Financial

Rehabilitation and
Insolvency Act of 2010
(RA 10142)
and Concurrence and
Preference of Credits

Members:

De Leon, Jea Belinda B. Sarmiento, Maria Michaela O.,

Garcia, Thriza Czarina Q. Santos, Aura Eunice S.,
Isidro, Carlo Inigo G. Santos, Robert Jr. C.,
Pelausa, Stephanie Louise S. Tolentino, Ma. Ana Fatima, R.
Sanguyo, Mary Jasmine L.
 EFFECTIVITY: FRIA took effect on August
31, 2010 and expressly repealed the
Insolvency Law.
 RATIONALE: The FRIA is an attempt to
institutionalize in statutory law useful
doctrines and principles in rehabilitation
proceedings; absence of effective and
orderly procedures that may be applied
consistently can aggravate economic
and financial crises. Without them, credit
availability may be compromised and
inevitably severely affect commercial
transactions.
PREVIOUS INSOLVENCY
LAWS AND RULES
 May 20, 1909: Enactment of Insolvency Law (Act
1956). Covered suspension of payments and voluntary
or involuntary insolvency proceedings

 1976: President Issued PD 902-A - introduced the

concept of rehabilitation. Gave the SEC jurisdiction
over matters relating to suspension of payments,
rehabilitation and insolvency

 1999: SEC issued Rules on Corporate Recovery

 2000: SC issued Interim Rules of Procedure on

Corporate Recovery. Necessary because jurisdiction
over petitions for suspension of payment and
rehabilitation was transferred to regular courts by the
Securities Regulations Code.

 2009: Court issued Rules of Procedure on Corporate

Rehabilitation
Procedural Aspect
 In 2013 the SC enacted the Financial
Rehabilitation Rules of Procedure – apply to
petitions for rehabilitation of corporations,
partnerships and sole proprietorships
 In 2015, SC approved the Financial Liquidation
and Suspension of Payments Rules of Procedure
for Insolvent Debtors (FSLP Rules) – governs the
practice, pleading and procedure for
liquidation and suspension of payments of
debtors
 FRIA governs proceedings in insolvency,
suspension of payment, and rehabilitation
cases, except to the extent that in opinion of
court, it would be unjust to apply FRIA
 FRIA applies to all contracts of debtors
regardless of the date of perfection
POLICIES: Section 2, FRIA
(E-E-R-F)
 To encourage debtors, both juridical and natural
persons, and their creditors to collectively and
realistically resolve and adjust competing claims and
property rights;
 To ensure a timely, fair, transparent, effective and
efficient rehabilitation and liquidation of debtors;
 To rehabilitate or liquidate considering the following: 1)
ensure or maintain certainty and predictability in
commercial affairs; 2) preserve and maximize the value
of the assets of these debtors; 3) recognise creditor
rights; 4) respect priority of claims; and 5) ensure
equitable treatment of creditors (similarly situated).
 When not feasible to rehabilitate, to facilitate a speedy
and orderly liquidate of the debtors’ assets and
settlement of their obligations.
CONCEPT OF INSOLVENCY
 Balance Sheet Test – state of a person whose
assets would not be sufficient to pay off liabilities;
in this sense – INSOLVENCY = BANKRUPTCY

 Illiquidity – inability of a person to pay his debts

as they become due in the ordinary course of his
business; thus a person may be insolvent
although he may be able to pay his debts at
some future time; debtor quits paying his current
obligations because he is unable to

 FRIA: “INSOLVENT” - financial condition of a

debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its
or his assets. (L > A)
 Covers both BST and Illiquidity
KEY DEFINITIONS: Section 3,
FRIA
 Debtor shall refer to, a sole proprietorship duly registered with
the Department of Trade and Industry (DTI), a partnership duly
registered with the Securities and Exchange Commission (SEC), a
corporation duly organized and existing under Philippine laws, or
an individual debtor who has become insolvent. (Sole
proprietor-DTI; Partnership - SEC; Corporation - PH Laws)
 Individual debtor shall refer to a natural person who is a resident
and citizen of the Philippines that has become insolvent as defined
herein.
 Group of debtors: (C-P-S) (1) corporations that are financially
related to one another as parent corporations, subsidiaries or
affiliates; (2) partnerships that are owned more than fifty percent
(50%) by the same person; and (3) single proprietorships that are
owned by the same person. When the petition covers a group of
debtors, all reference under these rules to debtor shall include and
apply to the group of debtors.
 Liabilities - monetary claims against the
debtor, including stockholder's advances
that have been recorded in the debtor's
audited financial statements as
advances for future subscriptions.

Ordinary course of business - transactions

in the pursuit of the individual debtor's or
debtor's business operations prior to
rehabilitation or insolvency proceedings
and on ordinary business terms.
 Creditor - natural or juridical person which has a claim
against the debtor that arose on or before the
commencement date.

 Commencement Date - court issues the

Commencement Order, which shall be retroactive
to the date of filing of the petition for voluntary or
involuntary proceedings.

 General unsecured creditor - creditor whose claim or

a portion thereof is neither secured, preferred nor
subordinated under this Act.

 Secured Creditor - creditor with a secured claim.

 Secured claim - secured by a lien.
 Lien - statutory or contractual claim or judicial
charge on real or personal property that legally
entitles a creditor to resort to said property for
payment of the claim or debt secured by such
lien.
Bankruptcy vs. Insolvency Laws

 Insolvency Law – petition of an

insolvent debtor to discharge him from
his debts
 Bankruptcy Law – petition of his
creditors for the purpose of applying his
property to the payment of his debts

 DISCTINCTION DISREGARDED: may be

initiated by either debtor or creditor,
may be used for either purpose
 PROCEEDINGS Covered by FRIA
and PERSONS who will FILE and/or
APPROVE
TYPE OF BUSINESS ORGANIZATION TYPE OF PROCEEDING WHO WILL APPROVE or FILE PETITION

Sole Proprietorship Voluntary Rehabilitation Owner/Proprietor (Sec. 12, FRIA)

Partnership Voluntary Rehabilitation Majority of Partners (Sec.12, FRIA)

Corporation Voluntary Rehabilitation 1) Majority of the Director or Trustees; and

2) Stockholders representing 2/3 of Outstanding Capital or 2/3 of Members of Non-Stock Corp. (Sec. 12, FRIA)

Sole Proprietorship, Partnership, and Involuntary Rehabilitation Creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least P1M or at least 25% of the subscribed
Corporation capital stock or partners’ contributions, whichever is higher. (Sec. 13, FRIA)

Sole Proprietorship, Partnership, and Pre-Negotiated Rehabilitation (Petition The insolvent debtor and the Rehabilitation Plan is endorsed or approved by creditors holding at least 2/3 of the total liabilities of the
Corporation for Approval of Pre-Negotiated debtor including secured creditors holding more than 50% of the total secured claim and unsecured creditors holding more than 50% of
Rehabilitation Plan) unsecured claims. (Sec. 76, FRIA)

Sole Proprietorship, Partnership, and Voluntary Liquidation (Sec. 90, FRIA) Insolvent Debtor
Corporation

Sole Proprietorship, Partnership, and Involuntary Liquidation (Sec. 91, FRIA) a) 3 or more creditors, and
Corporation b) the aggregated of whose claims is at least 1M or at least 25% of the subscribed capital stock or partner’s contributions of the
debtor, whichever is higher.

Individual Debtor Suspension of Payment (Sec. 94, FRIA) Individual Debtor

Individual Debtor Voluntary Liquidation (Sec. 103, FRIA) Individual Debtor with at least P500,000 debts who does not have sufficient assets to cover his liabilities.

Individual Debtor Involuntary Liquidation (Petition for Acts Any creditor or group of creditors with a claim of, or with claims aggregating at least P500,000.
of Insolvency) (Sec., 105)
 A group of debtors may jointly file a petition for
rehabilitation under this Act when one or more of its
members foresee the impossibility of meeting debts
when they respectively fall due, and the financial
distress would likely adversely affect the financial
condition and/or operations of the other members of
the group and/or the participation of the other
members of the group is essential under the terms
and conditions of the proposed Rehabilitation Plan.
EXCLUDED DEBTORS: Section
5, FRIA (B-P-I-N)
 Banks
 Pre-Need Companies
 Insurance Companies
 National and Local Government
Agencies/Units
The Rehabilitation of 1 to 3 is governed by their
respective special laws.
Rehabilitation
Rehabilitation shall refer to the restoration of
the debtor to a condition of a successful
operation and solvency, if it is shown that its
continuance of operation is economically
feasible and its creditors can recover by way of
the present value of payments projected in the
plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
(Sec. 4[gg], FRIA)
Rehabilitation of
Sole Proprietorship,
Partnership and
Corporation
Grounds for Rehabilitation
 Voluntary Rehabilitation. The following
must be alleged ( in must be alleged in the
verified Petition) and established:
 The Insolvency of the Debtor
 The Viability of its rehabilitation
 Involuntary Rehabilitation. A creditor or
group of creditors may initiate involuntary
proceedings against the debtor by filing a
petition for rehabilitation with the court if:
1. The is no genuine issue of fact or law on
the claim/s of the petitioner/s and that
the due and demandable payments
thereon have not been made for at
least sixty days or that the debtor has
failed generally to meet its liabilities as
they fall due; or
2. A creditor, other than the petitioner/s,
has initiated foreclosure proceedings
against the debtor that will prevent the
debtor from paying its debts as they
become due or will render it insolvent
Rehabilitation Plan
It shall refer to a plan by which the financial well-
being and viability of an insolvent debtor can be
restored using various means 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 new business entity, or other similar
arrangements as may be approved by the court or
creditors.
 A Rehabilitation Plan is attached to the
Petition for Rehabilitation.
 The Rehabilitation Plan :
 May be approved by the creditors (50% of the
total claims) (Sec. 64, FRIA)
 Confirmed by the court after the approval of
the creditors or even without such approval or
even over the objection of the creditors

 Cram Down Rule. The Rehabilitation Plan

(including pre-negotiated plans) confirmed
by the Court shall be binding upon the
debtor and all persons who may be
affected by it, including creditors, whether
or not such persons have participated in
the proceedings opposed the Plan or
whether or not their claims have been
scheduled
Stay Order
The court having jurisdiction over the rehabilitation case
shall issue a Commencement Order which shall include
a Stay Order. The Stay or Suspension Order shall:
1. Suspend all actions or proceedings, in court or
otherwise, for the enforcement of claims against the
debtor;
2. Suspend all actions to enforce any judgment,
attachment or other provisional remedies against
the debtor;
3. Prohibit the debtor from selling, encumbering,
transferring, or disposing in any manner any of its
properties except in the ordinary course of business;
and
4. Prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement
date except as may be provided. (Sec. 16, FRIA)
The Commencement Order and
consequently the Stay Order shall
be effective for the entire duration
of the rehabilitation proceedings.
The order may be lifted if there is
not substantial likelihood for the
debtor to be successfully
rehabilitated.
 Suspended Claims
Claim shall refer to all claims or demands of whatever
outcome or character against the debtor or its
property, whether for money or otherwise, liquidated
or unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, including, but not
limited to:

1. All claims of the government, whether national or

local, including taxes, tariffs, and customs duties;
and

2. Claims against directors and officers of the debtor

arising from acts done in the discharge of their
functions falling within the scope of their authority
 The authority or third parties are not prohibited from
filing cases against the directors and officers acting in
their personal capacities.
Examples of Claims
 The claims of passengers against a
common carrier (airline) for missing
luggages is a money claim or financial
demand that the law requires to be
suspended pending the rehabilitation
proceedings
 The suspension also covers employees’
claims
 Cases for revocation of a contract of
sale and restitution of the price filed
before the HLURB. Under the Interim
Rules, the claim is suspended even if the
case involves claim that is not purely for
money
Rationale of
Suspension of Claims
 To enable the rehabilitation receiver to
effectively exercise its/his powers free
from or unburdened by any judicial or
extrajudicial interference that might
unduly hinder or prevent the “rescue” of
the debtor company (time, resources,
and effort will be used to litigate)
 To enable the management committee
or the rehabilitation receiver to substitute
the defendant in any action against it
before any court, tribunal, board or
body.
Secured Credits
The Stay Order covers all creditors,
secured or unsecured. The
preferred status over the
unsecured creditors relative to the
mortgage liens is retained but the
enforcement of such preference is
suspended.
Exceptions to the Stay
or Suspension Order
 to cases already pending appeal in the Supreme Court
as of commencement date Provided, That any final and
executory judgment arising from such appeal shall be
referred to the court for appropriate action;
 subject to the discretion of the court, to cases pending
or filed at a specialized court or quasi-judicial agency
which, upon determination by the court is capable of
resolving the claim more quickly, fairly and efficiently
than the court: Provided, That any final and executory
judgment of such court or agency shall be referred to
the court and shall be treated as a non-disputed claim;
 to the enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters
of credit, unless the property subject of the third party or
accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the court
upon recommendation by the rehabilitation receiver;
 to any form of action of customers or clients of a
securities market participant to recover or otherwise
claim moneys and securities entrusted to the latter in
the ordinary course of the latter's business as well as
any action of such securities market participant or
the appropriate regulatory agency or self-regulatory
organization to pay or settle such claims or liabilities;
 to the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a
securities pledge or margin agreement for the
settlement of securities transactions in accordance
with the provisions of the Securities Regulation Code
and its implementing rules and regulations;
 the clearing and settlement of financial transactions
through the facilities of a clearing agency or similar
entities duly authorized, registered and/or
recognized by the appropriate regulatory agency
like the Bangko Sentral ng Pilipinas (BSP) and the SEC
as well as any form of actions of such agencies or
entities to reimburse themselves for any transactions
settled for the debtor; and
 any criminal action against individual debtor or
owner, partner, director or officer of a debtor
shall not be affected by any proceeding
commend under this Act.
MANAGEMENT OF THE
COMPANY UNDER
REHABILITATION
 The existing Board and/or Management
of the debtor shall continue.
MANAGEMENT OF THE
COMPANY UNDER
REHABILITATION
 However, management can be replaced. Upon
motion, the court may appoint either the
Rehabilitation Receiver or a Management
Committee to undertake the management of
the debtor in the following cases:
 Actual or eminent danger of dissipation, loss,
wastage, or destruction of the debtor’s assets or
properties.
 Paralyzation of the business operations of the debtor
 Gross mismanagement of the debtor, or fraud or
other wrongful conduct on the part of, or gross or
willful violation of the FRIA by existing management
of the debtor, owner, partner, director, officer, or
representative/s in the management of the debtor.
COURT ACTION ON PETITION
FOR REHABILITATION
(Sec 26, FRIA)
Within 10 days from receipt of the report of
the rehabilitation receiver, the court may:

 Give due course to the petition if the

court finds:
 Debtor is insolvent
 There is a substantial likelihood for the debtor to
be successfully rehabilitated.
COURT ACTION ON PETITION
FOR REHABILITATION
(Sec 26, FRIA)
 Dismiss the petition if the court finds:
 The debtor is not insolvent
 The petition is a sham filing intended only to
delay the enforcement of the rights of the
creditor’s or of any group of creditors
 The petition, the Rehabilitation Plan and the
attachments thereto contain any materially
false or misleading statements
 The debtor has committed acts of
misrepresentation or in fraud of creditor’s or a
group of creditors.
COURT ACTION ON PETITION
FOR REHABILITATION
(Sec 26, FRIA)
 Convert the proceedings into Liquidation
Proceeding if the court finds:
 The debtor is insolvent and there is no
substantial likelihood for the debtor to be
successfully rehabilitated.
 There is failure of rehabilitation.
OUT-OF-COURT REHABILITATION /
INFORMAL RESTRUCTURING
AGREEMENTS AND REHABILTIATION
PLANS (OCRA)
Minimum requirements (Sec. 84, FRIA):

 Debtor must agree to the out-of-court

rehabilitation

 Must be approved by creditors representing at

least 67% of the secured obligations of the
debtor

 Must be approved by creditors representing at

least 75% of the unsecured obligations of the
debtor

 Must be approved by creditors holding at least

85% of the total liabilities, secured and
unsecured, of the debtor.
OUT-OF-COURT REHABILITATION /
INFORMAL RESTRUCTURING
AGREEMENTS AND REHABILTIATION
PLANS (OCRA)
Standstill period (Sec. 85, FRIA):

 A standstill period may be agreed upon by the parties

pending negotiation and finalization of the Out-of-
Court Rehabilitation Plan, which shall be effective and
enforceable not only against the contracting parties
but also against the other creditors if the following
requisites are present.
 Agreement is approved by the creditors representing more
than 50% of the total liabilities of the debtor.
 Notice thereof is published in a newspaper of general
circulation of the Philippines once a week for 2 consecutive
weeks.
 Standstill period does not exceed 120 days from the date
of effectivity.
OUT-OF-COURT REHABILITATION /
INFORMAL RESTRUCTURING
AGREEMENTS AND REHABILTIATION
PLANS (OCRA)
Cram Down Rule (Sec. 86, FRIA)

 The Rehabilitation Plan confirmed by the Court

shall be binding upon the debtor, and all persons
who may be affected by it, including creditors,
whether or not such persons have participated in
the proceedings, opposed the Plan, or whether
or not their claims have been Scheduled.

 The Cram Down Rule applies upon publication of

the notice of the out-of-court approved
rehabilitation plan.
OUT-OF-COURT REHABILITATION /
INFORMAL RESTRUCTURING
AGREEMENTS AND REHABILTIATION
PLANS (OCRA)
Court Assistance
 While the OCRA or standstill agreement is
not filed with or approved by the court,
the insolvent debtor or a creditor may file
an application for court assistance to
execute or implement a standstill
agreement or an OCRA.
SUSPENSION OF PAYMENTS
 Only an individual debtor may file a petition for
suspension of payment.

 The debtor has sufficient properties to cover his

debts but he foresees the impossibility of meeting
his debts when they respectively fall due.

 The purpose is to suspend or delay the payment

of debts.

 The amount of indebtedness is not affected.

 The number of creditors is immaterial.

Suspension of
Payments
vs.
Rehabilitaiton
 SUSPENSION OF PAYMENTS REHABILITATION
Applies to? Applies to individual debtor Business organizations – Single
Proprietorship, Partnership and
Corporation

Has sufficient assets? Debtor has sufficient assets to Debtor is insolvent

cover its liabilities.

Secured creditors affected? Secured creditors are not In a Stay Order, secured
affected. creditors are affected by stay
order (the enforcement of
preference is suspended).

Who files? Filed by the debtor May be initiated by the debtor

(voluntary) or by the creditors
(involuntary)

Minimum amount of claim? There is no minimum The aggregate of claims is at

requirement for the amount of least 1M Pesos or at least 25%
the claims. of the subscribed capital stock
or partner’s contributions,
whichever is higher.
Suspension of
Payments vs.
Liquidation
 SUSPENSION OF PAYMENTS
Applies to? Applies to individual debtor
Has sufficient assets? Debtor has sufficient assets to
cover its liabilities.
Secured creditors Secured creditors are not
affected? affected.
Who files? Filed by the debtor
Minimum amount of There is no minimum
claim? requirement for the amount of
the claims.
LIQUIDATION
Individual debtors and
juridical persons.
Debtor is insolvent
The Liquidiation Order shall
not affect the right of a
secured creditor to
enforce his lien.
May be initiated by the
debtor (voluntary) or by
the creditors (involuntary)
The debt of the individual
debtor is not less than 500k
pesos
Suspension Order (Sec. 96,
FRIA)
 Section 96. Actions Suspended. - Upon
motion filed by the individual debtor, the
court may issue an order suspending any
pending execution against the individual
debtor. Provided, That properties held as
security by secured creditors shall not be
the subject of such suspension order. The
suspension order shall lapse when three
(3) months shall have passed without the
proposed agreement being accepted
by the creditors or as soon as such
agreement is denied.
No creditor shall sue or institute
proceedings to collect his claim from the
debtor from the time of the filing of the
petition for suspension of payments and
for as long as proceedings remain
pending except:
(a) those creditors having claims for
personal labor, maintenance, expense of
last illness and funeral of the wife or
children of the debtor incurred in the sixty
(60) days immediately prior to the filing of
the petition; and
(b) secured creditors.
Prohibited Acts of Individual
Debtors (Sec. 95, FRIA)
(e) forbidding (the individual debtor) from selling,
transferring, encumbering or disposing in any manner
of his property, except those used in the ordinary
operations of commerce or of industry in which the
petitioning individual debtor is engaged so long as
the proceedings relative to the suspension of
payments are pending;

(f) prohibiting (the individual debtor) from making any

payment outside of the necessary or legitimate
expenses of his business or industry, so long as the
proceedings relative to the suspension of payments
are pending; and
Creditor’s Meeting
Section 97. Creditors' Meeting. - The presence of creditors holding claims
amounting to at least three-fifths (3/5) of the liabilities shall be necessary
for holding a meeting. The commissioner appointed by the court shall
preside over the meeting and the clerk of court shall act as the secretary
thereof, subject to the following rules:

(a) The clerk shall record the creditors present and amount of their
respective claims;

(b) The commissioner shall examine the written evidence of the claims. If
the creditors present hold at least three-fifths (3/5) of the liabilities of the
individual debtor, the commissioner shall declare the meeting open for
business;

(c) The creditors and individual debtor shall discuss the propositions in the
proposed agreement and put them to a vote;
(d) To form a majority, it is necessary:

 (1) that two-thirds (2/3) of the creditors voting unite

upon the same proposition; and

 (2) that the claims represented by said majority vote

amount to at least three-fifths (3/5) of the total
liabilities of the debtor mentioned in the petition; and

(e) After the result of the voting has been announced, all
protests made against the majority vote shall be drawn
up, and the commissioner and the individual debtor
together with all creditors taking part in the voting shall
sign the affirmed propositions.
Liquidation
Liquidation of Individual
Debtors
 VOLUNTARY LIQUIDATION INVOLUNTARY LIQUIDATION

Debtor is insolvent

Debts must be at least Php 500,00.00

Acts of insolvency need not be alleged Creditors must prove acts of insolvency
and proved

Individual debtor files the Petition Creditor or group of creditors files the Petition

Debtor is not absent as he files the Applies even in case of an Absent Debtor
Petition It refers to debtors residing outside or has
departed from the Philippines, cannot be found
or conceals himself.

Posting of Bond by creditors is not Posting of Bond is required

required
Liquidation Order is issued without trial Liquidation Order is issued after trial
 Liquidation of Business
Organization
(Sole Proprietorship, Partnership,
Corporation)
 INVOLUNTARY LIQUIDATION OF INVOLUNTARY LIQUIDATION OF
INDIVIDUAL DEBTOR BUSINESS ORGANIZATIONS

At least 3 creditors are required There can be one or more creditors

Debts must be at least Php 500,000.00 Debt or aggregate of debts must be at

least Php 1,000,000 or equivalent to 25%
of the subscribed capital or partner’s
contribution, whichever is higher

Individual can continue his business Business organization will be dissolved

There must be an act of insolvency Acts of insolvency is not required

 ACTS OF INSOLVENCY
The petition for liquidation shall set forth or allege at least one of such acts:

(a) That such person is about to depart or has departed from the Republic of
the Philippines, with intent to defraud his creditors;

(b) That being absent from the Republic of the Philippines, with intent to
defraud his creditors, he remains absent;

(c) That he conceals himself to avoid the service of legal process for the
purpose of hindering or delaying the liquidation or of defrauding his creditors;

(d) That he conceals, or is removing, any of his property to avoid its being
attached or taken on legal process;

(e) That he has suffered his property to remain under attachment or legal
process for three (3) days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;

(f) That he has confessed or offered to allow judgment in favor of any creditor
or claimant for the purpose of hindering or delaying the liquidation or of
defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by
default for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;

(h) That he has suffered or procured his property to be taken on legal

process with intent to give a preference to one or more of his creditors
and thereby hinder or delay the liquidation or defraud any one of his
creditors;

(i) That he has made any assignment, gift, sale, conveyance or transfer of
his estate, property, rights or credits with intent to hinder or delay the
liquidation or defraud his creditors;

(j) That he has, in contemplation of insolvency, made any payment, gift,

grant, sale, conveyance or transfer of his estate, property, rights or
credits;

(k) That being a merchant or tradesman, he has generally defaulted in

the payment of his current obligations for a period of thirty (30) days;

(l) That for a period of thirty (30) days, he has failed, after demand, to pay
any moneys deposited with him or received by him in a fiduciary; and

(m) That an execution having been issued against him on final judgment
for money, he shall have been found to be without sufficient property
subject to execution to satisfy the judgment.
LIQUIDATION PROCESS
 It refers to the proceeding, where claims are filed
and the assets of the insolvent debtor are
disposed and the proceeds are divided among
the creditors.

1. Filing of Creditors’ Petition

2. Order to Individual Debtor
to show cause
 Upon the filing of such petition, the court shall
issue an Order requiring the individual debtor to
show cause, at a time and place to be fixed by
the said court, why he should not be charged an
insolvent.
3. Default
 If the individual debtor shall default or if, after
trial, the issues are found in favor of the
petitioning creditors the court shall issue the
Liquidation Order.
4. Order directing the Sheriff to take into
his custody a sufficient amount or property
of individual to satisfy the demands and
costs of proceedings.
 In case of an absent individual debtor & upon
submission of all requirements needed

 It shall be the duty of the sheriff to take

possession of the property and effects of the
individual debtor, not exempt from execution, to
an extent sufficient to cover the amount
provided for and to prepare within three (3) days
from the time of taking such possession, a
complete inventory of all the property so taken,
and to return it to the court as soon as
completed.
 The time for taking the inventory and making
return thereof may be extended for good cause
shown to the court.

 The sheriff shall also prepare a schedule of the

names and residences of the creditors, and the
amount due each, from the books of the debtor,
or from such other papers or data of the
individual debtor available as may come to his
possession, and shall file such schedule or list of
creditors and inventory with the clerk of court.
LIQUIDATION ORDER
 It refers to the order of the court that has
jurisdiction over the liquidation proceedings and
includes the following:

a. declaring that the debtor is insolvent

b. ordering the liquidation of the debtor

c. in case of juridical person, declaring that it is

dissolved prohibiting payments and/or transfer or
property by the debtor directing all claims to be
filed with the liquidator.
EFFECTS OF LIQUIDATION
ORDER
 The juridical debtor shall be deemed dissolved and its
corporate or juridical existence is also terminated.

 Legal title to and control of all the assets of the debtor,

except those that may be exempt from execution, shall
be deemed vested in the liquidator or, pending his
election or appointment, with the court.

 All contracts of the debtor shall be deemed terminated

and/or breached, unless the liquidator within 90 days from
the date of his assumption of office, declares otherwise
and the contracting party agrees.

 No separate action for the collection of an unsecured

claim shall be allowed.

 No foreclosure proceeding shall be allowed for a period

of 180 days.
RIGHTS OF A
SECURED
CREDITOR
 The Liquidation Order shall not affect the
right of a secured creditor to enforce his
lien in accordance with applicable
contract of law.
A Secured Creditor May:
1. Waive his right under the security or lien,
prove his claim in the liquidation
proceedings and share in the distribution
of the assets of the debtor; or
2. Maintain his right under security of lien
(FRIA Sec. 114)
What if the secured creditor maintains his
right under the security or lien?

 The value of the property may be fixed in

a manner agreed upon by the creditor
and liquidator.
What if the value of the property is less
than the claim it secures?
The Liquidator may convey the
property to the secured creditor and
the latter will be admitted in the
liquidation proceedings as a creditor
for the balance.
What if the value exceeds the
claim secured?
The liquidator may convey the
property to the creditor and
waive the debtor’s right of
redemption upon receiving the
excess from the creditor.
The liquidator may sell the
property and satisfy the
secured creditor’s entire claim
from the proceeds; or
The secured creditor may
enforce the lien, or foreclosure
on the property pursuant to
applicable laws. (FRIA Sec.
114)
SALES OF ASSETS IN
LIQUIDATION:
GENERAL RULE:
The liquidator may sell the
unencumbered assets of the debtor
and convert the same into
money.The sale shall be made at
public auction.
EXCEPTION: However, a private sale
may be allowed with the approval
of the court if:
 Goods are perishable in nature
 Liable to quickly to deteriorate in
value
 Disproportionately expensive to
keep or maintain
 Private sale is for the best interest
of the creditor and debtor.
DISTRIBUTION OF ASSETS
Shall be divided among the
creditors in accordance with the
liquidation plan submitted by the
liquidator and approved by the
court.

NOTE: rules on concurrence and

preference of credit shall be
observed.
RULES:

There is preference with respect to

TAXES ONLY under Art. 2241 nd
2242 NCC

All other claims or liens mentioned

in in Art. 2241 and 2242 NCC, there
is no order of preference.
EXCESS of the specific property, if
any, after the payment if the
credits which enjoy preferene:
Shall be added to the free
property for the payment of othe
credits
Shall be disposed in accordance
with the order of preference
under Art. 2244 of NCC as
modified by Art. 110 of the Labor
Code and Sec. 113 of FRIA
If there is excess after satisfying
the claims or lien under Art.
2244
All other common credits
shall be satisfied PRO RATA.
 Concurrence and
Preference of Credits
Articles 2236- 2251
CHAPTER 1

GENERAL PROVISIONS
Articles 2236- 2240
Article 2236

Debtor is liable with all his property,

present and future, for the fulfillment of
his obligations, subject to the
exemptions provided by law
Liability Of Debtor’s
Property For His
Obligations
Creditors have the right to pursue
the prop in possession of the debtor
to satisfy their claims. They are given
the right to exercise all the rights
and bring all actions of the latter for
the same purpose, save those which
are inherent in his person and
impugn acts which the debtor may
have done to defraud them (Art.
1177)
Rule:

Debtor is liable with all his property-

present and future, for the fulfillment
of his obligations.

law provides for property

which are exempt from such
fulfillment
EXEMPT
1. PRESENT PROPERTY
Article 152
Article 153
Article 154
Article 155
Article 205
Sec 13, Rule 39
EXEMPT
2. Future property
 With respect to his property, a debtor
who obtains a discharge from his
insolvency, is not liable for the
unsatisfied claims of his creditors with
said property subject to certain
exceptions expressly provided by law
EXEMPT
3. Property in custodia legis and of
public dominion
Property under legal custody and
those owned by municipal
corporations necessary for
governmental purposes have
been held exempt from
attachment or execution.
ARTICLE 2237

Insolvency shall be governed by

special laws insofar as they are not
inconsistent with this Code.
ARTICLE 2238
So long as the conjugal partnership or absolute
community subsists, its property shall not be among
the assets to be taken possession of by the assignee
for the payment of the insolvent debtor’s obligations,
except insofar as the latter has redounded to the
benefit of the family.
If it is the husband who is insolvent, the administration
of the conjugal partnership or absolute community
may, be order of the court, be transferred to the wife
or third person other than the assignee.
Exemption of the conjugal
partnership or absolute
community property.
The assets of the conjugal
partnership or absolute community do
not pass to the assignee in insolvency
elected by the creditors or appointed by
the court as they do not belong to the
individual spouses, but a distinct entity:
the partnership or the community.
The exemption applies
provided that:

The partnership or community

subsists; and
The obligation of the insolvent
spouse have not redounded
to the benefit of the family.
ARTICLE 2239

If there is property, other than that mentioned in

the preceding article, owned by two or more
persons, one of whom is the insolvent debtor, his
undivided share or interest therein shall be among
the assets to be taken possession of by the
assignee for the payment of the insolvent debtor’s
obligation.
Rules involving undivided
share or interest of a
co-owner.
If there is a co ownership and one of
the co-ownership is the insolvent debtor,
his undivided share or interest in the
property shall possessed by the assignee in
insolvency proceedings because it is part
of his assets.

The share of the other co-owners

cannot, of course, be taken possession of
by the assignee.
ARTICLE 2240
Property held by the insolvent debtor as
a trustee of an express or implied trust,
shall be excluded from his insolvency
proceedings.
Rule involving property
held in trust
The trustee is not, strictly speaking, the
owner of the trust property although he has
the legal title thereto.

 Hence, property held in trust by the

insolvent debtor should be excluded from
the insolvency proceedings.
CHAPTER 2

Classification of Credit
Classification of Credit

Special Preferred Ordinary Preferred Common

Credits Credits Credits
(Non-Preferred)
Specific Specific
Movable Immovabl Article 2244 Article 2245
Property e
-Article Property -
2441 Article
2442
FIRST CLASSIFICATION:
SPECIAL PREFERRED
CREDITS
(1) Specific Movable Property (SMP) - Article
2441

(2) Specific Immovable Property (SIP) -Article

2442
A. Specific Movable
Property (SMP) - Article
2441
1. Duties, taxes and fees due thereon to the State or
any subdivision thereof;
2. Claims from misappropriation, breach of trust,
malfeasance of public officer;
3. Claim for unpaid price of movable sold;
4. Credits guaranteed with pledge or mortgage;
5. Credits for making, repairs, safekeeping or
preservation of the property;
A. Specific Movable
Property (SMP) - Article
2441
6. Claims for laborer’s wages on goods manufactured
or the work done;
7. Expenses of salvage upon the goods salvaged;
8. Credits between the landlord and tenant from their
contract on the share of each in the fruits or harvest;
9. Price of the contract of transportation and
incidental expenses on the goods carried, until their
delivery and thirty (30) days thereafter;
A. Specific Movable
Property (SMP) - Article
2441
10. Credits for lodging and supplies furnished to travelers
by hotel keepers on the movables belonging to the
guest as long as such movables are in the hotel;
11. Expenses for cultivation and harvest upon the fruits
harvested;
12. Rent for one (1) year upon the property of lessee
existing on the immovable leased and on the fruits of
the same but not on money or instruments of credit;
and
14. Claims of the depositor if depositary has wrongfully
sold the thing deposited, upon the price of the sale.
A. Specific Movable
Property (SMP) - Article
2441

What if there is wrongful taking of

movables under Article 2241?

Accion Subrogatoria
Specific Movable
Property (SIP) - Article
2441

What if there is wrongful taking of

movables under Article 2241?

Accion Subrogatoria
B. Specific Immovable
Property (SIP) - Article
2441
1. Taxes due upon land or building;
2. Unpaid price of real property;
3. Claims of laborers and other workmen engaged in
construction and reconstruction or repair of
buildings, canals and other works;
4. Claims of furnishers of materials used in the
construction, reconstruction, or repair of buildings,
canals and other works;
5. Mortgage Credits;
B. Specific Immovable
Property (SIP) - Article
2441
6. Expenses for preservation and improvement of real
property when the law authorizes reimbursement;
7. Credits annotated in the Registry of Property by virtue
of judicial order, attachment or execution;
8. Claims of co-heirs for warranty in the partition of the
property;
9. Claims of donors for pecuniary charges or other
conditions imposed by him upon the donee; and
10. Claims of insurer’s for insurance premium for two (2)
years.
SECOND CLASSIFICATION:
ORDINARY PREFERRED
CREDITS
1. Credits for services rendered by laborers;
2. Funeral expenses for the debtor, or his children
under parental authority who have no own property,
upon court approval;
3. Expenses during the last illness of debtor or of his or
her spouse and children under parental authority, if
they have no own property;
4. Compensation due the laborers or their
dependents under laws providing for indemnity;
SECOND CLASSIFICATION:
ORDINARY PREFERRED
CREDITS
5. Credits and advancements made to the debtor for
support himself, and his family, during the last year
preceding insolvency;
6. Support during the insolvency proceedings and for
the three (3) months thereafter;
7. Fines and civil indemnifications arising from criminal
offense;
8. Legal expenses and expenses incurred in the valid
administration of the insolvent’s estate;
SECOND CLASSIFICATION:
ORDINARY PREFERRED
CREDITS
9. Taxes and assessments due the National
Government other than those mentioned in Articles
2241 (1) and 2242 (1) of the Civil Code;
10. Taxes and assessments due any city or municipality
other than those indicated in Articles 2241 (1) and
2242 (1) of the Civil Code;
11. Taxes and assessments due any province other
than those indicated in Articles 2241 (1) and 2242 (1)
of the Civil Code;
SECOND CLASSIFICATION:
ORDINARY PREFERRED
CREDITS
12. Damages for death or physical injuries caused by
quasi-delict;
13. Gifts due to charitable public and private
institutions; and
14. Credits which, without special privilege, appear in
(a) a public instrument; or (b) in a final judgment, if
they have been the subject of litigation.
STATUTORY PREFERENCE NOT
APPLICABLE TO
GOVERNMENT
 Article 2244, particularly par. (14)(a)
thereof, is not applicable to obligations
of the State as it is a recognized doctrine
that the State is always solvent

 The order of preference in Article 2244 of

the Civil Code is very important. The
order of preference here, however, does
not refer to specific or personal property.
It refers to other property.
THIRD CLASSIFICATION:
COMMON CREDITS
 Any other claims or credits other than
those mentioned in Articles 2241, 2242
and 2244 of the Civil Code.

 There is no order of preference among

common creditors. They share whatever
is left in proportion to their credit,
regardless of date.
THIRD CLASSIFICATION:
COMMON CREDITS
 In contrast with Articles 2241 and 2242
of the Civil Code, 2244 creates no
liens on determinate property which
follow such property.

 What Article 2244 creates are simply

rights in favor of certain creditors to
have the cash and other assets of the
insolvent applied in a certain
sequence pr order of priority.
Refectionary Credit
 Indebtedness incurred in the repair or
reconstruction of something previously
made, such repair or reconstruction
being made necessary by the
deterioration or destruction of the thing
as it formerly existed.

 They include new constructions

CHAPTER 3

Concurrence of Credits with

Respect to the Same Specific
Property

Articles 2236- 2240

Two-tier Order Of
Preference
 First-tier
 Only taxes, duties and fees due on the
specific movable or immovable
property
 Second-tier
 All other special preferred credits
 Satisfied pro rata, out of residual value
of the specific property to which such
other credits relate
NOTA BENE:
Pro rata rule DOES NOT APPLY to
“Credits annotated in the Registry
of Property by virtue of a judicial
order, by attachments and
executions” (later credits)
 In the order of time
Nota Bene:
Proceeding for payment pro rata
of preferred creditors
Proceeding required for
adjudication of claims of
preferred creditors
Contemplates more than one
creditor
Art. 2251
 Those credits which do not enjoy any
preference with respect to specific property,
and those which enjoy preference, as to the
amount not paid, shall be satisfied according
to the following rules:
1. In the order established by art. 2244
2. Common credits referred to in art. 2245
shall be paid pro rata regardless of dates
Steps in applying
the rules in
preference and
concurrence of
credits
Step 1:
Categorize the
credits
accordingly
Step 2: Determine
or make an
inventory of the
assets or properties
of the insolvent
Step 3:
Segregate
specific
immovables
and/or movables
Step 4:
Step 4.1
Sell movables and determine if
sufficient to cover SPECIAL
PREFERRED CREDIT
Exclude all other credits to the
extent of the value of the movable
to which preference refers
Step 4.2
Immovables and real rights
Sell and determine if sufficient
Exclude all other credits
 Step 5

Insufficient = Common credits

Exceed = Free property
 Step 6

Excess = ORDINARY PREFERRED

CREDIT
 Step 7

Apply = Common Credits in

accordance with 2251
* Pro rata regardless of dates