtor is insolvent and if so, the causes thereof and any of their notice of claims;
unlawful or irregular act or acts committed by the owner/s of a sole (b) hear and determine any objection to the qualifications of the
proprietorship partners of a partnership or directors or officers appointment of the rehabilitation receiver and, if necessary
of a corporation in contemplation of the insolvency of the appoint a new one in accordance with this Act;
debtor or which may have contributed to the insolvency of the (c) direct the creditors to comment on the petition and the
debtor; Rehabilitation Plan, and to submit the same to the court and to
(b) the underlying assumptions, the financial goals and the the rehabilitation receiver within a period of not more than
procedures to accomplish such goals as stated in the twenty (20) days; and
petitioner's Rehabilitation Plan are realistic, feasible and (d) direct the rehabilitation receiver to evaluate the financial
reasonable; condition of the debtor and to prepare and submit to the court
(c) there is a substantial likelihood for the debtor to be successfully within forty (40) days from initial hearing the report
rehabilitated;
(d) the petition should be dismissed; and ➡
(e) the debtor should be dissolved and/or liquidated. 40 days
➡
Soichi Fishery v. BPI, GR No. 193872, October 19, 2011
- the initial hearing took 11 years Receiver’s Report
- Thus, the case was remanded back to the rehab court stating that
each and every incident should not be heard but can be addressed ➡ ➡ ➡
by the rehab receiver.
Dismiss Give Due Course Liquidation
Possible Outcomes on the Petition
➡
Convert to
Give due course Dismiss 90 days ➡ if there is dispute
Liquidation
ADR
1. the debtor is 1.debtor is NOT 1. the debtor is
insolvent; AND insolvent; OR insolvent; AND ➡
2. there is a (clear 2.the petition is a sham 2. there is NO
showing or prima filing intended only substantial likelihood Submission of Revised Rehabilitation Plan
facia) substantial to delay the for the debtor to be
likelihood for the enforcement of the successfully ➡
debtor to be rights of the creditor/s rehabilitated;
successfully or of any group of Implementation
rehabilitated; creditors; OR
3.the petition, the
Rehabilitation Plan
and the attachments
thereto contain any
materially false or
misleading Rehabilitation Receiver and Management Committee
statements; OR Displacement of Existing Management by the Rehabilitation Receiver
4.the debtor has or Management Committee
committed acts of - Even if the petition is pending, the business is still open. So, the
misrepresentation or Board of Directors continues discharging their functions. Unless the
in fraud of its rehab court changes them or replaces them with a management
creditor/s or a group
of creditors; committee. If there is a management committee, that means the
board of directors are suspended.
Thus, it may either be:
• Board of Directors and Rehab Receiver; or
• Management Committee and Rehab Receiver

FRIA | Page 7 of 13
 • Note: Anyone may petition the rehab court of said
Grounds:
1. Actual or imminent danger of dissipation, loss, wastage
or destruction of the debtor’s assets or other properties;
2. Paralyzation of the business operations of the debtor; or
3. Gross mismanagement of the debtor or fraud or other
wrongful conduct on the part of, or gross or willful
violation of FRIA by existing management of the debtor or
the owner, partner, director, officer or representative/s in
management of the debtor.
Management Committee
- When appointed, it shall take the place of the management and the
governing body of the debtor and assume their rights and
responsibilities.
- NO hearing is required for the creation of the managment
committee
Rehabilitation Receiver
Who May Serve as a Rehabilitation Receiver
- Any qualified natural or juridical person
Qualifications
1. A citizen of the Philippines or a resident of the Philippines in
the six (6) months immediately preceding his nomination;
2. Of good moral character and with acknowledged integrity,
impartiality and independence;
3. Has the requisite knowledge of insolvency and other relevant
commercial laws, rules and procedures, as well as the
relevant training and/or experience that may be necessary to
enable him to properly discharge the duties and obligations of
a rehabilitation receiver; and
4. Has no conflict of interest:
Provided, That such conflict of interest may be waived,
expressly or impliedly, by a party who may be
prejudiced thereby.
Other qualifications and disqualification’s of the rehabilitation
receiver shall be set forth in procedural rules, taking into
consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.
disqualification. If any of these grounds are found to be present
by the court, then the rehab receiver will be required to recuse
himself.
- An individual shall be deemed to have a conflict of interest if he is
so situated as to be materially influenced in the exercise of his
judgment for or against any party to the proceedings
- An individual shall be deemed to have a conflict of interest if:
1. he is a creditor, owner, partner or stockholder of the debtor;
2. he is engaged in a line of business which competes with that
of the debtor;
3. he is, or was, within five (5) years from the filing of the
petition, a director, officer, owner, partner or employee of the
debtor or any of the creditors, or the auditor or accountant of
the debtor;
4. he is, or was, within two (2) years from the filing of the
petition, an underwriter of the outstanding securities of the
debtor;
5. he is related by consanguinity or affinity within the fourth civil
degree to any individual creditor, owners of a sole
proprietorship-debtor, partners of a partnership- debtor or to
any stockholder, director, officer, employee or underwriter of a
corporation-debtor; or
6. he has any other direct or indirect material interest in the
debtor or any of the creditors.
Creditor’s Committee (§42, §43)
During rehab proceedings, in order to facilitate the negotiation to be
paid by the rehab receiver with the various stakeholders, the court
through the rehab receiver may require that the Creditor’s Committee
be created. For example, if the debtor is obligated currently to about
10,000 creditors, it would be difficult to the rehab receiver to talk to
each of them individually. What can be done to facilitate negotiation
and discussion would be to create creditor’s committees.
Creditor’s committees might form themselves together by reason of
kind or class:
(a) Secured creditors;
(b) Unsecured creditors;
(c) Trade creditors and suppliers; and
(d) Employees of the debtor.

Compensation Service The rehab receiver is required to conduct discussions or meetings with
Note: these committees or groups in order to obtain their sentiments or their
Even if the corporation is insolvent, the appointed rehabilitation inputs in the drafting of the rehabilitation.
receiver is still entitled to compensation which is considered an
administrative expense. Determination of Claims (§§ 44-46)
In the determination of claims (debts owed by the company), the law
The rehabilitation receiver and his direct employees or required to establish a Preliminary Registry of Claims — a list of
independent contractors shall be entitled to compensation for creditors, the amount of debts, and their due dates.
reasonable fees and expenses from the debtor according to the
terms approved by the court after notice and hearing. Prior to such Note: Even if a creditor does not directly participate in the
hearing, the rehabilitation receiver and his direct employees shall proceedings, for as long as there’s proof of the obligation in
be entitled to reasonable compensation based on quantum favor of that creditor, that claim should be included in the
meruit. Such costs shall be considered administrative expenses. registry.

Determination of claims must be done within 30 days from the time

- he must be capable of the exercise independent judgment and must that a report is submitted to rehab court.
not represent any particular interest —that is always a balancing act
on the part of any of receiver who may be appointed to that This is a provision (Stay Order) in the FRIA that was exploited in
position. the case of Express Investment v. BayanTel, one of the famous rehab
proceedings which reached the SC.
Conflict of Interest (§40)
- ground for disqualification Treatment of Secured Creditors (§§60-61)
- overriding consideration: able to exercise independent judgment No Diminution of Secured Creditor Rights. 
- The issuance of the Commencement Order and the Suspension or
Covered: Stay Order, and any other provision of this Act, shall not be deemed
• Rehab receiver in any way to diminish or impair the security or lien of a secured
• any member of the management committee creditor, or the value of his lien or security,
• persons employed by the rehab receiver or management ‣ except that his right to enforce said security or lien may be
committee suspended during the term of the Stay Order.

FRIA | Page 8 of 13
- The court, upon motion or recommendation of the rehabilitation just in case, basahin nyo na lang. I will not ask any for your quiz of
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.
Discussion:
- secured creditors are the most difficult to negotiate with.
- that’s why, in order to remove the possible fears of the
unsecured creditors, the law requires that as much as
practicable, the securities that they currently have must be
maintained. If there is any impairment to those securities,
then a replenishment must be done at the instance of the
rehab receiver.
- eg. you are a creditor who lent 1 billion pesos worth of
debts, so your securities are in the form of Real Estate
Mortgages, and those Real Estate Mortgages consist land,
buildings on land. But because of the length of time
between the principal obligation was created up to the
time the rehab proceedings was instituted, these properties
depreciate in value, thus, depreciating as well the
securities of the secured creditor. The 1 billion security will
no longer the same value after 10 or 15 years. Under the
law as written, eg, the value decreased to 600 million, the
rehab receiver is required to find ways and means by
which to replenish the depreciation. Thus, he must find
other assets to fulfill the difference of 400 million.
- the business as a going concern and then when cash
- The operative word or phrase in this provision is “as much
as practicable” meaning they can maintain their means
and securities as much as practicable.
Lack of Adequate Protection.
- The court, on motion or motu proprio, may terminate, modify or set
conditions for the continuance of suspension of payment, or relieve
a claim from the coverage thereof, upon showing that:
(b) a creditor does not have adequate protection over property
securing its claim; or
(c) the value of a claim secured by a lien on property which is
not necessary for rehabilitation of the debtor exceeds the fair
market value of the said property.
- A creditor shall be deemed to lack adequate protection if it can be
shown that:
(d) the debtor fails or refuses to honor a pre-existing agreement
with the creditor to keep the property insured;
(e) the debtor fails or refuses to take commercially reasonable
steps to maintain the property; or
(f) the property has depreciated to an extent that the creditor is
under secured.
- Upon showing of a lack of protection, the court shall order the
debtor or the rehabilitation receiver:
• to make arrangements to provide for the insurance or maintenance
of the property; or
• to make payments or otherwise provide additional or replacement
security such that the obligation is fully secured.
- If such arrangements are not feasible, the court may modify the Stay
Order to allow the secured creditor lacking adequate protection to
enforce its security claim against the debtor:  Provided,
however, That the court may deny the creditor the remedies in this
paragraph if the property subject of the enforcement is required for
the rehabilitation of the debtor.
When there’s showing that they lack adequate protection, then the
court may intervene by providing them with additional.
The above are the remedies. You don’t have to read this because this is
really technical and I doubt if this would be ask in the bar exam. But
final exams.
Rehabilitation Plan
The heart of every court-supervised rehabilitation proceedings is the
Rehabilitation Plan because it provides the ways and means by which
the debtor may be released or relieved from the current obligations
and claims of the creditors.
Remember while a rehabilitation proceedings is going-on in court, the
business of the debtor is still open. That’s why, while that business is
being maintained, there are mechanisms by which the various
creditors are ordered for purposes of payment. That’s why a viable or
feasible rehabilitation plan must contain:
Contents of a Rehabilitation Plan
(a) specify the underlying assumptions, the financial goals and the
procedures proposed to accomplish such goals;
- eg. If new money is brought it to enable it to manufacture
and produce that fuel-saving device then it stands to
be able to revive itself through sales and subsequent
profit.
(b) compare the amounts expected to be received by the creditors
under the Rehabilitation Plan with those that they will receive
if liquidation ensues within the next one hundred twenty (120)
days;
- Is it better to just close the business and distribute the
assets or would it be better for the creditors to maintain
enters the company, creditors will be paid gradually
(c) contain information sufficient to give the various classes of
creditors a reasonable basis for determining whether supporting
the Plan is in their financial interest when compared to the
immediate liquidation of the debtor, including any reduction of
principal interest and penalties payable to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior approval has
been granted by the court;
(f) indicate how the insolvent debtor will be rehabilitated
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi-reorganization. dacion en
pago, debt-equity conversion and sale of the business (or parts
of it) as a going concern, or setting-up of a new business entity
or other similar arrangements as may be necessary to restore
the financial well-being and visibility of the insolvent debtor;
(g) specify the treatment of each class or subclass described in
subsections (d) and (e);
(h) provide for equal treatment of all claims within the same class
or subclass (PARI PASSU), unless a particular creditor
voluntarily agrees to less favorable treatment;
(i) ensure that the payments made under the plan follow the
priority established under the provisions of the Civil Code on
concurrence and preference of credits and other applicable
laws;
(j) maintain the security interest of secured creditors and preserve
the liquidation value of the security unless such has been
waived or modified voluntarily;
(k) disclose all payments to creditors for pre-commencement debts
made during the proceedings and the justifications thereof;
(l) describe the disputed claims and the provisioning of funds to
account for appropriate payments should the claim be ruled
valid or its amount adjusted;
FRIA | Page 9 of 13
 (m) identify the debtor's role in the implementation of the Plan; When presented for approval by the creditors.
> If they approve it — implementation of the rehab plan
(n) state any rehabilitation covenants of the debtor, the breach of > If they approve but there are objections — the court will conduct
which shall be considered a material breach of the Plan; hearing on the objection (hearings which are not required since it is a
summary proceedings) > implementation
(o) identify those responsible for the future management of the > if they reject > the court will conduct hearing on the objection>
debtor and the supervision and implementation of the Plan, > if objections are valid > liquidation
their affiliation with the debtor and their remuneration; > If objections are not valid > cramdown authority >
implementation
(p) address the treatment of claims arising after the confirmation of
the Rehabilitation Plan; The Implementation is still court supervised.

(q) require the debtor and its counter-parties to adhere to the terms If upon presentation to the creditors, they reject it and the objections
of all contracts that the debtor has chosen to confirm; are found to be valid, then the court can motu proprio convert the
rehab proceedings to liquidation proceedings.
(r) arrange for the payment of all outstanding administrative
expenses as a condition to the Plan's approval unless such On the other hand, even if a creditor or a group of creditors reject the
condition has been waived in writing by the creditors rehab plan that was written or crafted by the rehab receiver, the court
concerned; may use its CRAMDOWN authority and order that the rehab plan be
implemented despite objection.
(s) arrange for the payment" of all outstanding taxes and
assessments, or an adjusted amount pursuant to a compromise Examples of invalid objections:
settlement with the BlR Or other applicable tax authorities; - dilatory
- without basis
(t) include a certified copy of a certificate of tax clearance or - purely speculative in character
evidence of a compromise settlement with the BIR;
When can the court its CRAMDOWN authority?
(u) include a valid and binding, solution of a meeting of the - despite objections, the debtor complies with all the requirements of
debtor's stockholders to increase the shares by the required the FRIA
amount in cases where the Plan contemplates an additional - when the rehab receiver acting in good faith recommends
issuance of shares by the debtor; confirmation by the court
- the shareholders or partners of the debtor lose at least their
(v) state the compensation and status, if any, of the rehabilitation controlling interest (eg. BayanTel Case where the Lopez family yield
receiver after the approval of the Plan; and their controlling interest to creditors)

(w) contain provisions for conciliation and/or mediation as a When to deny the remedy of Rehabilitation?
prerequisite to court assistance or intervention in the event of - The remedy of rehabiliation should be denied to corporations whose
any disagreement in the interpretation or implementation of the insolvency appears to be irreversible and whose sole purpose is to
Rehabilitation Plan. delay the enforcement of any of the rights of the creditors, which is
rendered obvious by the following:
Consultation with Debtor and Creditors (§63) (g) the absence of a sound and workable business plan;
If the court gives due course to the petition, the rehabilitation (h) baseless and unexplained assumptions, targets and goals;
receiver shall confer with the debtor and all the classes of creditors, (i) speculative capital infusion or complete lack thereof for the
and may consider their views and proposals and shall the review, execution of the business plan;
revision or preparation of a new Rehabilitation Plan. (j) cash flow cannot sustain daily operations; and
(k) negative net worth and the assets are near full depreciation or
Note: If the Rehabilitation Plan is to be enforced, it has to have the fully depreciated. (Wonder Book v. PBCom, GR No. 187316,
cooperation of all stakeholders, not just debtor but also all July 16, 2012)
creditors. Meaning, they must treat the rehabilitation plan as a
common agreement among all of them. - If despite all attempts of rehabilitation, insolvency appears to be the
logical outcome and therefore, the business should be closed, then
Creditor’s Approval of Rehabilitation Plan (§64) rehabilitation should be denied
The correct term is that the rehabilitation plan is:
- APPROVED by CREDITORS and eg. Uniwide, a retailer engaged in property develpment, is the
- CONFIRMED by the COURT company won the bid 30 or 40 years ago for the rehabilitation of the
Baguio City Market. But after the trading stock market fall during the
• The rehabilitation receiver shall notify the creditors and stakeholders Asian Financial Crisis, Uniwide went to severe debt. It filed a petition
that the Plan is ready for their examination. for corporate rehabilitation with the SEC. About 4 or 5 years ago, the
SEC realized that it cannot be anymore be rehabilitated. So for all
• Within 20 days from the said notification, the rehabilitation receiver those years, the creditors of Uniwide cannot collect because it is going
shall convene the creditors, either as a whole or per class, for under rehabiliation. That’s why it was favorable that FRIA was passed
purposes of voting on the approval of the Plan. because under the old law, there is no period to observe a
rehabiliation proceedings. In the case of FRIA, the rehabilitation
Timeline: proceedings shall only be for a maximum of 1 year. Remember, in the
Filing of Petition > Commencement Order > Submission of Initial Draft case of Uniwide, the creditors cannot collect for 30 plus years and in
of Rehab Plan > Meetings will be conducted with creditors (w/in 90 the same period, the interests do not run. It is only when the SEC
days) > converted the proceedings to liquidation that the creditors will be able
> if there are disputes, the court, thru the rehab receiver is to collect.
allowed to resort to various ADRs — to minimize, if not totally
eliminate objections Sole Grounds for Objection of the Rehabilitation Plan (§66)
> If there are no disputes, present the rehabilitation plan to the - there are the only tenable grounds:
creditors for approval 5. The creditors' support was induced by fraud;

FRIA | Page 10 of 13
6. The documents or data relied upon in the Rehabilitation Plan are
materially false or misleading; or Effects of Confirmation of the Rehab Plan
7. The Rehabilitation Plan is in fact not supported by the voting (a) The Rehabilitation Plan and its provisions shall be binding upon the
creditors. debtor and all persons who may be affected by. it, including the
creditors, whether or not such persons have participated in the
Hearing on those Objections (§67) proceedings or opposed the Rehabilitation Plan or whether or not
- As much as possible, hear those objections. their claims have been scheduled;
(b) The debtor shall comply with the provisions of the Rehabilitation
Confirmation of the Rehabilitation Plan (§68) Plan and shall take all actions necessary to carry out the Plan;
- The ultimate outcome is confirmation of the rehab plan if the court (c) Payments shall be made to the creditors in accordance with the
is convince if the company may still be rehabilitated and that its provisions of the Rehabilitation Plan;
business may still result to solvency and wealth. (d) Contracts and other arrangements between the debtor and its
creditors shall be interpreted as continuing to apply to the extent
• If no objections are filed within the relevant period or, if objections that they do not conflict with the provisions of the Rehabilitation
are filed, the court finds them lacking in merit, or determines that the Plan;
basis for the objection has been cured, or determines that the debtor - if duly confirmed, the rehab is considered a continuing
has complied with an order to cure the objection, the court shall contract among all them until fully executed.
issue an order confirming the Rehabilitation Plan. (e) Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on creditors regardless of
• The court may confirm the Rehabilitation Plan notwithstanding whether or not the Plan is successfully implement; and
unresolved disputes over claims if the Rehabilitation Plan has made (f) Claims arising after approval of the Plan that are otherwise not
adequate provisions for paying such claims. treated by the Plan are not subject to any Suspension Order.

• For the avoidance of doubt, the provisions of other laws to the Rehabilitation Plan, defined (§4ii)
contrary notwithstanding, the court shall have the power to approve - refer to a plan by which the financial well-being and viability of an
or implement the Rehabilitation Plan despite the lack of approval, insolvent debtor can be restored using various means including, but
or objection from the owners, partners or stockholders of the not limited to:
insolvent debtor: Provided, That the terms thereof are necessary to • debt forgiveness (condonation or remission of debt),
restore the financial well-being and viability of the insolvent debtor. • debt rescheduling (novation),
• reorganization or quasi-reorganization,
Termination of Rehabilitation Proceedings • dacion en pago,
How will the court-supervised rehabilitation proceedings end? • debt-equity conversion and
- either: • sale of the business (or parts of it) as a going concern, or
• by successful implementation of the rehabilitation plan; or • setting-up of new business entity as prescribed in Section 62
• by failure of rehabiliation hereof, or
• other similar arrangements as may be approved by the court or
A. Failure of Rehabilitation creditors.
- there is failure of the rehabilitation when there is a rehabilitation
plan but despite best effort to comply with it, the business does not eg. There is one company that when rehabilitation and part of the
thrive, does not prosper or continues to bleed money, etc., rehabilitation plan included reorganization because it had 48 vice-
therefore, proceed to liquidation. presidents, all of them earning about 300-500 thousand a month.
- the court must dismiss the petition The 48 vice presidents were managing 6,000 employees. So, in the
- instances: rehabilitation plan, this was cut into 3 vice-presidents only.
(a) Dismissal of the petition by the court;
(b) The debtor fails to submit a Rehabilitation Plan; Cramdown, defined
(c) Under the Rehabilitation Plan submitted by the debtor, there - a restructuring of debt that creditors are required to accept as party
is no substantial likelihood that the debtor can be to the bankruptcy
rehabilitated within a reasonable period;
(d) The Rehabilitation Plan or its amendment is approved by CONTROVERSIAL CASES
the court but in the implementation thereof, the debtor fails Pacific Wide Realty and Development Corporation (PWRDC) v.
to perform its obligations thereunder or there is a failure to Puerto Azul Land, Inc. (PALI) GR No. 178768, November 25,
realize the objectives, targets or goals set forth therein, 2009
including the timelines and conditions for the settlement of • The rehabilitation plan was offered for approval by the rehabilitation
the obligations due to the creditors and other claimants; receiver to the creditors. Various creditors committees or groups met
(e) The commission of fraud in securing the approval of the together and found that the provisions of the rehabilitation plan were
Rehabilitation Plan or its amendment; and to onerous for them to accept. Puerto Azul is the company
(f) Other analogous circumstances as may be defined by the undergoing. Pacific Wide is one of its biggest creditors. Puerto Azul
rules of procedure. is a domestic company that is engaged in luxury resort business. It
belongs to the same family with Sulo Hotel or Silahis Hotel.
North Bulacan is one of the creditors of a cement company that was a • The rehabilitation plan is contested on the ground that the same is
subject of a rehabilitation proceeding. The rehab court probably unreasonable and results in the impairment of the obligations of
applied the usual rules on civil actions. Rehab proceedings are always contract.
considered in rem, adversarial but summary. The judge in this case of • PWRDC contests the following stipulations in PALI’s rehabilitation
North Bulacan v. PBCom, sets each motion filed by the creditors for plan:
hearing and litigation. So, from the time the petition for rehabilitation - fifty percent (50%) haircut or debt reduction of the principal
was filed up to the time that it reached the SC only to be remanded obligation;
back was already 10 years. So, there was no outcome, no - condonation of the accrued and substantial interests and penalty
rehabilitation plan. Eventually the court terminated the rehabilitation. charges; (Condonation is an act of donation which is ordinarily
voluntary; however, this is not the case in rehabilitation)
B. Successful - repayment over a period of ten years, with minimal interest of
- no purpose for the rehabilitation plan anymore and everything will two percent (2%) for the first five years and five percent (5%) for
be back to normal operation for the company the next five years until fully paid, and only upon availability of
- no more court supervision

FRIA | Page 11 of 13
 cash flow for debt service. (At that time the prevailing rate was corporation to its former position of successful operation and
18-24% and the legal rate was 12%) liquidity.
• The purpose of rehabilitation proceedings is precisely to enable the
company to gain a new lease on life and thereby allow creditors to
Note: this are debts that have matured and pending in various courts be paid their claims from its earnings.
for 10-20 years and yet in the rehabilitation plan a 10 year period is • The Rehabilitation Court held that "the creditors of Bayantel, whether
yet to be imposed. secured or unsecured, should be treated equally and on the same
footing or  pari passu  until the rehabilitation proceedings is
SC: terminated in accordance with the Interim Rules.”
• We find nothing onerous in the terms of PALI’s rehabilitation plan. - this is the controversial part — the PARI PASSU Order in the
The Interim Rules on Corporate Rehabilitation provides for means of Rehabilitation Plan
execution of the rehabilitation plan, which may include, among
others, the conversion of the debts or any portion thereof to equity, Pari Passu
restructuring of the debts, dacion en pago, or sale of assets or of the - principle of equality in equity
controlling interest. - it means that all creditors shall be treated alike
• The restructuring of the debts of PALI is part and parcel of its - all the creditors should stand on equal footing
rehabilitation. Moreover, per findings of fact of the RTC and as - Not anyone of them should be given any preference by paying one
affirmed by the CA, the restructuring of the debts of PALI would not or some of them ahead of the others
be prejudicial to the interest of PWRDC as a secured creditor .

Comment: What the court did not clarify in pari passu order is whether
it is:
- equal per class?
• We also find no merit in PWRDC’s contention that there is a - equal regardless of class?
violation of the impairment clause. Section 10, Article III of the - pro-rata per class?
Constitution mandates that no law impairing the obligations of - pro-rata for all?
contract shall be passed. Pacific Wide raised a constitutional issue
because it was being forced to accept a rehabilitation plan without Pari passu can take many forms in different jurisdictions.
its consent and that the basis used for such imposition is the FRIA. • Equal per class
According to Pacific Wide, the rehabilitation plan in accordance - In some countries, pari passu is equality over members of the
with the FRIA impairs its constitutional right. same class. So if secured creditors, they are equal to one another
but they are still considered superior to the ordinary creditors.
• This case does not involve a law or an executive issuance declaring Meaning, they maintain their liens over the property of the
the modification of the contract among debtor PALI, its creditors debtor.
and its accommodation mortgagors. Thus, the non-impairment • Equal regardless of class
clause may not be invoked. (inapplicable) - If equal regardless of class, as in the case of US, the secured and
unsecured creditors will be treated the same way. All of them are
• Furthermore, as held in Oposa v. Factoran, Jr. even assuming that the considered as ordinary unsecured. The secured creditors lose
same may be invoked, the non-impairment clause must yield to the their preferences.
police power of the State. Property rights and contractual rights are • If equal per class is imposed, it should be pro-rata per class
not absolute. The constitutional guaranty of non-impairment of • If equal regardless of class, all cash available for payment of debts
obligations is limited by the exercise of the police power of the State should be divided among all creditors alike without regard for any
for the common good of the general public. (overriding limitation to distribution.
the non-impairment clause)
Reading from the decision of the SC in Express Investment, it appears
• Successful rehabilitation of a distressed corporation will benefit its to be EQUALITY REGARDLESS OF CLASS — all creditors are
debtors, creditors, employees, and the economy in general. considered ordinary and unsecured.
(stakeholders of Puerto Azul)
• Since then, the principle of equality in equity has been cited as the
• CRAMDOWN AUTHORITY: basis for placing secured and unsecured creditors in equal footing or
The court may approve a rehabilitation plan even over the in  pari passu  with each other during rehabilitation. In legal
opposition of creditors holding a majority of the total liabilities of parlance,  pari passu  is used especially of creditors who, in
the debtor if, in its judgment, the rehabilitation of the debtor is marshaling assets, are entitled to receive out of the same fund
feasible and the opposition of the creditors is manifestly without any precedence over each other.
unreasonable.
The rehabilitation plan, once approved, is binding upon the Is the Assignment Agreement between Bayantel and and the group of
debtor and all persons who may be affected by it, including the foreign banks because the group of foreign banks, under the
creditors, whether or not such persons have participated in the assignment agreement NOT incorporated in the rehabilitation plan,
proceedings or have opposed the plan or whether or not their will about 80% of total assets. That leaves barely 20% for all other
claims have been scheduled. creditors. That’s why the court disallowed the Assignment Agreement
because substantial portion of the assets of Bayantel is taken without
Comment: leaving sufficient value for the other creditors.
Unfortunately, despite the success of Puerto Azul in the SC case, until
now, it is still doing rehabilitation and none of the creditors have been Effect of Approval and Confirmation of Rehabilitation Plan
paid because the operations of Puerto Azul breaks even, meaning, its Based on those decisions of the SC and by the law itself, once a
cash flow only sustains its administrative and operating expenses and rehabilitation plan is approved and confirmed, it operates as a
there is no extra cash to pay the creditors. novation of all existing contracts and obligation to which the company
is a party. All of these contracts are deemed extinguished and
Express Investments v. Bayantel, GR Nos. 1774457-59, December 5, superseded by the rehabilitation plan.
2012
• Rehabilitation is an attempt to conserve and administer the assets of However the rehabilitation plan was approved by some creditors and
an insolvent corporation in the hope of its eventual return from later confirmed through cramdown by the special commercial court,
financial stress to solvency. It contemplates the continuance of there was a provision there that the SC found to be repugnant to the
corporate life and activities in an effort to restore and reinstate the Constitution. Under the proposed restructure, there is a debt-for-equity

FRIA | Page 12 of 13
swap or conversion. The Lopez’s lost control in Bayantel by giving their economy will continue because the State will assist the banking
common shares to the foreign banks. Under the structure, 77.7% of all sector in proceedings against debtors.
common shares of Bayantel will be given to foreigner-creditor banks - Pro-creditor regime allows creditors to avail themselves of
despite the constitutional limitation of 40% foreign equity in public protection through security interest and set-offs, third-party owners
utility companies such as telecommunication companies. Meaning, to claim property held by bankrupt entities.
the foreign banks will own 77.7% of the common shares of BayanTel.
The SC struck down this provision in the rehabilitation plan because it Pro-debtor Regime
is unconstitutional. - Under pro-debtor regime, the objective is to increase the size of the
patrimony or estate of the debtor usually by destroying creditor’s
Remedies rights. The assets of the corporate debtor are maximized.
What if you are a creditor who has valid ground to believe that you - A pro-debtor regime redeems the debtor while a pro-creditor
had been prejudiced by an approved rehabilitation plan? regime, creditors are ought to be able to avoid losses, maintaining
- a Motion to Dismiss is INAPPROPRIATE the banking system as a viable channel for flow of capital.
- once the rehab court has confirmed the rehab plan and it is already
being implemented, motion to dismiss would be too late in the day. Danger: Operating at an extreme would be problematic. There are less
lenders in a pro-debtor regime but less borrowers in a pro-
BPI v. Shemberg Biotech Corporation and Benson Dakay, GR No. creditor regime.
162291, August 11, 2010
We cannot grant BPI’s prayer that the petition for rehabilitation Trivias:
be ordered dismissed and terminated. To dismiss the petition for • Hong Kong and Singapore which follows a pro-creditor regime are
rehabilitation would be to reverse improperly the final course of the most stable economies at least in southeast Asia.They have the
that petition: the petition was granted by the RTC; the RTC most stable banking system even during the Asian Financial Crises.
decision was affirmed with finality; and the rehabilitation plan is • Most pro-debtor would be France because it is socialist.
now being implemented. • Philippines is a pro-debtor regime (9) because the old insolvency law
And while the  Interim Rules and the new  Rules of Procedure protects the debtor in order to allow the debtor to start afresh in the
on Corporate Rehabilitation contain provisions on termination of business and the old insolvency law was carried into the FRIA.
the corporate rehabilitation proceedings, neither the RTC nor the Unfortunately, by the letter of the law FRIA intends to balance the
CA ruled on this point. In fact, BPI did not ask the CA to terminate interest of the debtor and creditor, the decision of the SC appears
the rehabilitation proceedings. Aside from being another new otherwise.
issue, its resolution involves factual matters such as: (1) whether
there was failure to achieve the desired targets or goals as set forth — End of FRIA —
in the rehabilitation plan; (2) whether there was failure of the
debtor (SBC) to perform its obligations under the plan; (3) whether
the rehabilitation plan may no longer be implemented in
accordance with its terms, conditions, restrictions or assumptions;
or (4) whether there was successful implementation of the
rehabilitation plan. We are not at liberty to consider these factual
matters for the first time. This Court is not a trier of facts and our
role in a petition for review on certiorari under Rule 45 of the 1997
Rules of Civil Procedure is limited to reviewing or reversing errors
of law. The Rule 45 petition itself must raise only questions of law.

Proper Mode of Appeal

- once rehab plan is confirmed by the court it becomes FINAL and
EXECUTORY.
- the only way to have it reviewed is by way Rule 65 Petition (CBC v.
Cebu Printing and Packaging Corporation, GR NO. 172880, 11
August 2010)

Liquidation vs. Corporate Rehabilitation

- the challenge is always for the court to decide with the help of the
receiver, who to pay and in what order to pay and how much
- efficiency and equity may sometimes be competing
- The way countries pursues those goals through an insolvency law
says about its attitude in its legal system
- Some countries are pro-debtor; some countries are pro-creditor
- Different countries implement the doctrines differently
- how pro-debtor or pro-creditor is the country determines its
economic status because if a country through its legal framework is
considered or perceive to be as pro-debtor, then there are more
business persons taking entrepreneurial risk. It is easier to put up
businesses and these businesses create jobs if the they know that the
law will protect them as a debtor. That emboldens them to borrow
more. That provides for greater innovation. Eg. If one invented a
product and wants to sell it but nobody wants to finance it under a
pro-creditor regime but if it is pro-debtor, there are banks willing to
lend even for such innovative enterprises.

Pro-creditor Regime
- Under pro-creditor regime, this encourages the provision of liquidity
in the business. It means that banks are tightened. To protect the
banking system, it is more or less assured that monetization of the

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