The current special law governing insolvency proceedings is Republic Act

No. 10142, An Act Providing for the Rehabilitation or Liquidation of Financially

Distressed Enterprises and Individuals, which took effect on August 31, 2010. It is
also known as also known as the Financial Rehabilitation and Insolvency Act
(FRIA) of 2010. Unlike the Insolvency Act of 1909, FRIA and the FR Rules do not
limit insolvency to a situation where the debtors assets are less than its liabilities.
It now covers a situation where the debtor is unable to meet its obligations as
they fall due even if its assets are more than its liabilities.
Question presented
What are the different insolvency proceedings under the FRIA available to
an individual, a partnership and a corporation?
Brief answer
Under the FRIA, an individual debtor may not avail of rehabilitation
unless he/she is a sole proprietorship. He/she can only avail either suspension of
payments, if he/she is illiquid, or liquidation, if he/she is insolvent under the
balance sheet concept. On the other hand, a sole proprietorship, a partnership
and a corporation may either undergo rehabilitation or liquidation. They cannot
properly avail of suspension of payments.
In rehabilitation, a debtor may only be a juridical person - either a sole
proprietorship duly registered with the Department of Trade and Industry (DTI),
a partnership duly registered with the Securities and Exchange Commission
(SEC) or a corporation duly organized and existing under Philippine laws. 1
On the other hand, in liquidation, a debtor may be any of the juridical
persons that can be rehabilitated, or an individual debtor who has become
insolvent. 2
1 Sec. 12, FRIA.
2 Ibid, Sec. 90 & Sec. 103.

Discussion
Insolvency proceedings are the statutory procedures by which a debtor
obtains financial relief and undergoes judicially supervised reorganization or
liquidation of its assets for the benefit of its creditors. 3
Under the FRIA, insolvent shall refer to the 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 (illiquidity or equity insolvency) or has liabilities that are greater than its
or his assets (balance-sheet insolvency).4
The FRIA provides for 3 insolvency proceedings, namely, suspension of
payments, rehabilitation and liquidation, to encourage debtors and creditors to
collectively resolve their competing claims.
For individual debtors, they can only avail of either suspension of
payments, if they are insolvent under the illiquidity concept, or they can file for
liquidation if they are insolvent under the balance sheet concept.
Suspension of Payments is a judicial insolvency proceeding by which an
individual debtor submits, for approval by his creditors, a proposed agreement
containing propositions delaying or extending the time of payment of his debts.
It may not be availed of by partnerships and corporations. 5 It is also unavailable
to non-resident citizens and aliens.6

3 Gomez-Somera, S. (2011). Credit Transactions: Notes and Cases, Vol. II, p. 793 citing Blacks Law Dictionary,
Ninth Edition (2009).

4 Sec. 4 (p), FRIA.

5 Gomez-Somera, S. (2011). Credit Transactions: Notes and Cases, Vol. II, p. 848. The institution of corporate
suspension of payments proceedings no longer exist, with the FRIA recognizing only suspension of payments
proceedings for individual debtors.

6 Section 4 (o) of the FRIA defines an individual debtor as a natural person who is a resident and citizen of
the Philippines that has become insolvent.

Suspension of payments is always voluntary. To avail of this proceeding,

the FRIA provides:
Section 94. Petition. - An individual debtor who, possessing sufficient property to
cover all his debts but foreseeing the impossibility of meeting them when they
respectively fall due [Illiquidity Concept], may file a verified petition that he be
declared in the state of suspension of payments by the court of the province or city
in which he has resides for six (6) months prior to the filing of his petition. He shall
attach to his petition, as a minimum: (a) a schedule of debts and liabilities; (b)
an inventory of assets; and (c) a proposed agreement with his creditors.

Liquidation, on the other hand, is a judicial insolvency proceeding by

which the assets of an insolvent debtor are recovered and their value preserved
and maximized for the purpose of converting the same into money, and
discharging to the extent possible, all the claims against the insolvent debtor. Its
purpose is to reduce the debtors assets to cash, discharging its liabilities and
dividing the surplus or re-allocating the loss.
Liquidation, in contrast to suspension of payments, is available to both
individual and juridical debtors. It may be voluntary or involuntary.
Voluntary liquidation is available for individual debtors who are insolvent
under the balance sheet concept. The purpose of voluntary liquidation is for the
individual debtor to seek a discharge from his debts and liabilities, thus freeing
the debtor of legal responsibility for certain specified obligations. 7 The FRIA
explicitly provides:
Section 103. Application. - An individual debtor whose properties are not
sufficient to cover his liabilities [Balance Sheet Concept], and owing debts
exceeding Five hundred thousand pesos (Php500,000.00), may apply to be
discharged from his debts and liabilities by filing a verified petition with the
court of the province or city in which he has resided for six (6) months prior to
the filing of such petition. He shall attach to his petition a schedule of debts and
liabilities and an inventory of assets. The filing of such petition shall be an act of
insolvency.

7 Gomez-Somera, S. (2011). Credit Transactions: Notes and Cases, Vol. II, p. 1002-1003.

Involuntary liquidation, on the other hand, is available to creditors of individual

debtors provided that the requirements of the law on number of creditors or
value of claims or both is met and provided an act of insolvency is alleged and
thereafter established. The FRIA explicitly provides:
Section 105. Petition; Acts of Insolvency. - Any creditor or group of creditors with a
claim of, or with claims aggregating at least Five hundred thousand pesos
(Php500, 000.00) may file a verified petition for liquidation with the court of the
province or city in which the individual debtor resides.
The following shall be considered acts of insolvency, and 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.

The petitioning creditor/s shall post a bond in such as the court shall direct,
conditioned that if the petition for liquidation is dismissed by the court, or
withdrawn by the petitioner, or if the debtor shall not be declared an insolvent
the petitioners will pay to the debtor all costs, expenses, damages occasioned by
the proceedings and attorney's fees.

In contrast to individual debtors, a sole proprietorship, a partnership and

a corporation may undergo either rehabilitation or liquidation. They, however,
cannot properly avail of suspension of payments.
Rehabilitation refers to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan (present value recovery), more if the
debtor continues as a going concern than if it is immediately liquidated. 8 The
purpose of rehabilitation proceedings is to enable the company to gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings 9.
It is a means to reorganize a debtors financial affairs so that the debtor may
continue to exist as a financial entity, with creditors satisfying their claims from
the debtors future earnings.
There are 3 kinds of rehabilitation proceedings under the FRIA, namely,
court-supervised rehabilitation, pre-negotiated rehabilitation and out-of-court
rehabilitation.
The

first

kind

of

rehabilitation

proceeding

is

court-supervised

rehabilitation which may either be voluntary or involuntary.

8 Ibid, Sec. 4 (gg).
9 Express Investments III Private Ltd. v. Bayan Telecommunications, Inc., G.R. Nos. 174457-59, December 5,
2012, 687 SCRA 50, 86-87

In voluntary proceedings for court-supervised rehabilitation, a debtor may

only be a juridical person - either a sole proprietorship duly registered with the
Department of Trade and Industry (DTI), a partnership duly registered with the
Securities and Exchange Commission (SEC) or a corporation duly organized and
existing under Philippine laws. 10 It does not, however, include banks, insurance
companies, pre-need companies, and national and local government agencies or
units with the exception of government financial institutions other than banks
and GOCCs which shall be covered by FRIA, unless their specific charter
provides otherwise.
To initiate said proceedings, an insolvent debtor may file a verified petition
for rehabilitation with the court and on the grounds specifically provided in the
Act which must be previously approved by the following entities 11:
Debtor

When Initiated

Sole proprietorship

When approved by the owner

Partnership

When approved by a majority of the partners

Corporation

When approved by a majority vote of the board of directors or

trustees and authorized by the vote of stockholders representing at
least 2/3 of the outstanding capital stock in a stockholders
meeting duly called for the purpose or at least 2/3 of the members
(nonstock corporation) in a members meeting duly called for the
purpose

The petition shall be verified to establish the insolvency of the debtor and
the viability of its rehabilitation and include, whether as an attachment or as part
of the body of the petition, as a minimum the following:
(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency or inability to
pay its obligations as they become due;

10 Sec. 12, FRIA.

11 Ibid.

(c) The specific relief sought pursuant to this Act;

(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the
form of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors with
their addresses, amounts of claims and collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against third
parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation
receiver; and
(j) Other documents required to be filed with the petition pursuant to this Act
and the rules of procedure as may be promulgated by the Supreme Court. 12

In all cases, the petition must allege that rehabilitation of the insolvent
debtor is economically feasible and rehabilitation results in better present value
recovery for the creditors.
On

the

other

hand,

involuntary

proceedings

for

court-supervised

rehabilitation are judicial insolvency proceedings instituted by a creditor or

group of creditors against an insolvent debtor, provided that the requirements of
the law on number of creditors or value of claims, or both is met; and the
circumstance requiring rehabilitation is alleged and thereafter established. The
FRIA explicitly provides that:
Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any
creditor or group of creditors with a claim of, or the aggregate of whose claims is,
at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%)
of the subscribed capital stock or partners' contributions, whichever is higher,
may initiate involuntary proceedings against the debtor by filing a petition for
rehabilitation with the court if:
(a) there is no genuine issue of fact on 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 (60) days or that the debtor has failed generally to meet its liabilities as
they fall due; or

12 Ibid.

(b) 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.

To initiate said proceedings, the creditor/s' petition for rehabilitation shall

be verified to establish the substantial likelihood that the debtor may be
rehabilitated, and include:
(a) identification of the debtor its principal activities and its address;
(b) the circumstances sufficient to support a petition to initiate involuntary
rehabilitation proceedings under Section 13 of this Act;
(c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
(e) the names of at least three (3) nominees to the position of rehabilitation
receiver;
(f) other information that may be required under this Act depending on the form
of relief requested; and
(g) other documents required to be filed with the petition pursuant to this Act
and the rules of procedure as may be promulgated by the Supreme Court. 13

The

second

kind

of

rehabilitation

proceeding

is

pre-negotiated

rehabilitation which is commenced by the filing of a verified petition by an

insolvent debtor, by itself or jointly with any of its creditors, with the court for the
approval of a pre-negotiated Rehabilitation Plan which has been endorsed or
approved by creditors holding at least two-thirds (2/3) of the total liabilities of
the debtor, including secured creditors holding more than fifty percent (50%) of
the total secured claims of the debtor and unsecured creditors holding more than
fifty percent (50%) of the total unsecured claims of the debtor.14
The petition shall include as a minimum:
(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan, including the names of at least three
(3) qualified nominees for rehabilitation receiver; and

13 Sec. 14, FRIA.

14 Sec. 76, Ibid.

(d) a summary of disputed claims against the debtor and a report on the
provisioning of funds to account for appropriate payments should any such
claims be ruled valid or their amounts adjusted.15

The third kind of rehabilitation proceeding is out-of-court rehabilitation

which is an extrajudicial insolvency proceeding and involves the negotiation and
eventual approval of an Out-of-Court or Informal Restructuring Agreement (or an
Out-of-Court or Informal Workout Agreement, or an Out-of-Court or Informal
Rehabilitation Plan).16
Pursuant to Sec. 84 of the FRIA, an out-of-court or informal restructuring
agreement or Rehabilitation Plan must meet the following minimum
requirements:
(a) The debtor must agree to the out-of-court or informal restructuring/workout
agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least sixty-seven (67%) of the
secured obligations of the debtor;
(c) It must be approved by creditors representing at least seventy-five percent
(75%) of the unsecured obligations of the debtor; and
(d) It must be approved by creditors holding at least eighty-five percent (85%) of
the total liabilities, secured and unsecured, of the debtor.

The benefit of an out-of-court rehabilitation is that the parties may agree to a

standstill period, pending negotiation and finalization of the out-of-court or
informal restructuring/workout agreement or Rehabilitation Plan, which shall be
effective and enforceable not only against the contracting parties but also against
the other creditors: Provided, That (a) such agreement is approved by creditors
representing more than fifty percent (50%) of the total liabilities of the debtor; (b)
notice thereof is publishing in a newspaper of general circulation in the
Philippines once a week for two (2) consecutive weeks; and (c) the standstill

15 Ibid.
16 Gomez-Somera, S. (2011). Credit Transactions: Notes and Cases, Vol. II, p. 983-984. An Out-of-Court or
Informal Rehabilitation Plan is a consensual contract between an insolvent debtor and its creditors that amends
or modifies the terms of the claims against the debtor.

period does not exceed one hundred twenty (120) days from the date of
effectivity.17
Aside from rehabilitation, a sole proprietorship, a partnership and a
corporation may also avail of liquidation. The juridical debtor must be insolvent
either under the illiquidity or equity concept or balance sheet concept. In every
case, the rehabilitation of the juridical debtor should not be economically feasible
or does not result in better present value recovery for the creditors. As previously
mentioned, the purpose of liquidation is to reduce the debtors assets to cash,
discharging its liabilities and dividing the surplus or re-allocating the loss.
In the case of Philippine Veterans Bank Employees Union-NUBE v. Vega,18 the
Supreme Court distinguished liquidation from rehabilitation. In that case, the
court stated:
Liquidation, in corporation law, connotes a winding up or settling with creditors
and debtors. It is the winding up of a corporation so that assets are distributed to
those entitled to receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss.
On the opposite end of the spectrum is rehabilitation which connotes a
reopening or reorganization. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation to
its former position of successful operation and solvency.
It is crystal clear that the concept of liquidation is diametrically opposed or
contrary to the concept of rehabilitation, such that both cannot be undertaken at
the same time. (Citations omitted)

The difference between the 2 proceedings was also highlighted in the case of BPI
v. Sarabia Manor Hotel Corp.19 where the Supreme Court, citing Wonder Book
Corporation v. Philippine Bank of Communications, explained that:
17 Sec. 85, FRIA.
18 G.R. No. 105364, June 28, 2001. While the case was decided before the FRIA took effect, the distinction
between liquidation and rehabilitation is still applicable under the said Act.

19 G.R. No. 175844, July 29, 2013.

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets

that can generate more cash if used in its daily operations than sold. Its liquidity
issues can be addressed by a practicable business plan that will generate
enough cash to sustain daily operations, has a definite source of financing for its
proper and full implementation, and anchored on realistic assumptions and
goals. This remedy should be denied to corporations whose insolvency
appears to be irreversible and whose sole purpose is to delay the enforcement of
any of the rights of the creditors, which is rendered obvious by the following: (a)
the absence of a sound and workable business plan; (b) baseless and unexplained
assumptions, targets and goals; (c) speculative capital infusion or complete lack
thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or
fully depreciated.

For juridical debtors, liquidation may also be voluntary or involuntary. In

voluntary liquidation, an insolvent debtor may apply for liquidation by filing a
petition for liquidation with the court or by filing a motion to convert
rehabilitation proceedings into liquidation proceedings. The FRIA explicitly
provides:
Section 90. Voluntary Liquidation. - An insolvent debtor may apply for liquidation
by filing a petition for liquidation with the court. The petition shall be verified,
shall establish the insolvency of the debtor and shall contain, whether as an
attachment or as part of the body of the petition;
(a) a schedule of the debtor's debts and liabilities including a list of
creditors with their addresses, amounts of claims and collaterals, or
securities, if any;
(b) an inventory of all its assets including receivables and claims against
third parties; and
(c) the names of at least three (3) nominees to the position of liquidator
At any time during the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the debtor may also initiate liquidation proceedings
by filing a motion in the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into liquidation proceedings.
The motion shall be verified, shall contain or set forth the same matters required
in the preceding paragraph, and state that the debtor is seeking immediate
dissolution and termination of its corporate existence xxx

Involuntary liquidation, on the other hand, may be commenced by creditors

by filing a petition for liquidation or by filing a motion to convert rehabilitation
proceedings into liquidation proceedings. The FRIA explicitly provides:
Section 91. Involuntary Liquidation. - Three (3) or more creditors the aggregate of
whose claims is at least either One million pesos (Php1,000,000,00) or at least
twenty-five percent (25%0 of the subscribed capital stock or partner's
contributions of the debtor, whichever is higher, may apply for and seek the
liquidation of an insolvent debtor by filing a petition for liquidation of the debtor
with the court. The petition shall show that:
(a) there is no genuine issue of fact or law on the claims/s of the
petitioner/s, and that the due and demandable payments thereon have
not been made for at least one hundred eighty (180) days or that the
debtor has failed generally to meet its liabilities as they fall due; and
(b) there is no substantial likelihood that the debtor may be rehabilitated.
At any time during the pendency of or after a rehabilitation court-supervised or
pre-negotiated rehabilitation proceedings, three (3) or more creditors whose
claims is at least either One million pesos (Php1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital or partner's contributions of the debtor,
whichever is higher, may also initiate liquidation proceedings by filing a motion
in the same court where the rehabilitation proceedings are pending to convert
the rehabilitation proceedings into liquidation proceedings. The motion shall be
verified, shall contain or set forth the same matters required in the preceding
paragraph, and state that the movants are seeking the immediate liquidation of
the debtor.
If the petition or motion is sufficient in form and substance, the court shall issue
an Order:
(1) directing the publication of the petition or motion in a newspaper of
general circulation once a week for two (2) consecutive weeks; and
(2) directing the debtor and all creditors who are not the petitioners to
file their comment on the petition or motion within fifteen (15) days from
the date of last publication.

The court may also order the conversion of rehabilitation proceedings to

liquidation proceedings during the pendency of court-supervised or prenegotiated rehabilitation proceedings.20

20 Sec. 92, FRIA.