Cred - Pledge To Fria

V.
PLEDGE AND MORTGAGE

B. OBLIGATIONS SECURED
A. GENERAL CONCEPTS
Art. 2086 The provisions of article 2052 are applicable to a pledge or
mortgage. (n)
Art. 2085 The following requisites are essential to the contracts of pledge
and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;
Art. 2052 A guaranty [pledge or mortgage] cannot exist without a valid
(2) That the pledgor or mortgagor be the absolute owner of the obligation.
thing pledged or mortgaged;
Nevertheless, a guaranty may be constituted to guarantee the performance
(3) That the persons constituting the pledge or mortgage have the of a voidable or an unenforceable contract. It may also guarantee a natural
free disposal of their property, and in the absence thereof, that obligation. (1824a)
they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. (1857)
Art. 2091 The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory
condition. (1861)
Art. 2087 It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor. (1858) As accessory obligations, the validity of a pledge and mortgage is
dependent on the existence of a valid principal obligation, whether the
latter is voidable, unenforceable, natural, pure, or conditional.
Security transactions constituted to secure the fulfillment of a principal
obligation The consideration of a pledge or mortgage is the very consideration of the
principal contract, from which they receive their right, and without which
Unlike guaranty and surety, a pledge and mortgage are real security they cannot exist as independent contracts.
transactions
Essence: when the principal obligation becomes due, the property pledged C. CONTRACT TO PLEDGE OR TO MORTGAGE
or mortgaged (the collateral) may be alienated for purposes of payment to
the creditor of the principal obligation
Art. 2092 A promise to constitute a pledge or mortgage gives rise only to
It is essential that the pledgor or mortgagor be the absolute owner of the
a personal action between the contracting parties, without prejudice to the
collateral and that it have the free disposal of the property; or that it be
criminal responsibility incurred by him who defrauds another, by offering
legally authorized to constitute the pledge or mortgage, otherwise the
in pledge or mortgage as unencumbered, things which he knew were
same is void
subject to some burden, or by misrepresenting himself to be the owner of
the same. (1862)
A pledge or mortgage is void and ineffective if it were constituted over
future property
However, the law allows third persons, which are not parties to the A promise to constitute a pledge or mortgage is a valid consensual
principal obligation, to secure the latter by pledging or mortgaging their contract.
own property
Pledgor or mortgagor remains the owner of the collateral; no title passes

to the creditor
If there may have been delivery of the collateral, the delivery is only to
secure the fulfillment of the principal obligation and does not empower the
creditor to convey the collateral in favor of another person
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F. PACTUM COMMISSORIUM
D. REMEDIES OF PLEDGEE AND MORTGAGEE
The creditor (the pledgee or mortgagee) may institute a foreclosure,
either to gain title, or to force a sale, in order to satisfy the unpaid Art. 2087 It is also of the essence of these contracts that when the
obligation secured by the collateral. A foreclosure is a legal proceeding to principal obligation becomes due, the things in which the pledge or
terminate a pledgor’s or mortgagor’s interest in the collateral mortgage consists may be alienated for the payment to the creditor. (1858)
Generally, the contract and a statute may authorize a power-of-sale
foreclosure, or the sale of the collateral at a non-judicial public sale by a
public official, the creditor, or trustee.
Art. 2088 The creditor cannot appropriate the things given by way of
If the principal obligation becomes due and the debtor defaults, the pledge or mortgage, or dispose of them. Any stipulation to the contrary is
pledgee or mortgagee may elect to do two things: null and void. (1859a)
 To foreclose the pledge or mortgage, in accordance with its
terms; or
 To elect and waive the security and bring an action for specific The essence of a pledge or mortgage is that when the debtor defaults in
performance to recover the indebtedness. the fulfillment of the obligation, the collateral may be alienated for
purposes of payment to the creditor. However, the law requires resort
The remedies available are alternative and not cumulative, and the to a legal proceeding (foreclosure) to terminate the debtor’s (pledger or
election of one remedy operates as a waiver of the other. mortgagor) ownership of the collateral.
A stipulation that allows the creditor to appropriate or otherwise

dispose of the collateral, in contravention of the provisions of foreclosure,
E. INDIVISIBILITY OF A PLEDGE OR MORTGAGE is considered a pactum commissorium or pacto comisorio, and is null
and void.
Art. 2089 A pledge or mortgage is indivisible, even though the debt may For there to be a case of pactum commissorium, it is first necessary that a
be divided among the successors in interest of the debtor or of the pledge or mortgage does exist and is valid. No pledge or mortgage, no
creditor. pactum commissorium.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for 1. ELEMENTS
the proportionate extinguishment of the pledge or mortgage as long as the (a) There is property pledged or mortgaged (collateral) by way
debt is not completely satisfied. of security for the payment of the principal obligation, and
(b) There is a stipulation for automatic appropriation by the
Neither can the creditor's heir who received his share of the debt return creditor of the collateral in case of non-payment of the principal
the pledge or cancel the mortgage, to the prejudice of the other heirs who obligation within the stipulated period.
have not been paid.
A case of pactum commissorium is null and void for being contrary to law
From these provisions is excepted the case in which, there being several
and public policy, as it contravenes the express prohibition stated in Art.
things given in mortgage or pledge, each one of them guarantees only a
2088. [Editor’s Note]
determinate portion of the credit.
When the debtor defaults, the creditor is merely entitled to foreclosure,
The debtor, in this case, shall have a right to the extinguishment of the
but he is not authorized to appropriate the collateral in order to recover
pledge or mortgage as the portion of the debt for which each thing is
the amount due.
specially answerable is satisfied. (1860)
Nevertheless, a pledger or mortgageor may validly sell the collateral to
the pledgee or mortgagee for the amount of the debt, when the latter
becomes due, if the parties stipulate upon the sale, or mere promise to
Art. 2090 The indivisibility of a pledge or mortgage is not affected by the sell, of the collateral should the obligation secured by it not be complied
fact that the debtors are not solidarily liable. (n) with in time, stipulating the conditions of the alienation;
2. EFFECT ON PLEDGE OR MORTGAGE

Indivisibility of a pledge or mortgage is understood in the sense that The nullity of the pactum commissorium does not substantially affect the
each and every parcel of the collateral answers for the totality of the debt. validity of the contract of pledge or mortgage, and it subsists although
the parties have not agreed on the manner by which the creditor shall
It proscribes the foreclosure of only a portion of the collateral or a recover its credit.
number of the several properties pledged or mortgaged corresponding to
the unpaid portion of the debt where before the foreclosure proceedings In such cases, the provisions of the law on foreclosure sale shall apply.
the debtor partially paid the total outstanding obligation.
DBP v. CA (1998) – Davide, J.
A debtor who has partially fulfilled the obligation/ paid a part of the debt Petitioner: Development Bank of the Philippines
cannot ask for the proportionate extinguishment of the pledge or Respondents: Court of Appeals; Lydia Cuba
mortgage as long as the debt is not completely satisfied. Concept: Pactum Commissorium
Intended for the protection of the pledgee and mortgagee, as it refers Brief facts: Cuba’s loan from DBP was secured by two deeds of
to the release of the pledge or mortgage which secures the satisfaction of assignment over her fishpond leasehold rights granted by the government.
the indebtedness and naturally presupposes that the pledge or mortgage When she defaulted on her payments, DBP appropriated said rights
exists. without foreclosure proceedings and sold it in a public bidding. Cuba
contends that this violates the prohibition on pactum commissorium
But Art. 2089 presupposes several heirs of the debtor or creditor and does provided in Art. 2088
not apply in the absence of such stipulation.
Doctrine: For a mortgage to be considered as pactum commissorium, thus
void, the two requisites must be present: (1) that there should be a
property mortgaged by way of security for the payment of the principal
obligation; and (2) that there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged. G. EQUITABLE MORTGAGE
Natalia P. Bustamante vs. Spouses Rodito F. Rosel and Normal A. Rosel—

Art. 1602 The contract shall be presumed to be an equitable mortgage, in
Pardo, J.
any of the following cases:
Petitioner: Natalia P. Bustamante
(1) When the price of a sale with right to repurchase is unusually
Respondents: Rodito F. Rosel and Norma A. Rosel (Spouses Rosel) inadequate;
Concept: Pactum Commissorium (2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase
Brief Facts: The Bustamantes borrowed money from the Rosels. The loan another instrument extending the period of redemption or
was secured by collateral (land). It was stipulated that in case of non- granting a new period is executed;
payment, the Rosels could purchase the land, with the unpaid principal and (4) When the purchaser retains for himself a part of the purchase
interest considered as downpayment. price;
(5) When the vendor binds himself to pay the taxes on the thing
Doctrine: The elements of pactum commissorium are as follows: 1) there sold;
should be a property mortgaged by way of security for the payment of the (6) In any other case where it may be fairly inferred that the real
principal obligation, and 2) there should be a stipulation for automatic intention of the parties is that the transaction shall secure the
appropriation by the creditor of the thing mortgaged in case of non- payment of a debt or the performance of any other obligation.
payment of the principal obligation within the stipulated period. In any of the foregoing cases, any money, fruits, or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest
which shall be subject to the usury laws. (n)
Ong v Roban (2008) – Carpio-Morales, J.
Petitioner: Wilfredo N. Ong and Edna Shiela Paguio-Ong
Respondents: Roban Lending Corporation
Concept: Pactum Commissorium Art. 1603 In case of doubt, a contract purporting to be a sale with right to
repurchase shall be construed as an equitable mortgage. (n)
Brief Facts: Sps. Ong obtained obtained several loans from respondent
Roban Lending Corporation. These loans were secured by real estate
mortgage on Spouses Ong‘s parcel of lands. Ong and Roban executed
several agreements - dacion in payment wherein spouses Ong assigned
their mortgaged properties to Roban to settle their total obligation and Art. 1604 The provisions of article 1602 shall also apply to a contract
Memorandum of Agreement (MOA). Spouses On.g filed a complaint to purporting to be an absolute sale. (n)
declare the mortgage contract, dacion in payment agreement, and MOA
void. Spouses Ong allege that the dacion in payment agreement is pactum
commissorium
Art. 1605 In the cases referred to in articles 1602 and 1604, the apparent
Doctrine: Lack of provisions for foreclosure proceedings may be evidence vendor may ask for the reformation of the instrument. (n)
of pactum commissorium
Equitable mortgage: a contract, which, although lacking in some

formality, or form or words, or other requisites by a statute, nevertheless
reveals the intention of the parties to charge property as security for a
debt, but contains nothing impossible or contrary to law.
Essential requisites of an equitable mortgage:

(1) The parties entered into a contract denominated as a
contract of sale; and
(2) Their true intention was to secure an existing debt by way of
mortgage.
Why does the law provide for equitable mortgages? It is to prevent

the circumvention of the laws on usury and the prohibition against
pactum commissórium.
Pacto de retro sales have been frequently used to conceal the true nature
of the contract, i.e., a loan secured by a mortgage.
What quantum of evidence is needed to prove an equitable

mortgage? It may be proven in court by the apparent vendor or vendor a
retro to be one of a loan with mortgage through, as with any civil case,
preponderance of evidence. Parole evidence becomes competent and
admissible.

VI. PLEDGE
C. OBLIGATIONS SECURED
A. GENERAL CONCEPTS
A pledge may exceptionally secure after-incurred obligation so long as
these debts that are yet to be contracted (or future debts) are accurately
Art. 2085 The following requisites are essential to the contracts of pledge described.
and mortgage:
Dragnet clause: a stipulation specifically phrased to subsume all debts,
(1) That they be constituted to secure the fulfillment of a principal whether past or future.
obligation;
It is carefully and strictly construed, although the pledge containing
(2) That the pledgor or mortgagor be the absolute owner of the thing such provision is valid and legal.
pledged or mortgaged;
The amounts stated as consideration in the pledge do not limit the
(3) That the persons constituting the pledge or mortgage have the free amounts for which the pledge may stand as security if from the four
disposal of their property, and in the absence thereof, that they be legally corners of the whole instrument the intent to secure future and other
authorized for the purpose. indebtedness can be gathered.
Third persons who are not parties to the principal obligation may secure A pledge given to secure future debts is a continuing security and is not
the latter by pledging or mortgaging their own property. (1857) discharged by repayment of the amount named in the pledge, until the full
amount of the principal obligation is paid.
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor. (1858) D. OBJECT OF PLEDGE
Art. 2123 With regard to pawnshops and other establishments, which are Art. 2094 All movables which are within commerce may be pledged,
engaged in making loans secured by pledges, the special laws and provided they are susceptible of possession. (1864)
regulations concerning them shall be observed, and subsidiarily, the
provisions of this Title. (1873a) Art. 2095 Incorporeal rights, evidenced by negotiable instruments, bills of
lading, shares of stock, bonds, warehouse receipts and similar documents
Pledge or conventional pledge (pignus in Roman law): a real security may also be pledged. The instrument proving the right pledged shall be
transaction constituted to secure the fulfillment of a principal obligation delivered to the creditor, and if negotiable, must be indorsed. (n)
by the absolute owner (the pledgor) of a movable property who has free
disposal of the property, or in the absence thereof, is legally authorized for Art. 416 The following things are deemed to be personal property:
the purpose, subjecting the pledged property (or collateral) to the
condition that when the principal obligation becomes due, the collateral (1) Those movables susceptible of appropriation which are not included in
may be alienated for payment to the creditor. the preceding article;
How is pledge perfected? It is perfected by mere delivery of the movable (2) Real property which by any special provision of law is considered as
property to the creditor (the pledge) or to a third person. personalty;
In case of doubt as to whether a transaction is a pledge or dación en pago, (3) Forces of nature which are brought under control by science; and
the presumption is that it is a pledge.
(4) In general, all things which can be transported from place to place
without impairment of the real property to which they are fixed. (335a)
B. FORM OF PLEDGE
Art. 417 The following are also considered as personal property:
Art. 2096 A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear (1) Obligations and actions which have for their object movables or
in a public instrument. (1865a) demandable sums; and
(2) Shares of stock of agricultural, commercial and industrial entities,

although they may have real estate. (336a)
What can be pledged? Any of the following can be pledged:

1) Movables within commerce and susceptible of possession
2) Incorporeal rights evidenced by:
Negotiable instruments
Bills of lading
Shares of stock
Bonds
Warehouse receipts
And similar documents

Estate of George Litton v. Mendoza (1988) – Gancayco, J.
E. OWNERSHIP OF COLLATERAL Concept: Pledge: Ownership of Collateral
Contracts Involved:
Art. 2103 Unless the thing pledged is expropriated, the debtor continues (a) Sale on Credit between Bernal spouses and Alfonso Tan
to be the owner thereof.
(b) Contract of Pledge (Deed of Assignment) by Alfonso Tan to
George Litton, Sr.
Nevertheless, the creditor may bring the actions which pertain to the
owner of the thing pledged in order to recover it from, or defend it against
Brief Facts: Tan brought an action against Mendoza for the collection of
a third person. (1869)
a sum of money in relation to the credit granted by Tan to facilitate the
sale to the Bernals of textile materials. Pending the resolution of the case,
Art. 2102 If the pledge earns or produces fruits, income, dividends, or he assigned his litigatious credit (in the amount of P76,000) to George
interests, the creditor shall compensate what he receives with those which Litton, Sr. to secure his obligation to Litton, Sr. Later, Tan and Mendoza
are owing him; but if none are owing him, or insofar as the amount may entered into a compromise agreement waiving all rights and actions
exceed that which is due, he shall apply it to the principal. Unless there is (including the right assigned to Litton, Sr.) against each other and
a stipulation to the contrary, the pledge shall extend to the interest and declaring Mendoza absolved from liability. When the compromise
earnings of the right pledged. agreement was approved, Mendoza sought to have the CA resolution
holding him liable set aside.
In case of a pledge of animals, their offspring shall pertain to the pledgor
or owner of animals pledged, but shall be subject to the pledge, if there is Doctrine: In guaranteeing an obligation, the pledgor remains the owner
no stipulation to the contrary. (1868a) of the collateral (what is pledged; in this case, the litigatious credit).
However, this right of ownership (and the right to alienate pursuant to
Art. 2101 The pledgor has the same responsibility as a bailor in said ownership) is not absolute because of the restriction provided by law
commodatum in the case under article 1951. (n) under Art. 2097, NCC, requiring the consent of the pledgee to the
alienation. Ownership of said collateral is only upon the granting of the
consent by the pledgee. Absent such consent, the sale (or assignment) is
Art. 1951 The bailor who, knowing the flaws of the thing loaned, does not
invalidated.
advise the bailee of the same, shall be liable to the latter for the damages
which he may suffer by reason thereof. (1752)
F. RIGHTS OF THIRD PARTY PLEDGOR
Art. 2108 If, without the fault of the pledgee, there is danger of
destruction, impairment, or diminution in value of the thing pledged, he
may cause the same to be sold at a public sale. The proceeds of the auction Art. 2120 If a third party secures an obligation by pledging his own
shall be a security for the principal obligation in the same manner as the movable property under the provisions of article 2085 he shall have the
thing originally pledged. (n) same rights as a guarantor under articles 2066 to 2070, and articles 2077
to 2081. He is not prejudiced by any waiver of defense by the principal
obligor. (n)
Art. 2112 The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the thing pledged.
This sale shall be made at a public auction, and with notification to the Art. 2117 Any third person who has any right in or to the thing pledged
debtor and the owner of the thing pledged in a proper case, stating the may satisfy the principal obligation as soon as the latter becomes due and
amount for which the public sale is to be held. If at the first auction the demandable. (n)
thing is not sold, a second one with the same formalities shall be held; and
if at the second auction there is no sale either, the creditor may appropriate Art. 2066 The guarantor who pays for a debtor must be indemnified by
the thing pledged. In this case he shall be obliged to give an acquittance the latter.
for his entire claim. (1872a) The indemnity comprises
Art. 2097 With the consent of the pledgee, the thing pledged may be (1) The total amount of the debt;
alienated by the pledgor or owner, subject to the pledge. The ownership of (2) The legal interests thereon from the time the payment was
the thing pledged is transmitted to the vendee or transferee as soon as the made known to the debtor, even though it did not earn interest
pledgee consents to the alienation, but the latter shall continue in for the creditor;
possession. (n) (3) The expenses incurred by the guarantor after having notified
the debtor that payment had been demanded of him;
It is essential that the pledgor be the absolute owner of the collateral and (4) Damages, if they are due. (1838a)
that it have the free disposal of the property, or, in the absence of the
right of free disposition, that it be legally authorized to constitute the Art. 2067 The guarantor who pays is subrogated by virtue thereof to all
pledge. the rights which the creditor had against the debtor.
The pledgor continues to be the owner of the collateral unless the following
occur: If the guarantor has compromised with the creditor, he cannot demand of
1) Expropriation of the collateral the debtor more than what he has really paid. (1839)
2) Sale by public auction under Articles 2108 and 2112
3) Voluntary sale under Article 2097
Art. 2068 If the guarantor should pay without notifying the debtor, the
latter may enforce against him all the defenses which he could have set up
The pledgor’s right to alienate is restricted by the requirement imposed by
against the creditor at the time the payment was made. (1840)
law for the consent of the pledge to the alienation. Ownership passes to
buyer when pledgee grants consent, otherwise, the sale is invalid.
Art. 2069 If the debt was for a period and the guarantor paid it before it
became due, he cannot demand reimbursement of the debtor until the
expiration of the period unless the payment has been ratified by the
debtor. (1841a)
Art. 2070 If the guarantor has paid without notifying the debtor, and the
latter not being aware of the payment, repeats the payment, the former has
no remedy whatever against the debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if the guarantor was
prevented by a fortuitous event from advising the debtor of the payment,

and the creditor becomes insolvent, the debtor shall reimburse the 1. RIGHT OF RETENTION
guarantor for the amount paid. (1842a)
Art. 2098 The contract of pledge gives a right to the creditor to retain the
Art. 2079 An extension granted to the debtor by the creditor without the thing in his possession or in that of a third person to whom it has been
consent of the guarantor extinguishes the guaranty. The mere failure on delivered, until the debt is paid. (1866a)
the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension of time referred to herein. Art. 2109 If the creditor is deceived on the substance or quality of the
(1851a) thing pledged, he may either claim another thing in its stead, or demand
immediate payment of the principal obligation. (n)
Art. 2080 The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor they cannot be Art. 2099 The creditor shall take care of the thing pledged with the
subrogated to the rights, mortgages, and preference of the latter. (1852) diligence of a good father of a family; he has a right to the reimbursement
of the expenses made for its preservation, and is liable for its loss or
Art. 2081 The guarantor may set up against the creditor all the defenses deterioration, in conformity with the provisions of this Code. (1867)
which pertain to the principal debtor and are inherent in the debt; but not
those that are personal to the debtor. (1853) Art. 2100 The pledgee cannot deposit the thing pledged with a third
person, unless there is a stipulation authorizing him to do so.
Although the principal debtor may be the pledgor, the law allows third
persons (or third party pledgors), which are not parties to the principal The pledgee is responsible for the acts of his agents or employees with
obligation, to secure the latter by pledging their own property. respect to the thing pledged. (n)
Third party pledgor: one who is not a party to the principal obligation Art. 2104 The creditor cannot use the thing pledged, without the
but secures the latter by pledging his own property. authority of the owner, and if he should do so, or should misuse the thing
in any other way, the owner may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing pledged requires its use, it
G. RIGHT TO POSSESSION must be used by the creditor but only for that purpose. (1870a)
Art. 2093 In addition to the requisites prescribed in article 2085, it is Art. 2106 If through the negligence or wilful act of the pledgee, the thing
necessary, in order to constitute the contract of pledge, that the thing pledged is in danger of being lost or impaired, the pledgor may require
pledged be placed in the possession of the creditor, or of a third person by that it be deposited with a third person. (n)
common agreement. (1863)
Possession by the pledgee of the collateral constitutes the pledge.
Art. 2110 If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall be The right of retention is a means or device by which the pledgee is able to
void. obtain payment of the principal obligation.
If subsequent to the perfection of the pledge, the thing is in the possession 2. RIGHT TO PAYMENT
of the pledgor or owner, there is a prima facie presumption that the same
has been returned by the pledgee. This same presumption exists if the Art. 2102 If the pledge earns or produces fruits, income, dividends, or
thing pledged is in the possession of a third person who has received it interests, the creditor shall compensate what he receives with those which
from the pledgor or owner after the constitution of the pledge. (n) are owing him; but if none are owing him, or insofar as the amount may
exceed that which is due, he shall apply it to the principal. Unless there is
The primary obligation of the pledgor is the delivery, i.e., the formal act of a stipulation to the contrary, the pledge shall extend to the interest and
transferring, or the giving or yielding of possession or control, of the earnings of the right pledged.
collateral.
In case of a pledge of animals, their offspring shall pertain to the pledgor
A pledge is a real contract. or owner of animals pledged, but shall be subject to the pledge, if there is
no stipulation to the contrary. (1868a)
If the creditor returns the thing pledged, the pledge is extinguished.
Art. 2118 If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall
apply the same to the payment of his claim, and deliver the surplus, should
there be any, to the pledgor. (n)
In case of certain types of collateral, Articles 2102 and 2118 give the
pledgee not only the right to possession but also the right to payment of
the principal obligation without the need of a foreclosure sale.
Those mentioned in the said articles are used to compensate for the
interest, then to the principal. If the principal is fully paid as a result, the
pledge is extinguished.

Manila Banking Corp. v. Teodoro, Jr. and Teodoro – Bidin, J.
Concept: Pledge; Right to Possession; Right to Payment
Contracts: 3 Promissory Notes, and a “Deed of Assignment of
Receivables” (later considered as one of pledge)
Brief Facts: Initially, the Teodoros and MBC entered into an agreement
where the Teodoros assigned its title and rights over credit against EEA
(now PFC) to MBC, in order to be able to make loans from the MBC. Two
years later, the Teodoros made such loans, as evidenced by promissory
notes. When the Teodoros failed to pay, MBC tried to collect money from
the PFC. When it failed, MBC went after the Teodoros. Now the
Teodoros are claiming that by the virtue of the assignment of credit, their
obligation had been extinguished.
Doctrine: Even if the instrument allows for the full alienation of the title
and rights, it may still be considered as a contract of pledge “if the debt
continues in existence and is not discharged by the transfer, and that
accordingly, the use of the terms ordinarily importing conveyance, of
absolute ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and therefore do
not unqualifiedly indicate a transfer of absolute ownership, in the absence
of clear and ambiguous language or other circumstances excluding an
intent to pledge.”
Chu v. CA (1989) – Grino-Aquino, J.

Concept: Pledge; Right to Possession; Right to Payment
Contracts Involved:
(a) Sale on Credit between Mrs. Chu and CAMS Trading
(b) Contract of Pledge (Deeds of Assignment) between Mrs. Chu and
CAMS Trading
(c) Contract of Loan (Time Deposit) between Mrs. Chu and Family
Savings Bank
Brief Facts: Mrs. Chu assigned her time deposit certificates to CAMS
Trading as collateral for cement she purchased from the latter, on credit.
When she defaulted in payment, CAMS Trading encashed the time deposit
certificates, with Mrs. Chu’s conformity. However, after the encashment,
Mrs. Chu demanded its restoration, arguing that the encashment is a pacto
commissorio prohibited by law.
Doctrine: Where the security for the debt is also money deposited in the
bank, it is not illegal for the creditor to encash the time deposit certificates
to pay the debtor’s overdue obligation, with the latter’s consent.

VII. REAL ESTATE MORTGAGE
A. GENERAL CONCEPTS General Rule: Real Estate Mortgage is limited to the principal
obligations mentioned in the contract of real estate mortgage.
Art. 2085 The following requisites are essential to the contracts of pledge Literal accuracy in describing the obligations is not required, but the
and mortgage: description must be correct and full enough to direct the attention to the
sources of the correct information, and must not mislead or deceive.
obligation; Terms of the contract must be sufficiently clear to put all parties who may
have occasion to deal with the collateral upon inquiry.
(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged; Exceptions: It may also secure future advancements or future debts so
long as these debts that are yet to be contracted are also accurately
(3) That the persons constituting the pledge or mortgage have the free described.
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose. Thus, most real estate mortgages contain a stipulation known as dragnet
or blanket mortgage clause, which is specifically phrased to subsume all
Third persons who are not parties to the principal obligation may secure debts, whether past or future.
the latter by pledging or mortgaging their own property.
Dragnet clause shall be carefully and strictly construed.
principal obligation becomes due, the things in which the pledge or The amount stated as consideration in the mortgage contract do not limit
mortgage consists may be alienated for the payment to the creditor. the amounts for which the mortgage may stand as security, provided that
the instrument reveals the intention to secure future and other
It is a real security transaction constituted to secure the fulfillment of a indebtedness.
principal obligation by the absolute owner (the mortgagor) of immovable
or alienable real rights, which has free disposal of the property, and in the A real estate mortgage given to secure future debts is a continuing
absence thereof, is legally authorized for the purpose; subjecting the security and is not discharged by repayment of the amount named in the
mortgaged property (or collateral) to the condition that when the real estate mortgage, until the full amount of the principal obligation is
principal obligation becomes due, the collateral may be alienated for paid.
payment to the creditor (the mortgagee)
Prudential Bank v. Alviar (2005) – Tinga, J.
Petitioner: Prudential Bank
Respondent: Don A. Alviar and Georgia B. Alviar
B. FORM OF REAL ESTATE MORTGAGE
Brief Facts: Sps. contracted a loan amounting to P250,000 from
Art. 2125 In addition to the requisites stated in Article 2085, it is Prudential Bank, secured by a real estate mortgage with a blanket
indispensable, in order that a mortgage may be validly constituted, that mortgage clause. Several other loans were contracted by the spouses with
the document in which it appears be recorded in the Registry of Property. their own securities. Prudential applied for the foreclosure of the real
If the instrument is not recorded, the mortgage is nevertheless binding estate mortgage for the failure of the spouses to pay 3 loans evidenced by 3
between the parties. promissory notes (Loans 1-3).
The persons in whose favor the law establishes a mortgage have no other Doctrine: Mortgages given to secure future advancements, or those with
right than to demand the execution and the recording of the document in “blanket mortgage clauses” and “dragnet clauses” are valid and legal
which the mortgage is formalized. contracts. The mortgage will not secure subsequent obligations if such
obligations have separate securities provided. The SC followed the 2nd
Art. 2131 The form, extent and consequences of a mortgage, both as to its school of thought that a “blanket mortgage clause” will not secure a note
constitution, modification and extinguishment, and as to other matters not that secures in its entirety a subsequent obligation. The “blanket mortgage
included in this Chapter, shall be governed by the provisions of the clause” will only secure the portion not covered by the security of the
Mortgage Law and of the Land Registration Law. subsequent obligation.
To bind third parties, a real estate mortgage must be recorded in the

Registry of Property.
An unregistered or unrecorded real estate mortgage still binds the

parties to the mortgage, but it only gives the mortgagee the right to
demand the execution and recording of the real estate mortgage.

1. AFTER ACQUIRED PROPERTIES
D. OBJECT OF REAL ESTATE MORTGAGE
Stipulation in a registered real estate mortgage that all property taken in
Art. 2124 Only the following property may be the object of a contract of exchange or replacement by the mortgagor (after acquired property)
mortgage: shall become subject to the mortgage is binding  real estate mortgage
need not be registered a second time in order to bind the after-acquired
(1) Immovables; properties and affect third parties
(2) Alienable real rights in accordance with the laws, imposed upon
immovables. People’s Bank and Trust Co. v. Dahican Lumber Co. (1967) – Dizon, J.
Plaintiff-Appellants: People’s Bank and Trust Co. (PBTC) and Atlantic,
Nevertheless, movables may be the object of a chattel mortgage. Gulf and Pacific Co. of Manila (AGPM)
Defendant-Appellants: Dahican Lumber Co (DALCO), Dahican
Art. 415 The following are immovable property: American Lumber Corp (DAMCO), and Connell Bros. Co.
(1) Land, buildings, roads and constructions of all kinds adhered to the Brief Facts: DALCO executed 2 deeds of mortgage in favor of AGP on
soil; the one hand and PBTC on the other, in view of its obligations to both. In
both deeds of mortgage, it was stated that properties acquired thereafter
(2) Trees, plants, and growing fruits, while they are attached to the land or would be immediately subject to the lien under the 2 deeds of mortgage.
form an integral part of an immovable; After the execution of the 2 deeds, DALCO bought machines, parts and
supplies, allegedly from Connell and DAMCO. Later on, DALCO
(3) Everything attached to an immovable in a fixed manner, in such a way rescinded the sale it had with Connell and DAMCO. AGP and PBTC
that it cannot be separated therefrom without breaking the material or protested, arguing that they were already covered by the lien.
deterioration of the object;
Doctrine: Stipulations that “after acquired” properties are to be
(4) Statues, reliefs, paintings or other objects for use or ornamentation, immediately subject to the lien are not unjust nor immoral; they are
placed in buildings or on lands by the owner of the immovable in such a commonplace and actually logical when the collateral is perishable, subject
manner that it reveals the intention to attach them permanently to the to wear and tear or is intended for resale.
tenements;
(5) Machinery, receptacles, instruments or implements intended by the 2. EFFECT AND EXTENT
owner of the tenement for an industry or works which may be carried on
in a building or on a piece of land, and which tend directly to meet the Art. 2126 The mortgage directly and immediately subjects the property
needs of the said industry or works; upon which it is imposed, whoever the possessor may be, to the fulfillment
of the obligation for whose security it was constituted.
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places
of similar nature, in case their owner has placed them or preserves them
with the intention to have them permanently attached to the land, and Art. 2127 The mortgage extends to the natural accessions, to the
forming a permanent part of it; the animals in these places are included; improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
(7) Fertilizer actually used on a piece of land; granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of declarations, amplifications and limitations established by law, whether the
the bed, and waters either running or stagnant; estate remains in the possession of the mortgagor, or it passes into the
hands of a third person.
(9) Docks and structures which, though floating, are intended by their
nature and object to remain at a fixed place on a river, lake, or coast; Art. 2129 The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the
(10) Contracts for public works, and servitudes and other real rights over property which said third person possesses, in the terms and with the
immovable property. formalities which the law establishes.
Alienable real rights – includes rights, title and interest in a contract of Under Art. 2126, a registered or recorded real estate mortgage is a right
lease, as well as the rights, title, and interest acquired in the land on which in rem
the building was constructed.
Right in rem: a lien or legal right or interest that a creditor has in
Consequently, an assignment by way of guaranty of such rights is a real another’s property whoever its owner may be
estate mortgage, inasmuch as it is executed to guarantee a principal
obligation. The real estate mortgage is inseparable from the collateral and until
discharged, follows the property
Although dominated an assignment, since its purpose is to guarantee a
principal obligation, and it is not an absolute conveyance of title that The sale of the property cannot affect or release the mortgage; the
confers ownership on the assignee, then it is a mortgage; especially if it is purchaser of the collateral is bound to acknowledge and respect the
stipulated that if the assignor should comply with a principal obligation, encumbrance, whether the transfer to them has the consent of the
the assignment would become null and void, otherwise it would remain in mortgagee or not
full force.

Star Two (SPV-AMC) Inc. v. Paper City Corp. – Perez, J.
Petitioner: Star Two (SPV-AMC) Inc. (note: it substituted RCBC in this E. RIGHT TO ALIENATE REAL ESTATE MORTGAGE CREDIT
action)
Respondent: Paper City Corp. of the Phils.(PC)
Art. 2128 The mortgage credit may be alienated or assigned to a third
Brief Facts: PC entered into a loan agreement with RCBC, secured by person, in whole or in part, with the formalities required by law.
chattel mortgages over its machineries. Later on, this was novated into an
Mortgage Trust Indenture with 2 more banks and now secured by real Art. 1625 An assignment of a credit, right or action shall produce no
estate mortgages over the lands and buildings of PC. When PC defaulted, effect as against third person, unless it appears in a public instrument, or
an extrajudicial foreclosure sale was executed. A dispute arose when PC the instrument is recorded in the Registry of Property in case the
moved to take the machineries out of the foreclosed lands and buildings, assignment involves real property.
contending that they were not part of the real estate mortgage and
consequently, not covered by the foreclosure. RCBC argued otherwise. Art. 1627 The assignment of a credit includes all the accessory rights,
such as a guaranty, mortgage, pledge or preference.
Doctrine:
1. Much as real property may be considered as personalty for a chattel
Right to alienate the real estate mortgage credit: the right of the
mortgage, the reverse is also true; personalty may be the subject of a
mortgagee to assign its rights under the principal obligation secured by
real estate mortgage.
the real estate mortgage
2. Accessory follows the principal.
3. Bischoff v. Pomar and Cia. General de Tabacos: Even if the
The mortgagee does not become the owner of the collateral, but it owns
machinery were not expressly included in the mortgage, the (old)
the real estate mortgage credit and may alienate or assign it to a third
Mortgage Law provides that chattels permanently located in a
person
building, either useful or ornamental, or for the service of some
industry even though they were placed there after the creation of
the mortgage, shall be deemed part of the mortgage, provided they
belong to the owner of the mortgaged land.
F. RIGHT TO ALIENATE COLLATERAL
Art. 2085 The following requisites are essential to the contracts of pledge
and mortgage:

obligation;
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.
Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.
Art. 2130 A stipulation forbidding the owner from alienating the

immovable mortgaged shall be void.
The mortgagor remains to be the owner of the collateral and retains the
right to dispose (jus disponendi), as an attribute of ownership
Pactum de non alienando (Sp. pacto de non alienando) is prohibited by Art.

2130
Pactum de non alienando:

(a) Stipulations forbidding the mortgagor from selling the
collateral, and
(b) Stipulations forbidding the mortgagor from selling the
collateral without the consent of the mortgagee
Why (b) is a violation of Art. 2130: it achieves the same intent and purpose
of a stipulation forbidding the mortgagor from alienating the collateral.
A stipulation prohibiting the mortgagor from entering into second or

subsequent mortgages is valid since there is no law forbidding it
A grant of right of first refusal in favor of the mortgagee is valid

Consideration for the real estate mortgage is the same for the right of first
refusal
Garcia v. Villar (2012) – Leonardo-De Castro, J.

Petitioner: Pablo P. Garcia
Respondent: Yolanda Valdez Villar

Brief Facts: Galas and Pingol obtained a loan from Villar and secured
payment by virtue of a Real Estate Mortgage constituted over real G. FORECLOSURE OF REAL ESTATE MORTGAGE
property Galas owned. Galas and Pingol obtained another loan from
Garcia and mortgaged the same real property previously mortgaged to If the principal obligation becomes due and the debtor defaults, the
Villar. Thereafter, Galas sold the subject property to Villar. Garcia filed a creditor, as mortgagee, may elect to foreclose the collateral
complaint for foreclosure and damages against Villar, alleging that the
sale was invalid, it being done without his prior consent. Foreclosure of a real estate mortgage may be judicial or extrajudicial
Doctrine: The mortgagor in a Real Estate Mortgage retains ownership
over the mortgaged property and may validly alienate the same. A 1. JUDICIAL FORECLOSURE
stipulation forbidding the alienation of the immovable mortgaged shall be
void. A. COMPLAINT FOR FORECLOSURE
Rule 68, Sec. 1 Complaint in action for foreclosure — In an action for the
foreclosure of a mortgage or other encumbrance upon real estate, the
complaint shall set forth the date and due execution of the mortgage; its
assignments, if any; the names and residences of the mortgagor and the
mortgagee; a description of the mortgaged property; a statement of the
date of the note or other documentary evidence of the obligation secured
by the mortgage, the amount claimed to be unpaid thereon; and the names
and residences of all persons having or claiming an interest in the property
subordinate in right to that of the holder of the mortgage, all of whom
shall be made defendants in the action.
B. JUDGMENT ON FORECLOSURE
Rule 68, Sec. 2 Judgment on foreclosure for payment or sale — If upon the
trial in such action the court shall find the facts set forth in the complaint
to be true, it shall ascertain the amount due to the plaintiff upon the
mortgage debt or obligation, including interest and other charges as
approved by the court, and costs, and shall render judgment for the sum so
found due and order that the same be paid to the court or to the judgment
obligee within a period of not less than ninety (90) days nor more than one
hundred twenty (120) days from the entry of judgment, and that in default
of such payment the property shall be sold at public auction to satisfy the
judgment.
Korea Exchange Bank vs. Filkor Business Integrated, Inc. (2002) –

Quisumbing J.
Petitioners: Korea Exchange Bank
Respondents: Filkor Business Integrated; Kim Eung Joe; Lee Han San
Brief Facts: For Filkor’s failure to pay the loan, Korea Exchange filed a
complaint with TC, seeking payment of the former’s obligation and the
foreclosure and sale of the REM executed between the two. TC rendered
judgment, ordering the payment of the obligation but did not order the
foreclosure in case of non-payment, as it treated the complaint as one for
collection of a sum of money and not an action for foreclosure. As such, it
held that the bank has in effect waived its right to foreclose the mortgaged
property.
Doctrine: It is a basic principle in Civil Procedure that what determines

the nature of an action are the allegations in the complaint and the reliefs
sought. If the complaint sufficiently complies with the requirements for
REM foreclosure in the Rules, then the action should be treated as one for
foreclosure.

C. EQUITY OF REDEMPTION If the property is not redeemed, the final deed of sale executed by the
sheriff in favor of the purchaser at the foreclosure sale shall be registered
Rule 68, Sec. 2 Judgment on foreclosure for payment or sale — If upon the with the registry of deeds; whereupon the certificate of title in the name of
trial in such action the court shall find the facts set forth in the complaint the mortgagor shall be cancelled and a new one issued in the name of the
to be true, it shall ascertain the amount due to the plaintiff upon the purchaser.
mortgage debt or obligation, including interest and other charges as
approved by the court, and costs, and shall render judgment for the sum so Rule 68, Sec. 8 Applicability of other provisions — The provisions of
found due and order that the same be paid to the court or to the judgment sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial
obligee within a period of not less than ninety (90) days nor more than one foreclosure of real estate mortgages under this Rule insofar as the former
hundred twenty (120) days from the entry of judgment, and that in default are not inconsistent with or may serve to supplement the provisions of the
of such payment the property shall be sold at public auction to satisfy the latter
judgment.
Rule 39, Sec. 31 Manner of using premises pending redemption; waste
D. FORECLOSURE SALE restrained — Until the expiration of the time allowed for redemption, the
court may, as in other proper cases, restrain the commission of waste on
Rule 68, Sec. 3 Sale of mortgaged property; effect — When the defendant, the property by injunction, on the application of the purchaser or the
after being directed to do so as provided in the next preceding section, judgment obligee, with or without notice; but it is not waste for a person
fails to pay the amount of the judgment within the period specified therein, in possession of the property at the time of the sale, or entitled to
the court, upon motion, shall order the property to be sold in the manner possession afterwards, during the period allowed for redemption, to
and under the provisions of Rule 39 and other regulations governing sales continue to use it in the same manner in which it was previously used; or
of real estate under execution. Such sale shall not affect the rights of to use it in the ordinary course of husbandry; or to make the necessary
persons holding prior encumbrances upon the property or a part thereof, repairs to buildings thereon while he occupies the property.
and when confirmed by an order of the court, also upon motion, it shall
operate to divest the rights in the property of all the parties to the action Rule 39, Sec. 32 Rents, earnings and income of property pending redemption —
and to vest their rights in the purchaser, subject to such rights of The purchaser or a redemptioner shall not be entitled to receive the rents,
redemption as may be allowed by law. earnings and income of the property sold on execution, or the value of the
use and occupation thereof when such property is in the possession of a
Upon the finality of the order of confirmation or upon the expiration of the tenant. All rents, earnings and income derived from the property pending
period of redemption when allowed by law, the purchaser at the auction redemption shall belong to the judgment obligor until the expiration of his
sale or last redemptioner, if any, shall be entitled to the possession of the period of redemption.
property unless a third party is actually holding the same adversely to the
judgment obligor. The said purchaser or last redemptioner may secure a Rule 39, Sec. 34 Recovery of price if sale not effective; revival of judgment — If
writ of possession, upon motion, from the court which ordered the the purchaser of real property sold on execution, or his successor in
foreclosure. interest, fails to recover the possession thereof, or is evicted therefrom, in
consequence of irregularities in the proceedings concerning the sale, or
Rule 68, Sec. 4 Disposition of proceeds of sale — The amount realized from because the judgment has been reserved or set aside, or because the
the foreclosure sale of the mortgaged property shall, after deducting the property sold was exempt from execution, or because a third person has
costs of the sale, be paid to the person foreclosing the mortgage, and when vindicated his claim, to the property, he may on motion in the same action
there shall be any balance or residue, after paying off the mortgage debt or in a separate action recover from the judgment obligee the price paid,
due, the same shall be paid to junior encumbrancers in the order of their with interest, or so much thereof as has not been delivered to the
priority, to be ascertained by the court, or if there be no such judgment obligor; or he may, on motion, have the original judgment
encumbrancers or there be a balance or residue after payment to them, revived in his name for the whole price with interest, or so much thereof as
then to the mortgagor or his duly authorized agent, or to the person has been delivered to the judgment obligor. The judgment so revived shall
entitled to it have the same force and effect as an original judgment would have as of
the date of the revival and no more.
Rule 68, Sec. 5 How sale to proceed in case the debt is not all due — If the
debt for which the mortgage or encumbrance was held is not all due as
provided in the judgment, as soon as a sufficient portion of the property
has been sold to pay the total amount and the costs due, the sale shall
terminate; and afterwards, as often as more becomes due for principal or
interest and other valid charges, the court may, on motion, order more to
be sold. But if the property cannot be sold in portions without prejudice to
the parties, the whole shall be ordered to be sold in the first instance, and
the entire debt and costs shall be paid, if the proceeds of the sale be
sufficient therefor, there being a rebate of interest where such rebate is
proper.
Rule 68, Sec. 7 Registration — A certified copy of the final order of the
court confirming the sale shall be registered in the registry of deeds. If no
right of redemption exists, the certificate of title in the name of the
mortgagor shall be cancelled, and a new one issued in the name of the
purchaser.
Where a right of redemption exists, the certificate of title in the name of

the mortgagor shall not be cancelled, but the certificate of sale and the
order confirming the sale shall be registered and a brief memorandum
thereof made by the registrar of deeds upon the certificate of title. In the
event the property is redeemed, the deed of redemption shall be registered
with the registry of deeds, and a brief memorandum thereof shall be made
by the registrar of deeds on said certificate of title.

E. RIGHT OF REDEMPTION F. RIGHT TO SURPLUS OR DEFICIENCY
Huerta Alba Resort, Inc. vs. Court of Appeals – Purísima, J. Rule 68, Sec. 4 Disposition of proceeds of sale — The amount realized from
Petitioner: Huerta Alba Resort, Inc. (Huerta Alba) the foreclosure sale of the mortgaged property shall, after deducting the
Respondents: Court of Appeals (CA) and Syndicated Management Group, costs of the sale, be paid to the person foreclosing the mortgage, and when
Inc. (SMGI) there shall be any balance or residue, after paying off the mortgage debt
due, the same shall be paid to junior encumbrancers in the order of their
Brief Facts: Huerta Alba’s mortgaged properties were judicially priority, to be ascertained by the court, or if there be no such
foreclosed. In a series of proceedings it did not invoke its right of encumbrancers or there be a balance or residue after payment to them,
redemption under Sec. 78 of RA 337. After the foreclosure sale was then to the mortgagor or his duly authorized agent, or to the person
confirmed, it invoked for the first time its right of redemption under the entitled to it.
said provision.
Rule 68, Sec. 6 Deficiency judgment — If upon the sale of any real property
Doctrine: Generally, the right of redemption exists only in extrajudicial as provided in the next preceding section there be a balance due to the
foreclosures. In case of judicial foreclosures, there exists only an equity of plaintiff after applying the proceeds of the sale, the court, upon motion,
redemption. However, even if the foreclosure is judicial, the right of shall render judgment against the defendant for any such balance for
redemption exists when the mortgagee is the PNB, a bank, a banking which, by the record of the case, he may be personally liable to the
institution, or a credit institution. The right of redemption under Sec. 78 plaintiff, upon which execution may issue immediately if the balance is all
of RA 337 is a compulsory counterclaim that must be averred in the due at the time of the rendition of the judgment; otherwise, the plaintiff
answer. Failing to invoke it in a timely fashion shall bar a person from shall be entitled to execution at such time as the balance remaining
claiming its benefits in later part of proceedings. (See further discussion becomes due under the terms of the original contract, which time shall be
based on the cited case of Limpin vs. IAC below) stated in the judgment.
Rule 86, Sec. 7 Mortgage debt due from estate — A creditor holding a claim
against the deceased secured by mortgage or other collateral security, may
abandon the security and prosecute his claim in the manner provided in
this rule, and share in the general distribution of the assets of the estate; or
he may foreclose his mortgage or realize upon his security, by action in
court, making the executor or administrator a party defendant, and if there
is a judgment for a deficiency, after the sale of the mortgaged premises, or
the property pledged, in the foreclosure or other proceedings to realize
upon the security, he may claim his deficiency judgment in the manner
provided in the preceding section; or he may rely upon his mortgage or
other security alone, and foreclose the same at any time within the period
of the statute of limitations, and in that event he shall not be admitted as a
creditor, and shall receive no share in the distribution of the other assets of
the estate; but nothing herein contained shall prohibit the executor or
administrator from redeeming the property mortgaged or pledged, by
paying the debt for which it is held as security, under the direction of the
court, if the court shall adjudge it to be for the best interest of the estate
that such redemption shall be made.

2. EXTRAJUDICIAL FORECLOSURE the complete records, while awaiting any redemption within a period of
one (1) year from date of registration of the certificate of sale with the
A. SPECIAL POWERS Register of Deeds concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons whose
property is sold pursuant to an extra-judicial foreclosure, shall have the
Act No. 3135, Sec. 1 When a sale is made under a special power inserted right to redeem the property until, but not after, the registration of the
in or attached to any real-estate mortgage hereafter made as security for certificate of foreclosure sale which in no case shall be more than three (3)
the payment of money or the fulfillment of any other obligation, the months after foreclosure, whichever is earlier, as provided in Section 47 of
provisions of the following election shall govern as to the manner in which Republic Act No. 8791 (as amended, Res. Of Aug. 7, 2001).
the sale and redemption shall be effected, whether or not provision for the
same is made in the power. Where the application concerns the extrajudicial foreclosure of mortgages
of real estates and/or chattels in different locations covering one
Mortgagee has the right to foreclose a real estate mortgage upon the indebtedness, only one filing fee corresponding to such indebtedness shall
mortgagor’s failure to pay his obligation be collected. The collecting Clerk of Court shall, apart from the official
receipt of the fees, issue a certificate of payment indicating the amount of
This right must be exercised according to its clear mandate – indebtedness, the filing fees collected, the mortgages sought to be
requirements of the law must be complied with, otherwise, valid exercise foreclosed, the real estates and/or chattels mortgaged and their respective
of the right ends locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places where the
Extrajudicial foreclosure other properties are located and of allowing the extrajudicial foreclosures
May be exercised only if there is a special power inserted or attached to to proceed thereat.
the document in which the REM appears, and only in accordance with the
provisions of Act No. 3135 3. The notices of auction sale in extrajudicial foreclosure for publication by
the sheriff or by a notary public shall be published in a newspaper of
B. FORECLOSURE SALE general circulation pursuant to Section 1, Presidential Decree No. 1079,
dated January 2, 1977, and non-compliance therewith shall constitute a
violation of Section 6 thereof.
Act No. 3135, Sec. 2 Said sale cannot be made legally outside of the
province in which the property sold is situated; and in case the place 4. The Executive Judge shall, with the assistance of the Clerk of Court,
within said province in which the sale is to be made is subject to raffle applications for extrajudicial foreclosure of mortgage under the
stipulation, such sale shall be made in said place or in the municipal direction of the sheriff among all sheriffs, including those assigned to the
building of the municipality in which the property or part thereof is Office of the Clerk of Court and Sheriffs IV assigned in the branches.
situated.
5. The name/s of the bidder/s shall be reported by the sheriff or the
A.M. No. 99-10-05-0, as amended notary public who conducted the sale to the Clerk of Court before the
Procedure In Extra-Judicial Foreclosure Of Mortgage issuance of the certificate of sale.
In line with the responsibility of an Executive Judge under Administrative
Order No. 6, dated June 30, 1975, for the management of courts within his (1) REQUIREMENTS OF NOTICE
administrative area, included in which is the task of supervising directly Notice
the work of the Clerk of Court, who is also the Ex-Office Sheriff, and his Its object is to inform the public of the nature and condition of the
staff, and the issuance of commissions to notaries public and enforcement collateral to be sold (and the time, place and terms of the sale)
of their duties under the law, the following procedures are hereby
prescribed in extrajudicial foreclosure of mortgages: For the purpose of securing bidders and to prevent a sacrifice of the
collateral
1. All applications for extra-judicial foreclosure of mortgage whether
under the direction of the sheriff or a notary public, pursuant to Act 3135,
as amended by Act 4118, and Act 1508, as amended, shall be filed with the GR: Under normal circumstances, statutory provisions governing posting
Executive Judge, through the Clerk of court who is also the Ex-Officio of notice of REM foreclosure sales must be strictly complied with. Even
Sheriff. slight deviations will invalidate the notice and render the sale voidable
Examples:
2. Upon receipt of an application for extra-judicial foreclosure of o If the sheriff sells the collateral without the required notice, and
mortgage, it shall be the duty of the Clerk of Court to: induced by the mortgagee, and the purchaser is the mortgagee,
the sale is absolutely void and no title passes
a) receive and docket said application and to stamp thereon the o If mistakes or omissions occur in the notice of sale, calculated to
corresponding file number, date and time of filing; deter or mislead bidders, to depreciate the value of the property,
or to prevent it from bringing a fair price, such mistakes will be
fatal to the validity of the notice and the consequent
b) collect the filing fees therefore pursuant to rule 141, Section 7(c), as foreclosure sale
amended by A.M. No. 00-2-01-SC, and issue the corresponding official
receipt; XPN: If the objectives are attained, immaterial errors and mistakes may
not affect the sufficiency of the notice
c) examine, in case of real estate mortgage foreclosure, whether the Examples:
applicant has complied with all the requirements before the public auction o If what is lacking is the posting in three public places, not the
is conducted under the direction of the sheriff or a notary public, pursuant publication in a newspaper of general circulation, and
to Sec. 4 of Act 3135, as amended; considering the attendant circumstances, the publication of
the notice of sale in a newspaper general circulation alone
d) sign and issue the certificate of sale, subject to the approval of the has been held to be more than sufficient compliance with
Executive Judge, or in his absence, the Vice-Executive Judge. No the notice-posting requirement of the law, specifically if the
certificate of sale shall be issued in favor of the highest bidder until all fees objectives are attained and there is no showing that the
provided for in the aforementioned sections and in Rule 141, Section 9(1), collateral was sold for a price far below its value to insinuate
as amended by A.M. No. 00-2-01-SC, shall have been paid; Provided, that any bad faith, nor that there was collusion
in no case shall the amount payable under Rule 141, Section 9(1), as o There is a greater probability that a notice published in a
amended, exceed P100,000.00; newspaper of general circulation, which is distributed
nationwide, shall be read by more people than a notice posted in
e) after the certificate of sale has been issued to the highest bidder, keep a public bulletin board, no matter how strategic its location
(2) CONDUCT OF SALE
Grand Farms, Inc. vs. CA (1991) – Regalado, J. Act No. 3135, Sec. 4 The sale shall be made at public auction, between
Petitioners: Grand Farms, Inc. and Philippine Shares Corp. the hours or nine in the morning and four in the afternoon; and shall be
Respondents: CA; Esperanza Echiverri, as Clerk of Court & Ex-officio under the direction of the sheriff of the province, the justice or auxiliary
Sheriff; Sergio Cabrera as Deputy Sheriff-in-Charge; and Banco Filipino justice of the peace of the municipality in which such sale has to be made,
Savings and Mortgage Bank. or a notary public of said municipality, who shall be entitled to collect a fee
of five pesos each day of actual work performed, in addition to his
Brief Facts: Grand Farms sought to annul the foreclosure proceedings expenses.
instituted by Banco Filipino. Banco Filipino impliedly admitted that no
personal notice was sent to Grand Farms, although it argues that notice Act No. 3135, Sec. 5 At any sale, the creditor, trustee, or other persons
by publication in a newspaper of general circulation is sufficient. Grand authorized to act for the creditor, may participate in the bidding and
Farms claims that this lack of notice violates paragraph (k) of the purchase under the same conditions as any other bidder, unless the
mortgage contract, and is fatal to the foreclosure proceedings. contrary has been expressly provided in the mortgage or trust deed under
Consequently, it filed a motion for summary judgment. which the sale is made.
Doctrine: The need of personal notice to the mortgagor, while not
generally required by law, could be validly stipulated in the mortgage A.M. No. 99-10-05-0
contract, and the failure to comply with such is fatal to the foreclosure (AS FURTHER AMENDED, AUGUST 7, 2001)
proceedings. PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF
MORTGAGE
In line with the responsibility of an Executive Judge under Administrative

Order No. 6, dated June 30, 1975, for the management of courts within his
administrative area, included in which is the task of supervising directly
the work of the Clerk of Court, who is also the Ex-Office Sheriff, and his
staff, and the issuance of commissions to notaries public and enforcement
of their duties under the law, the following procedures are hereby
prescribed in extrajudicial foreclosure of mortgages:
(1) All applications for extra-judicial foreclosure of mortgage whether

under the direction of the sheriff or a notary public, pursuant to Act
3135, as amended by Act 4118, and Act 1508, as amended, shall be
filed with the Executive Judge, through the Clerk of court who is also
the Ex-Officio Sheriff.
(2) Upon receipt of an application for extra-judicial foreclosure of

mortgage, it shall be the duty of the Clerk of Court to:
a. receive and docket said application and to stamp thereon the

corresponding file number, date and time of filing;
b. collect the filing fees therefore pursuant to rule 141, Section

7(c), as amended by A.M. No. 00-2-01-SC, and issue the
corresponding official receipt;
c. examine, in case of real estate mortgage foreclosure, whether

the applicant has complied with all the requirements before the
public auction is conducted under the direction of the sheriff or
a notary public, pursuant to Sec. 4 of Act 3135, as amended;
d. sign and issue the certificate of sale, subject to the approval of

the Executive Judge, or in his absence, the Vice-Executive
Judge. No certificate of sale shall be issued in favor of the
highest bidder until all fees provided for in the aforementioned
sections and in Rule 141, Section 9(1), as amended by A.M. No.
00-2-01-SC, shall have been paid; Provided, that in no case shall
the amount payable under Rule 141, Section 9(1), as amended,
exceed P100,000.00;
e. after the certificate of sale has been issued to the highest bidder,
keep the complete records, while awaiting any redemption
within a period of one (1) year from date of registration of the
certificate of sale with the Register of Deeds concerned, after
which, the records shall be archived. Notwithstanding the
foregoing provision, juridical persons whose property is sold
pursuant to an extra-judicial foreclosure, shall have the right to
redeem the property until, but not after, the registration of the
certificate of foreclosure sale which in no case shall be more
than three (3) months after foreclosure, whichever is earlier, as
provided in Section 47 of Republic Act No. 8791 (as amended,
Res. Of August 7, 2001).
Where the application concerns the extrajudicial foreclosure of

mortgages of real estates and/or chattels in different locations
covering one indebtedness, only one filing fee corresponding to such the spouses’ loan was P3,517,380 (as evidenced by promissory notes). The
indebtedness shall be collected. The collecting Clerk of Court shall, spouses failed to pay the balance when it became due, so PNB filed a
apart from the official receipt of the fees, issue a certificate of petition for the extrajudicial foreclosure of the REM. At the 2 auction
payment indicating the amount of indebtedness, the filing fees sales, PNB was the highest bidder with a bid of P3,874,800. As the
collected, the mortgages sought to be foreclosed, the real estates proceeds were insufficient (entire obligation amounted to P14,745,398.25),
and/or chattels mortgaged and their respective locations, which PNB sent demand letters to the spouses, and when they failed to comply,
certificate shall serve the purpose of having the application docketed PNB filed a complaint for sum of money. The Sps. Rabat filed a
with the Clerks of Court of the places where the other properties are counterclaim, questioning the validity of the auction sales, and the RTC
located and of allowing the extrajudicial foreclosures to proceed and CA initially declared the 2 auction sales void. On remand from the SC,
thereat. the CA declared the auction sales valid and ruled that the PNB was
entitled to be paid the remainder of the obligation still owing it because of
(3) The notices of auction sale in extrajudicial foreclosure for publication the inadequacy of the auction proceeds.
by the sheriff or by a notary public shall be published in a newspaper
of general circulation pursuant to Section 1, Presidential Decree No. Doctrine: Inadequacy of the price in an extrajudicial foreclosure does not
1079, dated January 2, 1977, and non-compliance therewith shall invalidate the sale, and said sale is still valid. If the proceeds of the sale are
constitute a violation of Section 6 thereof. insufficient to satisfy the principal obligation, the mortgagee is entitled to
the deficiency owing it.
(4) The Executive Judge shall, with the assistance of the Clerk of Court,
raffle applications for extrajudicial foreclosure of mortgage under the
direction of the sheriff among all sheriffs, including those assigned to
the Office of the Clerk of Court and Sheriffs IV assigned in the
branches.
(5) 5. The name/s of the bidder/s shall be reported by the sheriff or the
notary public who conducted the sale to the Clerk of Court before the
issuance of the certificate of sale.
How: By public auction

When: Between 9 AM and 4 PM
Where:
GR: In the province in which the real property is situated
XPN: When the place within said province is subject of stipulation,
sale shall be made in the place in the municipal building of the
municipality in which the property or part thereof is situated
Conducted by whom:
(1) Sheriff of the province;
(2) Justice or auxiliary justice of the peace of the municipality in
which such sale has to be made;
(3) Notary public of said municipality – entitled to a fee of P5 each
day, in addition to his expenses
Who may participate:

GR:
1. Creditor
2. Trustee
3. Other persons authorized to act for the creditor
XPN: Contrary has been expressly provided in the mortgage or trust deed
Bidding: Through sealed bids, submitted to the Sheriff

In case of a tie, open bidding shall be conducted between the highest
bidders
Payment: In cash or in manager’s check (in Philippine currency), within 5

days from notice
Fees: Collected by the Clerk of Court, NON-REFUNDABLE (even if

property subsequently redeemed)
Report: Sheriff or notary public shall report name/s of the bidder/s to the
Clerk of Court
Certificate of Sale: Issued and signed by the Clerk of Court upon

presentation of the appropriate receipts. Subject to approval of the Exec.
Judge (in his absence, Vice-Executive Judge)
Rabat v. PNB (2012) – Bersamin, J.

Petitioner: Spouses Francisco and Merced Rabat
Respondent: Philippine National Bank
Brief Facts: Loan accommodation of P4-M was granted to the Sps. Rabat
by PNB, with a REM securing said obligation. The aggregate amount of
C. RIGHT OF REDEMPTION o Sell the right to redeem to a third party
Either of the 2 abovementioned situations allows the mortgagor to
Act No. 3135, Sec. 6 In all cases in which an extrajudicial sale is made recover any alleged loss suffered by reason of the low price at the
under the special power hereinbefore referred to, the debtor, his successors foreclosure sale
in interest or any judicial creditor or judgment creditor of said debtor, or
any person having a lien on the property subsequent to the mortgage or
deed of trust under which the property is sold, may redeem the same at
any time within the term of one year from and after the date of the sale;
and such redemption shall be governed by the provisions of sections four Goldenway Merchandising Corp. v. Equitable PCI Bank (2013) – Villarama,
hundred and sixty-four to four hundred and sixty-six, inclusive, of the Jr., J.
Code of Civil Procedure, in so far as these are not inconsistent with the Petitioner: Goldenway Merchandising Corp. (GMC)
provisions of this Act. Respondent: Equitable PCI Bank
Concept: Real Estate Mortgage; Foreclosure; Extrajudicial Foreclosure;
Right of Redemption
A.M. No. 99-10-05-0
(see above)
Brief Facts: GMC attempted to redeem its foreclosed properties from
Equitable. Equitable rejected the attempt to redeem, arguing that the
period for redemption, as provided for by RA 8791, which amended Act
Who may redeem: No. 3135, has already lapsed and that the title to the properties had
1. Debtors already been consolidated in its favor. GMC now comes to the Court to
2. Successors in interest argue against the application of RA 8791.
3. Any judicial creditor or judgment creditor of said debtor
4. Any person having a lien on the property subsequent to the Doctrine:
mortgage or deed of trust under which the property is sold - The right of redemption is a statutory right that must be exercised in
the manner prescribed and the period provided by the statute that
Juridical persons: May redeem until the registration of the certificate of grants such right, for it to be effective.
foreclosure sale (shall not be more than 3 months after foreclosure) - Under the General Banking Law of 2000 (RA 8791), juridical persons,
as mortgagors, have a redemption period which commences from the
When: Within the term of 1 year from and after the date of the sale. date of the foreclosure sale and expires upon (a) registration of the
After issuance of the Certificate of Sale, Clerk of Court shall keep complete certificate of sale, or (b) three months after the foreclosure, whichever
records for a period of 1 year from the date of registration of the certificate is earlier.
of sale with the Register of Deeds
How: Rules of Court, Secs. 27-33
Extrajudicial foreclosure sale

Right acquired by the purchaser: is merely inchoate
Ownership remains in the mortgagor until the expiration of the
period granted for the right of redemption
Right of redemption
Upon its expiration, without the mortgagor having exercised the
right of redemption, the ownership becomes consolidated in the
purchaser (not inchoate right anymore)
To claim a right of redemption, there must be a specific law that
exceptionally allows it
GR: When a REM is foreclosed extrajudicially, Act 3135 grants the right
of redemption within 1 year from the date of registration of the
certificate of the foreclosure sale
Provision says from date of sale, but jurisprudence interpreted it to
be from date of registration
XPN: RA 8791 (General Banking Law of 2000) provides that when the
REM is foreclosed extrajudicially by a bank, quasi-bank or trust entity,
juridical mortgagors are granted the right to redeem until, but not later
than the registration of the certificate of foreclosure sale (in no case
shall be more than 3 months after foreclosure)
How to determine if a right of redemption exists?

1. Identify the law that allows the right of redemption
2. Apply its provisions to the specific case
On the price of the sale of the collateral:

Immaterial if the collateral is sold at an amount less than its actual
market value
o Mere inadequacy of the price obtained at the foreclosure sale
will not be sufficient to set it aside if there is no showing that in
the event of a regular sale, a better price can be obtained
o XPT: the amount is “shocking to the conscience”
When there is a right to redeem, the mortgagor can:
o Exercise the right and sell the collateral; OR

(1) WHO MAY REDEEM Unlike a mortgagor, a redemptioner must PROVE its right to
redeem by producing the documents required by Rule 39
Act No. 3135, Sec. 6 In all cases in which an extrajudicial sale is made
under the special power hereinbefore referred to, the debtor, his successors Medida, et al. v. CA (1992) – Regalado, J.
in interest or any judicial creditor or judgment creditor of said debtor, or Petitioners: Manuel D. Medida, Deputy Sheriff of the Province of Cebu,
any person having a lien on the property subsequent to the mortgage or City Savings Bank (formerly Cebu City Savings and Loan Association,
deed of trust under which the property is sold, may redeem the same at Inc.) and Teotimo Abellana
any time within the term of one year from and after the date of the sale; Respondents: Sps. Andred Dolino and Pascuala Dolino
and such redemption shall be governed by the provisions of sections four Concept: Foreclosure of Real Estate Mortgage; Extrajudicial Foreclosure;
hundred and sixty-four to four hundred and sixty-six, inclusive, of the Who may Redeem
Code of Civil Procedure, in so far as these are not inconsistent with the
provisions of this Act. Brief Facts: Sps. Dolino obtained a loan from a bank and executed a real
estate mortgage over their property to secure payment of the loan. They
Rule 39, Sec. 27 Who may redeem real property so sold — Real property sold defaulted in payment and the mortgage was foreclosed. It was purchased
as provided in the last preceding section, or any part thereof sold in the public auction by Giandoncho. For fear that they might lose their
separately, may be redeemed in the manner hereinafter provided, by the right of redemption, they obtained another loan from CSB and mortgaged
following persons: the same property to secure payment of the loan. They again defaulted in
payment, and CSB foreclosed the mortgage and was sold to the latter as
(a) The judgment obligor, or his successor in interest in the whole or any highest bidder. The spouses now assail the validity of the foreclosure and
part of the property; sale. The CA passed upon the issue of ownership over the subject property,
without it being raised by either of the parties, and ruled that the second
(b) A creditor having a lien by virtue of an attachment, judgment or mortgage was not valid, as the spouses could not have validly constituted
mortgage on the property sold, or on some part thereof, subsequent to the a mortgage over subject property, it being sold to CSB in the public
lien under which the property was sold. Such redeeming creditor is termed auction.
a redemptioner.
Doctrine: There is no obstacle to the legal creation of such lien even after
the auction sale of the property but during the redemption period, since no
distinction is made between a mortgage constituted over the property
Act No. 3135, Sec. 6 Rule 39, Sec. 27, ROC
before or after the auction sale thereof. A redemptioner is defined as a
1. Debtors 1. Judgment obligor, or his creditor having a lien by attachment, judgment or mortgage on the
2. Successors in interest successor in interest in the property sold subsequent to the judgment under which the property was
3. Any judicial creditor or whole or any part of the sold. While in extrajudicial foreclosure, the sale contemplated is not under
judgment creditor of said property a judgment but the proceeding pursuant to which the mortgaged property
debtor 2. Creditor having a lien by was sold, a subsequent mortgage could nevertheless be legally constituted
4. Any person having a lien on virtue of an attachment, thereafter with the subsequent mortgagee becoming and acquiring the
the property subsequent to the judgment or mortgage on the rights of a redemptioner, aside from his right against the mortgagor.
mortgage or deed of trust property sold, or on some part
under which the property is therefor, subsequent to the
sold lien under which the property
was sold. Such redeeming
creditor is termed a
redemptioner
GR: It is the mortgagor who has the right to redeem the collateral sold at
an extrajudicial foreclosure sale
XPN: Parties who acquire a right to the collateral under certain

conditions are also granted the right to redeem
1. Successor in interest: includes, but not limited to:
a. One to whom the mortgagor has transferred the statutory
right of redemption
b. One to whom the mortgagor has conveyed its interest in the
collateral for the purpose of redemption
c. One who succeeds to the interest of the mortgagor by
operation of law
d. One or more joint debtor-mortgagors who were joint owners of
the collateral sold
Note: A surety CANNOT redeem the collateral of the debtor-
mortgagor because the surety, by paying the debt of the debtor-
mortgagor, stands in the place of the creditor, not the debtor-
mortgagor, and consequently is NOT a successor in interest in
the collateral
2. Redemptioner: a creditor of the mortgagor with a lien on the
collateral subsequent to the lien was the basis of the foreclosure sale
(said creditor is called a junior encumbrancer) (example: second
mortgagee)
If the lien of the creditor is PRIOR to the lien under which the
collateral was sold (senior encumbrancer as, for example, a
senior mortgagee), it is NOT a redemptioner and cannot
redeem
o But said senior encumbrancer is fully protected, since any
purchaser at the foreclosure sale of the collateral takes the
property subject to such prior lien (mortgage follows the
property), which must first be satisfied

(2) HOW TO REDEEM the sale to redeem the property. The deed shall be executed by the officer
making the sale or by his successor in office, and in the latter case shall
Rule 39, Sec. 28 Time and manner of and amounts payable on, successive have the same validity as though the officer making the sale had continued
redemptions; notice to be given and filed — The judgment obligor, or in office and executed it.
redemptioner, may redeem the property from the purchaser, at any time
within one (1) year from the date of the registration of the certificate of Under the expiration of the right of redemption, the purchaser or
sale, by paying the purchaser the amount of his purchase, with one per redemptioner shall be substituted to and acquire all the rights, title,
centum per month interest thereon in addition, up to the time of interest and claim of the judgment obligor to the property as of the time of
redemption, together with the amount of any assessments or taxes which the levy. The possession of the property shall be given to the purchaser or
the purchaser may have paid thereon after purchase, and interest on such last redemptioner by the same officer unless a third party is actually
last named amount at the same rate; and if the purchaser be also a creditor holding the property adversely to the judgment obligor.
having a prior lien that of the redemptioner, other than the judgment
under which such purchase was made, the amount of such’ other lien, with Requisites for a valid redemption:
interest. 1. The redemption must be made within 12 months from the date of
registration of the sale in the Office of the Register of Deeds
Property so redeemed may again be redeemed within sixty (60) days after 2. Payment of the purchase price of the collateral involved, plus 1%
the last redemption upon payment of the sum paid on the last redemption, interest per month, together with the amount of any assessments or
with two per centum thereon in addition, and the amount of any taxes if any, paid by the purchaser after the sale with the same rate of
assessments or taxes which the last redemptioner may have paid thereon interest
after redemption by him, with interest on such last-named amount, and in Under RA 8791, Art. III, Sec. 47, the right to redeem is
addition, the amount of any liens held by said last redemptioner prior to exercised by paying the amount due under the mortgage
his own, with interest. The property may be again, and as often as a deed (not the purchase price, as above indicated)
redemptioner is so disposed, redeemed from any previous redemptioner 3. Written notice of the redemption must be served on the officer who
within sixty (60) days after the last redemption, on paying the sum paid on made the sale and a duplicate filed with the Register of Deeds of the
the last previous redemption, with two per centum thereon in addition, province
and the amounts of any assessments or taxes which the last previous
redemptioner paid after the redemption thereon, with interest thereon, and GR: Not sufficient that a person offering to redeem manifests its desire to
the amount of any liens’ held by the last redemptioner prior to his own, do so; actual and simultaneous tender of payment must accompany the
with interest. statement of intention
Written notice of any redemption must be given to the officer who made
Bona fide redemption necessarily implies a reasonable and valid
the sale and a duplicate filed with the registry of deeds of the place, and if tender of the entire redemption price; otherwise, the rule on the
any assessments or taxes are paid by the redemptioner or if he has or redemption period may easily be circumvented
acquires any lien other than that upon which the redemption was made,
notice thereof must in like manner be given to the officer and filed with the BUT filing of a judicial action, made simultaneously with the deposit of
registry of deeds; if such notice be not filed, the property may be redeemed the redemption price, within the redemption period, may be necessary to
without paying such assessments, taxes, or liens preserve the right of redemption for future enforcement even beyond
such period
Filing of a complaint to enforce redemption, within the redemption
Rule 39, Sec. 29 Effect of redemption by judgment obligor, and a certificate to
period, is equivalent to an offer to redeem and has the effect of
be delivered and recorded thereupon; to whom payments on redemption made — If preserving the right of redemption
the judgment obligor redeems, he must make the same payments as are
required to effect a redemption by a redemptioner, whereupon, no further Nothing in the law prohibits piecemeal redemption of collateral sold
redemption shall, be allowed and he is restored to his estate. The person to at a foreclosure (Yap v. Dy, et al.)
whom the redemption payment is made must execute and deliver to him a
certificate of redemption acknowledged before a notary public or other Sps. Yap v. Sps. Dy (2011) – Villarama, J.
officer authorized to take acknowledgments of conveyances of real Concept: Right of Redemption - How to Redeem
property. Such certificate must be filed and recorded in the registry of
deeds of the place in which the property is situated, and the registrar of Brief Facts: Sps. Tirambulo mortgaged 7 lots to DBRI to secure loans.
deeds must note the record thereof on the margin of the record of the They sold all of them to Sps. Dy and Maxino without the consent and
certificate of sale. The payments mentioned in this and the last preceding knowledge of the bank. Upon default of Sps. Tirambulo, DBRI foreclosed
sections may be made to the purchaser or redemptioner, or for him to the the mortgage on the first loan, and being the highest bidder, sold 3 of the
officer who made the sale 5 lots to Sps. Yap. When the Dys and Maxinos tried to tender the
redemption lot for 2 of the 3 lots, DBRI and the Yaps refused, contending
that piecemeal redemption is not allowed pursuant to the doctrine of
Rule 39, Sec. 30 Proof required of redemptioner — A redemptioner must
indivisibility and mortgage, and as such, they should have tendered the
produce to the officer, or person from whom he seeks to redeem, and serve
whole auction price for all of the properties foreclosed.
with his notice to the officer a copy of the judgment or final order under
which he claims the right to redeem, certified by the clerk of the court
wherein the judgment or final order is entered; or, if he redeems upon a Doctrine: Nothing in the law prohibits the piecemeal redemption of the
mortgage or other lien, a memorandum of the record thereof, certified by properties sold at a foreclosure proceeding, as the right of the mortgagor
the registrar of deeds; or an original or certified copy of any assignment or redemptioner to redeem one or some of the foreclosed properties is
necessary to establish his claim; and an affidavit executed by him or his recognized. The doctrine of indivisibility of mortgage no longer applies
agent, showing the amount then actually due on the lien. once foreclosure is effected.
D. RIGHT TO DEFICIENCY
Rule 39, Sec. 33 Deed and possession to be given at expiration of redemption
period; by whom executed or given — If no redemption be made within one Rule 86, Sec. 7 Mortgage debt due from estate — A creditor holding a claim
(1) year from the date of the registration of the certificate of sale, the against the deceased secured by mortgage or other collateral security, may
purchaser is entitled to a conveyance and possession of the property; or, if abandon the security and prosecute his claim in the manner provided in
so redeemed whenever sixty (60) days have elapsed and no other this rule, and share in the general distribution of the assets of the estate; or
redemption has been made, and notice thereof given, and the time for he may foreclose his mortgage or realize upon his security, by action in
redemption has expired, the last redemptioner is entitled to the court, making the executor or administrator a party defendant, and if there
conveyance and possession; but in all cases the judgment obligor shall is a judgment for a deficiency, after the sale of the mortgaged premises, or
have the entire period of one (1) year from the date of the registration of the property pledged, in the foreclosure or other proceedings to realize
upon the security, he may claim his deficiency judgment in the manner
provided in the preceding section; or he may rely upon his mortgage or barred by prescription, without the right to file a claim for any deficiency.
other security alone, and foreclose the same at any time within the period The options are alternative, not cumulative. In case the third option is
of the statute of limitations, and in that event he shall not be admitted as a chosen, the procedure governing extra-judicial foreclosures set forth in
creditor, and shall receive no share in the distribution of the other assets of Act No. 3135 shall be observed.
the estate; but nothing herein contained shall prohibit the executor or
administrator from redeeming the property mortgaged or pledged, by Suico v. PNB (2007) – Chico-Nazario, J.
paying the debt for which it is held as security, under the direction of the Petitioner: Sps. Esmeraldo and Elizabeth Suico
court, if the court shall adjudge it to be for the best interest of the estate Respondent: Philippine National Bank and CA
that such redemption shall be made. Concept: Real Estate Mortgage: Extrajudicial Foreclosure – Right to
surplus
While Act 3135 does not specifically provide for a mortgagee’s right
to recover the deficiency from the application of the proceeds of the Brief Facts: The Sps. Suico obtained a loan from PNB, secured by a REM
foreclosure sale, the said law ALSO does NOT prohibit it. on real parties in the names of the Sps Because they were unable to pay
their obligation, PNB extrajudicially foreclosed the mortgage over their
The mortgagee’s recovery of the deficiency is supported by the principle properties. A year later, PNB secured a certificate of final sale and had the
that a real estate mortgage is a security transaction and not a subject properties registered in its name. The spouses filed a complaint for
satisfaction of indebtedness of the debtor. declaration of nullity of the extrajudicial foreclosure of mortgage, the
certificate of sale and the final deed of sale. RTC declared the sale null and
- The REM does not in, in any way, limit nor minimize the amount of
void because of the error in the notice of sale. CA reversed RTC and held
the principal obligation, as its only function is to secure its
that the sale was valid.
fulfillment.
Doctrine: Pursuant to Rule 68, Sec. 4, the disposition of the proceeds of
the sale in foreclosure shall be as follows: (a) first, pay the costs; (b)
Hence, the creditor-mortgagee may proceed against the debtor-mortgagor
secondly, pay off the mortgage debt; (c) thirdly, pay the junior
in a proper action to recover such deficiency.
encumbrancers, if any, in the order of priority; and (d) fourthly, give the
- The creditor-mortgagee must be able to prove the basis for the balance to the mortgagor, his agent or the person entitled to it. Since the
deficiency judgment that it seeks. application of the proceeds from the sale of mortgaged property is an act
- The right to recovery of the deficiency only arises when the of payment, it is the mortgagee’s duty to return any surplus in the selling
proceeds are determined to be insufficient to cover the price to the mortgagor.
obligation and other costs of the sale.
- Hence, the amount of the obligation prior to the foreclosure and
the proceeds of the foreclosure are important in enforcing a claim
for the deficiency.
The exception to the rule that the creditor-mortgagee may recover the
deficiency is when the extrajudicial foreclosure of a mortgage arises out of
a settlement of estate.
- In such a case, Rule 86 grants three distinct and independent
remedies to the creditor-mortgagee.
GR: The creditor-mortgagee, in a separate action, may recover the

deficiency from the debtor-mortgagor when it has been established that
the proceeds of the foreclosure sale is insufficient to pay the amount of the
obligation and the other costs of the sale.
EX: If the extrajudicial foreclosure of mortgage arises out of a settlement

of the estate, then the right to recover the deficiency does NOT apply.
However, Rule 86 privedes for three distinct, independent, and mutually
exclusive remedies, which the mortgagee may pursue, alternatively, to
satisfy the principal obligation. These three remedies are:
1. WAIVE the mortgage and CLAIM the principal obligation from the
estate of the mortgagor as an ORDINARY CLAIM.
2. FORECLOSE the mortgage judicially and prove any deficiency as an
ORDINARY CLAIM,
3. RELY on the mortgages exclusively, EXTRAJUDICIALLY
FORECLOSING the same at any time BEFORE it is barred by
prescription, WITHOUT right to file a claim for any deficiency.
Heirs of the Late Spouses Maglasang vs. Manila Banking Corporation –

Perlas-Bernabé, J.
Concept: Right to deficiency (real estate mortgage)
Brief Facts: Flaviano had a loan with MBC. His loan was secured by a
real estate mortgage. He died. Respondent (substitute of MBC) extra-
judicially foreclosed the mortgage. There was a deficiency in the proceeds.
Respondent wanted to recover the deficiency.
Doctrine: Section 7, Rule 86, ROC applies when a secured creditor wants
to recover his claims against the estate of a deceased. The provision gives
three options: a) waive the mortgage and claim the entire debt from the
estate of the mortgagor as an ordinary claim; b) foreclose the mortgage
judicially and prove the deficiency as an ordinary claim; and c) rely on the
mortgage exclusively, or other security and foreclose the same before it is
(1) DURING REDEMPTION PERIOD (1) year from the date of the registration of the certificate of sale, the
purchaser is entitled to a conveyance and possession of the property; or, if
Act No. 3135, Sec. 7 In any sale made under the provisions of this Act, so redeemed whenever sixty (60) days have elapsed and no other
the purchaser may petition the Court of First Instance of the province or redemption has been made, and notice thereof given, and the time for
place where the property or any part thereof is situated, to give him redemption has expired, the last redemptioner is entitled to the
possession thereof during the redemption period, furnishing bond in an conveyance and possession; but in all cases the judgment obligor shall
amount equivalent to the use of the property for a period of twelve have the entire period of one (1) year from the date of the registration of
months, to indemnify the debtor in case it be shown that the sale was the sale to redeem the property. The deed shall be executed by the officer
made without violating the mortgage or without complying with the making the sale or by his successor in office, and in the latter case shall
requirements of this Act. Such petition shall be made under oath and filed have the same validity as though the officer making the sale had continued
in form of an ex parte motion in the registration or cadastral proceedings in office and executed it.
if the property is registered, or in special proceedings in the case of
property registered under the Mortgage Law or under section one Under the expiration of the right of redemption, the purchaser or
hundred and ninety-four of the Administrative Code, or of any other real redemptioner shall be substituted to and acquire all the rights, title,
property encumbered with a mortgage duly registered in the office of any interest and claim of the judgment obligor to the property as of the time of
register of deeds in accordance with any existing law, and in each case the the levy. The possession of the property shall be given to the purchaser or
clerk of the court shall, upon the filing of such petition, collect the fees last redemptioner by the same officer unless a third party is actually
specified in paragraph eleven of section one hundred and fourteen of Act holding the property adversely to the judgment obligor.
Numbered Four hundred and ninety-six, as amended by Act Numbered
Twenty-eight hundred and sixty-six, and the court shall, upon approval of If the purchaser is entitled to the possession of the foreclosed collateral,
the bond, order that a writ of possession issue, addressed to the sheriff of then it is all the more reason that such possession be granted to the
the province in which the property is situated, who shall execute said purchaser once ownership has been consolidated in his favor.
order immediately.
Sec. 7 of Act 3135 again provides for the issuance of such a writ.
Act No. 3135, Sec. 8 The debtor may, in the proceedings in which
possession was requested, but not later than thirty days after the At this point however, there is no need to file a bond and have it approved,
purchaser was given possession, petition that the sale be set aside and the as the writ of possession shall be issued as a matter of course and as a
writ of possession cancelled, specifying the damages suffered by him, matter of right.
because the mortgage was not violated or the sale was not made in o Such issuance by the Court is merely a ministerial function and
accordance with the provisions hereof, and the court shall take cognizance may be compelled through mandamus.
of this petition in accordance with the summary procedure provided for in
section one hundred and twelve of Act Numbered Four hundred and Once possession is secured, the purchaser’s unassailable right to
ninety-six; and if it finds the complaint of the debtor justified, it shall possession is now founded on the right of ownership.
dispose in his favor of all or part of the bond furnished by the person who
obtained possession. Either of the parties may appeal from the order of the Chu, et al. v. Lacqui and PBC (2010) – Carpio, J.
judge in accordance with section fourteen of Act Numbered Four hundred Concept: Real Estate Mortgage: Extrajudicial Foreclosure – Right to
and ninety-six; but the order of possession shall continue in effect during possession after consolidation of ownership
the pendency of the appeal. Contracts Involved:
(a) Contracts of loan:
Act No. 3135, Sec. 9 When the property is redeemed after the purchaser (1) P3.2-M by Chu and Sps. Castro from PBC
has been given possession, the redeemer shall be entitled to deduct from (2) Increased to P5-M by Amendment of REM
the price of redemption any rentals that said purchaser may have collected (b) Deed of real estate mortgage: In favor of PBC by Sps. Castro over
in case the property or any part thereof was rented; if the purchaser their property (TCT No. 22990)
occupied the property as his own dwelling, it being town property, or used
it gainfully, it being rural property, the redeemer may deduct from the Brief Facts: Chu and the Sps. Castro obtained a P3.2-M loan from PBC,
price the interest of one per centum per month provided for in section four which was secured by a REM. Later, the Deed of REM was amended to
hundred and sixty-five of the Code of Civil Procedure. increase the loan amount to P5-M. Upon demand, Chu and the sps. Castro
failed to pay the loan, and PBC applied for the extrajudicial foreclosure of
Sec. 7 of Act 3135 directs the issuance of a writ of possession in favor of the REM. At the sale, PBC emerged as the highest bidder and a certificate
the purchaser that seeks possession of the foreclosed collateral during the of sale was executed in its favor and annotated on the TCT. After the lapse
redemption period. of the 1-year redemption period, PBC filed an affidavit of consolidation to
consolidate its ownership, which was granted, and a new TCT was issued
In issuing this writ, there is no discretion left on the part of the court; any in its favor. Later, it applied for the issuance of a writ of possession on the
question regarding the validity and regularity of the sale must be foreclosed property, which Chu and the sps. Castro opposed.
ventilated in a subsequent proceeding.
Doctrine: Failure to redeem within the 1-year redemption period grants
This writ is issued in an ex-parte proceeding, involving only the purchaser, the purchaser an absolute right to the writ of possession. Moreover, once
without need for notice to or consent from any person who is adversely ownership has been consolidated, issuance of a writ of possession becomes
interested (ex. mortgagor). a ministerial duty because, as purchaser of the property at the foreclosure
sale, the right over the property had become absolute, vesting in the
Sec. 8 provides that the plain, speedy and adequate remedy in opposing the purchaser the corollary right of possession.
issuance of such a writ. A party may file a petition to set aside the
foreclosure sale and to cancel the writ of possession. This may be filed in
the Court which issued the writ of possession. (3) WHEN HELD BY A THIRD PARTY
However, if the appeal interposed was from an order granting the issuance
Rule 39, Sec. 33 Deed and possession to be given at expiration of redemption
of the writ, then the order shall continue to be in effect during the
period; by whom executed or given — If no redemption be made within one
pendency of the appeal.
(1) year from the date of the registration of the certificate of sale, the
purchaser is entitled to a conveyance and possession of the property; or, if
(2) AFTER CONSOLIDATION OF OWNERSHIP so redeemed whenever sixty (60) days have elapsed and no other
redemption has been made, and notice thereof given, and the time for
Rule 39, Sec. 33 Deed and possession to be given at expiration of redemption redemption has expired, the last redemptioner is entitled to the
period; by whom executed or given — If no redemption be made within one conveyance and possession; but in all cases the judgment obligor shall
have the entire period of one (1) year from the date of the registration of However, the duty ceases to be ministerial once it has been shown that a
the sale to redeem the property. The deed shall be executed by the officer third party possesses the collateral and that its possession is adverse to
making the sale or by his successor in office, and in the latter case shall that of the mortgagor.
have the same validity as though the officer making the sale had continued
in office and executed it. BPI Family Savings Bank v. Golden Power Diesel Sales Center (2011) –
Carpio, J.
Under the expiration of the right of redemption, the purchaser or Petitioner: BPI Family Savings Bank Inc. (BPI)
redemptioner shall be substituted to and acquire all the rights, title, Respondents: Golden Power Diesel Sales Center Inc. (Golden) and
interest and claim of the judgment obligor to the property as of the time of Renato Tan
the levy. The possession of the property shall be given to the purchaser or Concept: REM; Foreclosure; Extrajudicial Foreclosure; Right to
last redemptioner by the same officer unless a third party is actually Possession; When Held by Third Party
holding the property adversely to the judgment obligor.
Brief Facts: BPI was able to foreclose upon the properties mortgaged by
Rule 39, Sec. 16 Proceedings where property claimed by third person — If the CEDEC in its favor. However, the writs of possession it prayed for and
property levied on is claimed by any person other than the judgment issued by the RTC was not implemented because Golden had taken
obligor or his agent, and such person makes an affidavit of his title thereto possession of the foreclosed properties, by virtue of a deed a sale between
or right to the possession thereof, stating the grounds of such right or Golden and CEDEC. The RTC eventually stayed the implementation of
title, and serves the same upon the officer making the levy and a copy the writs of possession, finding Golden to be in the nature of a third party
thereof upon the judgment obligee, the officer shall not be bound to keep possessing the property adversely as against CEDEC, the judgment
the property, unless such judgment obligee, on demand of the officer, files debtor, which is a situation recognized as an exception to the rule that
a bond approved by the court to indemnify the third-party claimant in a writs of possession are issued as a matter of ministerial duty. Hence, the
sum not less than the value of the property levied on. In case of petition.
disagreement as to such value, the same shall be determined by the court
issuing the writ of execution. No claim for damages for the taking or Doctrine:
keeping of the property may be enforced against the bond unless the - GR: A purchaser in a public auction sale of a foreclosed property is
action therefor is filed within one hundred twenty (120) days from the date entitled to a writ of possession and, upon an ex parte petition of the
of the filing of the bond. purchaser; it is ministerial upon the trial court to issue the writ of
possession in favor of the purchaser.
The officer shall not be liable for damages for the taking or keeping of the - EX: If it can be shown that (a) the foreclosed property is in the
property, to any third-party claimant if such bond is filed. Nothing herein possession of a third party and (b) that such third party possesses such
contained shall prevent such claimant or any third person from vindicating property adversely to the judgment obligor, the duty to issue the writ
his claim to the property in a separate action, or prevent the judgment ceases to be ministerial.
obligee from claiming damages in the same or a separate action against a
third-party claimant who filed a frivolous or plainly spurious claim. Nagtalon v. United Coconut Planters Bank (2013) – Brion, J.
Concept: Foreclosure of Real Estate Mortgage; Extrajudicial Foreclosure;
When the writ of execution is issued in favor of the Republic of the Right to Possession; When Held by a Third Party
Philippines, or any officer duly representing it, the filing of such bond shall Contracts Involved:
not be required, and in case the sheriff or levying officer is sued for (1) Contract of Loan (Credit Accommodation Agreement) between
damages as a result of the levy, he shall be represented by the Solicitor Sps. Nagtalon and UCPB
General and if held liable therefor, the actual damages adjudged by the (2) Real Estate Mortgage over several properties in Kalibo, Aklan
court shall be paid by the National Treasurer out of such funds as may be executed by Sps. Nagtalon in favor of UCPB
appropriated for the purpose.
Brief Facts: Sps. Nagtalon entered into a Credit Accommodation
GR: In extrajudicial foreclosures, possession of the collateral may be Agreement with UCPB. To secure payment of their obligation, they
awarded to the purchaser during the redemption period, or after its lapse, executed a Real Estate Mortgage over properties in Kalibo, Aklan. Having
without the need of a separate and independent action. defaulted in payment, the mortgage was foreclosed and subject properties
were sold to UCPB at the public auction, as highest bidder. The
EX: Such rule will not apply where a third party holds/possesses the redemption period expired without the spouses exercising their right of
collateral adversely to the debtor-mortgagor. redemption. UCPB sought for the issuance of a writ of possession, having
consolidated its ownership of the subject properties. Nagtalon opposes the
Sec. 16 of Rule 39 provides two remedies to a third party who holds the issuance of said writ, citing the pendency of a civil case wherein the
foreclosed property adversely against the debtor-mortgagor: validity of the mortgage, foreclosure, and sale is at issue.
1. Terceria, in order to determine whether the sheriff has rightly or
wrongly taken hold of a property not belonging to the mortgagor. Doctrine: Once title to the property has been consolidated in the buyer’s
This action is filed against the sheriff or officer effecting the writ, name upon failure of the mortgagor to redeem the property within the
by serving on him an affidavit of title with a copy to the purchaser. one-year period of redemption, the writ of possession becomes a matter of
 By this action, the sheriff/officer is not bound to keep the right belonging to the buyer. The pendency of a civil case questioning the
collateral and could be held liable for damages if he does. validity of the mortgage, its foreclosure, and subsequent sale of mortgaged
2. An independent and separate action to vindicate its claim of properties is not a bar for the issuance of the writ of possession. The same
ownership or possession over the collateral, filed before a forum of does not constitute the presence of peculiar and equitable circumstances
competent jurisdiction, even before or without filing a claim in the that can be considered as an exception to the general rule that issuance of
court that issued the writ of possession. said writ is the ministerial duty of the court when ownership of properties
 The object of this action is the recover of ownership and/or has been consolidated in buyer’s name.
possession of the collateral seized by the sheriff or officer who
effected the writ of possession. An exception the said general rule is when there is a third party claiming
right adverse to debtor/mortgagor. The obligation of the court to issue
These remedies can be exercised cumulatively; they can be availed of, a writ of possession in favor of the purchaser in a foreclosure mortgage
independently or separately from each other. ceases to be ministerial when a third party in possession of the property
claims a right adverse to that of the debtor-mortgagor. Where such third
party claim and possession exist, the trial court should conduct a hearing
BPI Family Savings Bank v. Golden Power Diesel Sales Center to determine the nature of the adverse possession
A purchaser is entitled to a writ of possession and it is the court’s
ministerial duty to issue said writ; it is a matter of right.

VIII. CHATTEL MORTGAGE Upon TMI’s default, PCILF was entitled to seize the mortgaged
equipment, not as owner but as creditor-mortgagee for the purpose
of foreclosing the chattel mortgage
A. GENERAL CONCEPTS
PCILF’s sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in the exercise of
Art. 2085 The following requisites are essential to the contracts of pledge its right to foreclose the chattel mortgage as creditor-mortgagee
and mortgage:
Brief Facts: TMI came to PCI to seek a loan. Instead of extending a loan,
PCI offered to buy various equipment TMI owned, in exchange for
obligation;
P2.8M. Deeds of sale were executed and both parties entered into a lease
agreement.
B. FORM OF CHATTEL MORTGAGE
(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally Act No. 1508, Sec. 4 Validity. — A chattel mortgage shall not be valid
authorized for the purpose. against any person except the mortgagor, his executors or administrators,
unless the possession of the property is delivered to and retained by the
Third persons who are not parties to the principal obligation may secure mortgagee or unless the mortgage is recorded in the office of the register
the latter by pledging or mortgaging their own property. (1857) of deeds of the province in which the mortgagor resides at the time of
making the same, or, if he resides without the Philippine Islands, in the
Art. 2087 It is also of the essence of these contracts that when the province in which the property is situated: Provided, however, That if the
principal obligation becomes due, the things in which the pledge or property is situated in a different province from that in which the
mortgage consists may be alienated for the payment to the creditor. (1858) mortgagor resides, the mortgage shall be recorded in the office of the
register of deeds of both the province in which the mortgagor resides and
that in which the property is situated, and for the purposes of this Act the
Art. 2140 By a chattel mortgage, personal property is recorded in the city of Manila shall be deemed to be a province.
Chattel Mortgage Register as a security for the performance of an
obligation. If the movable, instead of being recorded, is delivered to the
creditor or a third person, the contract is a pledge and not a chattel Act No. 1508, Sec. 5 Form. — A chattel mortgage shall be deemed to be
mortgage. (n) sufficient when made substantially in accordance with the following form,
and shall be signed by the person or persons executing the same, in the
presence of two witnesses, who shall sign the mortgage as witnesses to the
Art. 2141 The provisions of this Code on pledge, insofar as they are not in execution thereof, and each mortgagor and mortgagee, or, in the absence
conflict with the Chattel Mortgage Law shall be applicable to chattel of the mortgagee, his agent or attorney, shall make and subscribe an
mortgages. (n) affidavit in substance as hereinafter set forth, which affidavit, signed by the
parties to the mortgage as above stated, and the certificate of the oath
A chattel mortgage: signed by the authority administering the same, shall be appended to such
Is a real security transaction constituted to secure the fulfillment of mortgage and recorded therewith.
a principal obligation by the absolute owner (the mortgagor) of
personal property who has free disposal of the property, and in the FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
absence thereof, is legally authorized for the purpose
"This mortgage made this ____ day of ______19____ by
Is perfected by the recording of the personal property in the Chattel
_______________, a resident of the municipality of ______________,
Mortgage Register as a security
Province of ____________, Philippine Islands mortgagor, to
Subjects the collateral to the condition that when the principal ____________, a resident of the municipality of ___________, Province of
obligation becomes due, the collateral may be alienated for payment ______________, Philippine Islands, mortgagee, witnesseth:
to the creditor (the mortgagee)
"That the said mortgagor hereby conveys and mortgages to the said
Art. 2140: adheres to the equitable concept of a chattel mortgage; mortgagee all of the following-described personal property situated in the
preserves the distinction between pledge and chattel mortgage municipality of ______________, Province of ____________ and now in
the possession of said mortgagor, to wit:
Act of recording grants the chattel mortgagee the symbolic possession of
the collateral (Here insert specific description of the property mortgaged.)
In commercial transactions, it greatly facilitates the sale of goods and "This mortgage is given as security for the payment to the said ______,
merchandise; sales of merchandise would be sluggish and insubstantial if a mortgagee, of promissory notes for the sum of ____________ pesos, with
chattel mortgage did not adequately protect sellers against the defaults (or without, as the case may be) interest thereon at the rate of
and delinquencies of buyers ___________ per centum per annum, according to the terms of
__________, certain promissory notes, dated _________, and in the words
Old definition of Chattel Mortgage (but repealed by the CC) and figures following (here insert copy of the note or notes secured).
A conditional sale of personal property as security for the payment of a
debt, or the performance of some other obligation specified therein, the "(If the mortgage is given for the performance of some other obligation
condition being that the sale shall be void upon the seller paying the aside from the payment of promissory notes, describe correctly but
purchaser a sum of money or doing some other act named. If the condition concisely the obligation to be performed.)
is performed according to the terms the mortgage and sale immediately
becomes void, and the mortgagee is thereby divested of his title. "The conditions of this obligation are such that if the mortgagor, his heirs,
executors, or administrators shall well and truly perform the full
Originally regarded as a conditional sale of personal property, similar to a obligation (or obligations) above stated according to the terms thereof,
pacto de retro sale then this obligation shall be null and void.
"Executed at the municipality of _________, in the Province of ________,

PCI Leasing & Finance, Inc. v. Trojan Metal Industries Inc., et al.
this _____ day of 19_____
The true transaction was a simple loan secured by a chattel
mortgage, instead of a simulated financial leasing ____________________

(Signature of mortgagor.) Act No. 1508, Sec. 5 Form. — xxx
FORM OF OATH.
"In the presence of "We severally swear that the foregoing mortgage is made for the purpose
of securing the obligation specified in the conditions thereof, and for no
"_________________ other purpose, and that the same is a just and valid obligation, and one not
"_________________ entered into for the purpose of fraud."
(Two witnesses sign here.)
FORM OF CERTIFICATE OF OATH.
FORM OF OATH. "At ___________, in the Province of _________, personally appeared
"We severally swear that the foregoing mortgage is made for the purpose ____________, the parties who signed the foregoing affidavit and made
of securing the obligation specified in the conditions thereof, and for no oath to the truth thereof before me.
other purpose, and that the same is a just and valid obligation, and one not
entered into for the purpose of fraud." "_____________________________"
(Notary public, justice of the peace (now municipal judge), or other officer,
FORM OF CERTIFICATE OF OATH. as the case may be.)
"At ___________, in the Province of _________, personally appeared
____________, the parties who signed the foregoing affidavit and made
oath to the truth thereof before me.
"_____________________________" AFFIDAVIT OF GOOD FAITH

(Notary public, justice of the peace, 1 or other officer, as the case may be.) Unique requirement, required to be executed by the parties under the
Chattel Mortgage Law
Act No. 1508, Sec. 6 Corporations. — When a corporation is a party to Affidavit states that the chattel mortgage is:
such mortgage the affidavit required may be made and subscribed by a 1. Made solely for the purpose of securing the obligation specified in the
director, trustee, cashier, treasurer, or manager thereof, or by a person chattel mortgage, and
authorized on the part of such corporation to make or to receive such 2. The principal obligation is a just and valid obligation, and one not
mortgage. When a partnership is a party to the mortgage the affidavit entered into for the purpose of fraud
may be made and subscribed by one member thereof.
OBLIGATIONS SECURED
Unlike a pledge, can only cover obligations existing at the time the
mortgage is constituted
To be valid against any person:
Recorded in the office of the register of deeds:
Cannot secure after-incurred obligations even if these future debts are
Resident: Province in which the mortgagor resides at the time of accurately described
making the same
Non-resident: Province in which the province is situated Cannot be made to secure a debt to be thereafter contracted because the
If property is situated in a different province from which the law provides that the parties must make oath that the debt is a just debt,
mortgagor resides: Both the province in which the mortgagor resides honestly due and owing from the mortgagor to the mortgagee
and in which the property is situated
An increase or an extension of the chattel mortgage obligation becomes a
Form (see Sec. 5, Act No. 1508) new chattel mortgage in itself, and will take effect only from the date the
Signed by the person or persons executing the same same are made and NOT from the date of the original chattel mortgage
In the presence of two witnesses, who shall sign as witnesses to the
execution CONTRACT TO MORTGAGE
If it includes future debts is a binding commitment
Each mortgagor and mortgagee, or, in the absence of the mortgagee,
his agent or attorney, shall make and subscribe an affidavit in
But chattel mortgage itself, is not perfected until after an agreement
substance, signed by the parties
covering the newly contracted debt is executed conformably with the form
Certificate of oath signed by the authority administering the same prescribed
Appended to the mortgage and recorded
Refusal of the debtor to execute the agreement to cover the after-incurred
When a corporation is a party: affidavit may be made and subscribed by a obligation may consist in an event of default of the contract to mortgage
director, trustee, cashier, treasurer, or manager thereof, or by a person - Remedy of foreclosure will only cover the debts existing at the time
authorized of constitution of the contract of chattel mortgage
When a partnership is a party: affidavit may be made and subscribed by
one member

ACME Shoe, Rubber & Plastic Corporation v. CA
Contracts of personal security: the faithful performance of the D. OBJECT OF CHATTEL MORTGAGE
obligation by the principal debtor is secured by the personal
commitment of another Art. 2124 Only the following property may be the object of a contract of
Contracts of real security: fulfillment is secured by an encumbrance mortgage:
of property
o If the principal obligation becomes due and the debtor defaults, (1) Immovables;
the property encumbered can be alienated for the payment of
the obligation (2) Alienable real rights in accordance with the laws, imposed upon
o Should the obligation be duly paid, the contract is automatically immovables.
extinguished proceeding from the accessory character of the
agreement Nevertheless, movables may be the object of a chattel mortgage. (1874a)
o Once the obligation is complied with, then the contract of
security becomes, ipso facto, null and void
Art. 416 The following things are deemed to be personal property:
A promise expressed in a chattel mortgage to include debts that are
yet to be contracted can be a binding commitment that can be (1) Those movables susceptible of appropriation which are not included in
compelled upon; the security itself, however, does not come into the preceding article;
existence or arise until after a chattel mortgage agreement covering
the newly contract debt is executed (2) Real property which by any special provision of law is considered as
o Refusal on the party of the borrower to execute the agreement personalty;
to cover the after-incurred obligation can constitutes an act of
default (3) Forces of nature which are brought under control by science; and
o Remedy of foreclosure can only cover debts extant at the time of
constitution and during the life of the chattel mortgage sought (4) In general, all things which can be transported from place to place
to be foreclosed without impairment of the real property to which they are fixed. (335a)
Since the 1978 chattel mortgage had ceased to exist coincidentally
with the full payment of the P3-M loan, there no longer was any Art. 417 The following are also considered as personal property:
chattel mortgage that could cover the new loans that were concluded
thereafter (1) Obligations and actions which have for their object movables or
demandable sums; and
Contracts Involved:
(a) Contract of Loan: between Acme and Producers (2) Shares of stock of agricultural, commercial and industrial entities,
1st: P3-M (FULLY PAID) with chattel mortgage although they may have real estate. (336a)
2nd: P2.7-M (FULLY PAID)
3rd: P1-M (NOT FULLY PAID) Act No. 1508, Sec. 2 All personal property shall be subject to mortgage,
(b) Chattel Mortgage: between Chua Pac and Producers, in favor of agreeably to the provisions of this Act, and a mortgage executed in
Acme covering the P3-M pursuance thereof shall be termed chattel mortgage.
Brief Facts: Acme obtained a loan worth P3-M from Producers Bank, GR: Movable/Personal properties are the object of a chattel mortgage.
with Chua Pac executing a Chattel Mortgage Agreement to secure said
loan. In the Agreement, there was a stipulation providing for the EX: Jurisprudence provides that immovable/real properties may be the
mortgage securing subsequent/future loans. Later, Acme obtained 2 more object of a chattel mortgage when (1) parties validly agree/consent to
loans from Producers, fully paying the first and defaulting in the second. treat them as movable/personal properties, and (2) no third persons are
The Bank applied for the extrajudicial foreclosure of the mortgage, which prejudiced by such an agreement. (Makati Leasing and Finance Corp v.
was opposed by Acme. Wearever Textile Mills, citing Tumalad v. Vicencio).
Doctrine: A chattel mortgage can only cover obligations existing at the Makati Leasing and Finance Corp v. Wearever Textile Mills
time the mortgage is constituted. A promise to include debts yet to be Concept: Chattel Mortgage; Object of Chattel Mortgage
contracted can be a binding commitment that can be compelled upon, but Contract Involved:
the security itself does not come into existence until a new chattel (a) Chattel Mortgage, between MLFC and WTM over certain raw
mortgage is created or the old one is amended conformably with the materials and machinery
Chattel Mortgage Law.
Brief Facts: When WTM defaulted on its obligation to MLFC, MLFC
sought to execute the deed of chattel mortgage (subject of which was an
immobilized machine) securing the obligation. The CFI found for MLFC
and issued a writ of replevin. However, the CA reversed the CFI and ruled
that the immobilized machine is n invalid subject of the writ and of the
chattel mortgage.
Doctrine: Parties may treat real property as personal property for a

chattel mortgage, as long as (1) they validly agree/consent to it, and (2)
no third persons are prejudiced by such an arrangement.
1. REASONABLE DESCRIPTION RULE
Act No. 1508, Sec. 7 Descriptions of property. — The description of the

mortgaged property shall be such as to enable the parties to the mortgage,
or any other person, after reasonable inquiry and investigation, to identify
the same.

If the property mortgaged be large cattle," as defined by section one of Act The purpose of allowing such a provision is to promote economic and
Numbered Eleven and forty-seven, (Now section 511 of the business transactions.
Administrative Code) and the amendments thereof, the description of said
property in the mortgage shall contain the brands, class, sex, age, knots of Had it not been allowed, it would have been impossible to constitute a
radiated hair commonly known as remolinos, or cowlicks, and other marks chattel mortgage over, for example, a retail store, the stocked goods of
of ownership as described and set forth in the certificate of ownership of which are bought and sold frequently, without requiring them to close
said animal or animals, together with the number and place of issue of down. This is contrary to the purpose of the Chattel Mortgage Law.
such certificates of ownership.
It is only required that the chattel mortgage expressly stipulate that such
If growing crops be mortgaged the mortgage may contain an agreement “after acquired properties” are included under the coverage of the chattel
stipulating that the mortgagor binds himself properly to tend, care for and mortgage.
protect the crop while growing, and faithfully and without delay to
harvest the same, and that in default of the performance of such duties the
mortgage may enter upon the premises, take all the necessary measures E. OWNERSHIP OF COLLATERAL
for the protection of said crop, and retain possession thereof and sell the
It is essential that (1) the mortgagor be the absolute owner of the
same, and from the proceeds of such sale pay all expenses incurred in
collateral, and (2) that the mortgagor have the free disposal of the
caring for, harvesting, and selling the crop and the amount of the
collateral OR, if it does not have such right to freely dispose of the
indebtedness or obligation secured by the mortgage, and the surplus
collateral, be legally authorized to constitute the mortgage.
thereof, if any shall be paid to the mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the property described A mortgagor retains the right to alienate the collateral.
therein and not like or substituted property thereafter acquired by the
mortgagor and placed in the same depository as the property originally However, such right is restrained by requirements imposed by law: the
mortgaged, anything in the mortgage to the contrary notwithstanding. mortgagor MUST obtain the consent of the mortgagee to make such
alienation.
Sec. 7 of Act 1508 (Chattel Mortgage Law) does NOT require a specific - Otherwise, he shall be liable under RPC Art. 319, Par. 2 (Sale or
and thorough definition. Pledge of Mortgaged Property)
The Reasonable Description Rule under the said provision only requires Somera in class: While it is already established that failure to obtain
that the description must enable the parties to identify the collateral, consent of the mortgagee with respect to the alienation will affect criminal
after reasonable inquiry and investigation. liability, how does it affect the validity of the alienation (ex. sale) to a third
person?
2. AFTER ACQUIRED PROPERTIES
Dy v. CA
When a sale of the collateral by the mortgagor is involved, lack of
Act No. 1508, Sec. 7 Descriptions of property. — The description of the consent from the mortgage only affects the criminal liability of the
mortgaged property shall be such as to enable the parties to the mortgage, mortgagor but NOT the validity
or any other person, after reasonable inquiry and investigation, to identify
Concept: Chattel mortgage; ownership of collateral
the same.
Contracts Involved:
If the property mortgaged be large cattle," as defined by section one of Act (a) Contract of Loan (Financing contract) between Wilfredo Dy and
Numbered Eleven and forty-seven, (Now section 511 of the Libra Finance and Investment Corporation
Administrative Code) and the amendments thereof, the description of said (b) Chattel Mortgage over the truck and tractor between Wilfredo Dy
property in the mortgage shall contain the brands, class, sex, age, knots of and Libra
radiated hair commonly known as remolinos, or cowlicks, and other marks (c) Contract of Sale with Assumption of Mortgage over the tractor
of ownership as described and set forth in the certificate of ownership of between Wilfredo Dy and Perfecto Dy
said animal or animals, together with the number and place of issue of (d) Chattel Mortgage between Perfecto Dy and Libra
such certificates of ownership. (e) Contract of Sale over the truck between Wilfredo Dy and Carol Dy-
Seno
If growing crops be mortgaged the mortgage may contain an agreement
stipulating that the mortgagor binds himself properly to tend, care for and Brief Facts: Wilfredo purchased a tractor and truck through financing
protect the crop while growing, and faithfully and without delay to extended by Libra Finance. He sold the tractor to his brother Perfecto,
harvest the same, and that in default of the performance of such duties the who assumed the mortgage debt with the consent of Libra. After the
mortgage may enter upon the premises, take all the necessary measures consummation of the sale through the execution of a Deed of Absolute
for the protection of said crop, and retain possession thereof and sell the Sale in favor of perfecto, the tractor was seized by the provincial sheriff of
same, and from the proceeds of such sale pay all expenses incurred in Cebu to satisfy the judgment debt of Wilfredo in a civil case filed against
caring for, harvesting, and selling the crop and the amount of the the latter by Gelac Trading. Perfecto is now questioning the validity of
indebtedness or obligation secured by the mortgage, and the surplus the seizure of the tractor, claiming that he and not Wilfredo was the
thereof, if any shall be paid to the mortgagor or those entitled to the same. owner of the same at the time it was taken into custody by the sheriff,
hence could not be levied upon to satisfy a judgment against Wilfredo.
A chattel mortgage shall be deemed to cover only the property described
therein and not like or substituted property thereafter acquired by the Doctrine: The mortgagor who gave the property as security under a
mortgagor and placed in the same depository as the property originally chattel mortgage did not part with the ownership of the same. Hence, the
mortgaged, anything in the mortgage to the contrary notwithstanding. mortgagor could validly alienate the property mortgaged but sale can only
bind the mortgagee if the same be done with the latter’s consent.
GR: A chattel mortgage will only cover the property described therein,
and shall not cover property acquired after its execution. Servicewide Specialists v. IAC
If the alienation, however, amounts to a substitution of the debtor (as
EX: However, Sec. 7 allows for a stipulation in the chattel mortgage that it is in this case), the consent of the mortgagee-creditor is essential,
the mortgagor may sell the chattel that is covered by the mortgage, and is pursuant to Art. 1293 of the NCC; it affects the validity of the alienation.
thereafter obligated to replace, renew or substitute the sold chattel with
other property thereafter acquired. Such provision is valid and binding and
effectively widens the scope of a chattel mortgage to “after acquired
properties.”
F. FORECLOSURE OF CHATTEL MORTGAGE
b) collect the filing fees therefore pursuant to rule 141, Section 7(c), as
Act No. 1508, Sec. 8 Failure of mortgagee to discharge the mortgage. — amended by A.M. No. 00-2-01-SC, and issue the corresponding official
If the mortgagee, assign, administrator, executor, or either of them, after receipt;
performance of the condition before or after the breach thereof, or after
tender of the performance of the condition, at or after the time fixed for c) examine, in case of real estate mortgage foreclosure, whether the
the performance, does not within ten days after being requested thereto by applicant has complied with all the requirements before the public auction
any person entitled to redeem, discharge the mortgage in the manner is conducted under the direction of the sheriff or a notary public, pursuant
provided by law, the person entitled to redeem may recover of the person to Sec. 4 of Act 3135, as amended;
whose duty it is to discharge the same twenty pesos for his neglect and all
damages occasioned thereby in an action in any court having jurisdiction d) sign and issue the certificate of sale, subject to the approval of the
of the subject-matter thereof. Executive Judge, or in his absence, the Vice-Executive Judge. No
certificate of sale shall be issued in favor of the highest bidder until all fees
provided for in the aforementioned sections and in Rule 141, Section 9(1),
Act No. 1508, Sec. 14 Sale of property at public auction; Officer's return; as amended by A.M. No. 00-2-01-SC, shall have been paid; Provided, that
Fees; Disposition of proceeds. — The mortgagee, his executor, in no case shall the amount payable under Rule 141, Section 9(1), as
administrator, or assign, may, after thirty days from the time of condition amended, exceed P100,000.00;
broken, cause the mortgaged property, or any part thereof, to be sold at
public auction by a public officer at a public place in the municipality e) after the certificate of sale has been issued to the highest bidder, keep
where the mortgagor resides, or where the property is situated, provided the complete records, while awaiting any redemption within a period of
at least ten days' notice of the time, place, and purpose of such sale has one (1) year from date of registration of the certificate of sale with the
been posted at two or more public places in such municipality, and the Register of Deeds concerned, after which, the records shall be archived.
mortgagee, his executor, administrator, or assign, shall notify the Notwithstanding the foregoing provision, juridical persons whose
mortgagor or person holding under him and the persons holding property is sold pursuant to an extra-judicial foreclosure, shall have the
subsequent mortgages of the time and place of sale, either by notice in right to redeem the property until, but not after, the registration of the
writing directed to him or left at his abode, if within the municipality, or certificate of foreclosure sale which in no case shall be more than three (3)
sent by mail if he does not reside in such municipality, at least ten days months after foreclosure, whichever is earlier, as provided in Section 47 of
previous to the sale. Republic Act No. 8791 (as amended, Res. Of August 7, 2001).
The officer making the sale shall, within thirty days thereafter, make in Where the application concerns the extrajudicial foreclosure of mortgages
writing a return of his doings and file the same in the office of the register of real estates and/or chattels in different locations covering one
of deeds where the mortgage is recorded, and the register of deeds shall indebtedness, only one filing fee corresponding to such indebtedness shall
record the same. The fees of the officer for selling the property shall be the be collected. The collecting Clerk of Court shall, apart from the official
same as in the case of sale on execution as provided in Act Numbered One receipt of the fees, issue a certificate of payment indicating the amount of
hundred and ninety, (Now Rule 141, section 7 of the Rules of Court) and indebtedness, the filing fees collected, the mortgages sought to be
the amendments thereto, and the fees of the register of deeds for foreclosed, the real estates and/or chattels mortgaged and their respective
registering the officer's return shall be taxed as a part of the costs of sale, locations, which certificate shall serve the purpose of having the
which the officer shall pay to the register of deeds. The return shall application docketed with the Clerks of Court of the places where the
particularly describe the articles sold, and state the amount received for other properties are located and of allowing the extrajudicial foreclosures
each article, and shall operate as a discharge of the lien thereon created by to proceed thereat.
the mortgage. The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then to the 3. The notices of auction sale in extrajudicial foreclosure for publication
payment of the demand or obligation secured by such mortgage, and the by the sheriff or by a notary public shall be published in a newspaper of
residue shall be paid to persons holding subsequent mortgages in their general circulation pursuant to Section 1, Presidential Decree No. 1079,
order, and the balance, after paying the mortgages, shall be paid to the dated January 2, 1977, and non-compliance therewith shall constitute a
mortgagor or person holding under him on demand. violation of Section 6 thereof.
If the sale includes any "large cattle," a certificate of transfer as required 4. The Executive Judge shall, with the assistance of the Clerk of Court,
by section sixteen of Act Numbered Eleven hundred and forty-seven (Now raffle applications for extrajudicial foreclosure of mortgage under the
Section 523 of the Administrative Code) shall be issued by the treasurer of direction of the sheriff among all sheriffs, including those assigned to the
the municipality where the sale was held to the purchaser thereof. Office of the Clerk of Court and Sheriffs IV assigned in the branches.
A.M. No. 99-10-05-0 August 7, 2001 5. The name/s of the bidder/s shall be reported by the sheriff or the
[PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF notary public who conducted the sale to the Clerk of Court before the
MORTGAGE] issuance of the certificate of sale.
In line with the responsibility of an Executive Judge under Administrative This Resolution amends or modifies accordingly Administrative Order
Order No. 6, dated June 30, 1975, for the management of courts within his No. 3 issued by then Chief Justice Enrique M. Fernando on 19 October
administrative area, included in which is the task of supervising directly 1984 and Administrative Circular No. 3-98 issued by the Chief Justice
the work of the Clerk of Court, who is also the Ex-Office Sheriff, and his Andres R. Narvasa on 5 February 1998.
staff, and the issuance of commissions to notaries public and enforcement
of their duties under the law, the following procedures are hereby The Court Administrator may issue the necessary guidelines for the
prescribed in extrajudicial foreclosure of mortgages: effective enforcement of this Resolution.
1. All applications for extra-judicial foreclosure of mortgage whether The Clerk of Court shall cause the publication of this Resolution in a
under the direction of the sheriff or a notary public, pursuant to Act 3135, nuewspaper of general circulation not later than August 14, 2001 and
as amended by Act 4118, and Act 1508, as amended, shall be filed with the furnish copies thereof to the Integrated Bar of the Philippines.
Executive Judge, through the Clerk of court who is also the Ex-Officio
Sheriff. This Resolution shall take effect on the 1st day of September of the year
2001.
2. Upon receipt of an application for extra-judicial foreclosure of
mortgage, it shall be the duty of the Clerk of Court to: Promulgated this 7th day of August 2001 in the City of Manila.
a) receive and docket said application and to stamp thereon the

corresponding file number, date and time of filing;
If the principal obligation becomes due and the debtor defaults, the If the equity of redemption is exercised not by the mortgagor but by a
creditor, as mortgagee, may elect to foreclose the collateral, by causing subsequent attaching creditor, who effectively pays the mortgagee, the
its alienation in accordance with the procedures allowed by law. rights acquired by the attaching creditor are the rights that pertain to the
mortgagee, granting the attaching creditor the right to foreclose the
The Chattel Mortgage Law authorizes the extrajudicial foreclosure of chattel mortgage.
chattel mortgage.
1. EQUITY OF REDEMPTION
Act No. 1508, Sec. 13 When the condition of a chattel mortgage is

broken, a mortgagor or person holding a subsequent mortgage, or a
subsequent attaching creditor may redeem the same by paying or
delivering to the mortgagee the amount due on such mortgage and the
reasonable costs and expenses incurred by such breach of condition before
the sale thereof. An attaching creditor who so redeems shall be subrogated
to the rights of the mortgagee and entitled to foreclose the mortgage in
the same manner that the mortgagee could foreclose it by the terms of this
Act.
Act No. 1508, Sec. 14 Sale of property at public auction; Officer's return;
Fees; Disposition of proceeds. — The mortgagee, his executor,
administrator, or assign, may, after thirty days from the time of condition
broken, cause the mortgaged property, or any part thereof, to be sold at
public auction by a public officer at a public place in the municipality
where the mortgagor resides, or where the property is situated, provided
at least ten days' notice of the time, place, and purpose of such sale has
been posted at two or more public places in such municipality, and the
mortgagee, his executor, administrator, or assign, shall notify the
mortgagor or person holding under him and the persons holding
subsequent mortgages of the time and place of sale, either by notice in
writing directed to him or left at his abode, if within the municipality, or
sent by mail if he does not reside in such municipality, at least ten days
previous to the sale.
The officer making the sale shall, within thirty days thereafter, make in
writing a return of his doings and file the same in the office of the register
of deeds where the mortgage is recorded, and the register of deeds shall
record the same. The fees of the officer for selling the property shall be the
same as in the case of sale on execution as provided in Act Numbered One
hundred and ninety, (Now Rule 141, section 7 of the Rules of Court) and
the amendments thereto, and the fees of the register of deeds for
registering the officer's return shall be taxed as a part of the costs of sale,
which the officer shall pay to the register of deeds. The return shall
particularly describe the articles sold, and state the amount received for
each article, and shall operate as a discharge of the lien thereon created by
the mortgage. The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then to the
payment of the demand or obligation secured by such mortgage, and the
residue shall be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgages, shall be paid to the
mortgagor or person holding under him on demand.
If the sale includes any "large cattle," a certificate of transfer as required

by section sixteen of Act Numbered Eleven hundred and forty-seven (Now
Section 523 of the Administrative Code) shall be issued by the treasurer of
the municipality where the sale was held to the purchaser thereof.
The redemption cited in Section 13 of the Chattel Mortgage Law partakes

of an equity of redemption.
EQUITY OF REDEMPTION
- The right of the mortgagor in default to recover the collateral
before a foreclosure sale by paying the principal, interest, and other
costs that are due, thereby alleviating, as a matter of equity, the
severity of the legal rule on default (Black’s Law Dictionary, Ninth
Edition)
- The right of the mortgagor to extinguish the mortgage and retain
ownership of the collateral after default in the performance of the
principal obligation but before the foreclosure sale of the collateral,
by paying the principal obligation within a grace period of 30 days
granted by the Chattel Mortgage Law

2. RIGHT OF REDEMPTION Brief Facts: Laus bought a motor vehicle on credit, issuing therefor a
Different from Equity of Redemption promissory note secured by a chattel mortgage over the vehicle. Laus
failed to pay despite demands from Servicewide. Servicewide, for the
Right of the mortgagor to “repurchase” the collateral even after purpose of foreclosing the mortgage, filed a replevin suit against Tee,
confirmation of a foreclosure sale but within the periods prescribed by law alleged possessor of the motor vehicle, who was later substituted by
Villafranca, who alleged that he owned the motor vehicle. Laus was not
It is a statutory right of a mortgagor in default to reclaim, regain or impleaded in the suit for replevin.
recover the collateral after the foreclosure sale
Doctrine: In an action for replevin arising from a chattel mortgage, if the
In this jurisdiction, there is no statute that vests the right of plaintiff’s right to possess the thing is not or cannot be disputed, then it is
redemption over personal property enough to file the complaint against the possessor of the thing mortgaged;
otherwise, other persons need to be impleaded. Plaintiff’s right to
Under the Chattel Mortgage Law, the mortgagor has only an equity of possession is in controversy, for example, when ownership rights to the
redemption but no right of redemption over property sold thing or default of the mortgagor is disputed.
Rizal Commercial Banking Corporation v. Royal Cargo Corporation 4. RIGHT TO SURPLUS OR DEFICIENCY
(2009)
Concept: Foreclosure of Chattel Mortgage – Right of Redemption Act No. 1508, Sec. 14 Sale of property at public auction; Officer's return;
Contracts Involved: Fees; Disposition of proceeds. — The mortgagee, his executor,
(a) P3M ‘obligation’ between RCBC and Terrymanila administrator, or assign, may, after thirty days from the time of condition
(b) Chattel Mortgage between RCBC and Terrymanila broken, cause the mortgaged property, or any part thereof, to be sold at
(c) Writ of Attachment over some of Terrymanila’s properties applied public auction by a public officer at a public place in the municipality
for by ROYAL where the mortgagor resides, or where the property is situated, provided
at least ten days' notice of the time, place, and purpose of such sale has
Brief Facts: Upon Terrymanila’s petition for voluntary insolvency, RCBC been posted at two or more public places in such municipality, and the
was granted permission to foreclose the chattel mortgage executed over mortgagee, his executor, administrator, or assign, shall notify the
Terrymanila’s assets. A foreclosure sale subsequently happened, in which mortgagor or person holding under him and the persons holding
RCBC was the winning bidder. ROYAL filed an annulment of said subsequent mortgages of the time and place of sale, either by notice in
foreclosure sale, as it included some of the properties of Terrymanila it had writing directed to him or left at his abode, if within the municipality, or
already attached to secure a judgment award against it, and that RCBC sent by mail if he does not reside in such municipality, at least ten days
failed to notify them of the auction sale pursuant to Sec. 14 of the CM law. previous to the sale.
Doctrine: An equity of redemption under Sec. 13 of CM law, is different The officer making the sale shall, within thirty days thereafter, make in
from the right to redemption under Sec. 14. An equity of redemption may be writing a return of his doings and file the same in the office of the register
exercised only after default of the mortgagor in the performance of the of deeds where the mortgage is recorded, and the register of deeds shall
conditions in the mortgage but before the sale of the property. record the same. The fees of the officer for selling the property shall be the
same as in the case of sale on execution as provided in Act Numbered One
hundred and ninety, (Now Rule 141, section 7 of the Rules of Court) and
3. RIGHT TO POSSESSION the amendments thereto, and the fees of the register of deeds for
A mortgagee, unlike a pledgee, is generally not in possession of the registering the officer's return shall be taxed as a part of the costs of sale,
collateral unless and until the principal debtor defaults and the mortgagee which the officer shall pay to the register of deeds. The return shall
seeks to foreclose. particularly describe the articles sold, and state the amount received for
each article, and shall operate as a discharge of the lien thereon created by
The chattel mortgage contract constitutes the mortgagee, upon the the mortgage. The proceeds of such sale shall be applied to the payment,
principal debtor’s default, as an attorney-in-fact of the mortgagor, first, of the costs and expenses of keeping and sale, and then to the
enabling the mortgagee to act for and in behalf of the owner of the payment of the demand or obligation secured by such mortgage, and the
collateral residue shall be paid to persons holding subsequent mortgages in their
- The mortgagee is authorized to take possession of the collateral on order, and the balance, after paying the mortgages, shall be paid to the
default of the principal debtor mortgagor or person holding under him on demand.
- When possessor of collateral refuses to yield possession, the
mortgage has the right to maintain an action to recover possession, If the sale includes any "large cattle," a certificate of transfer as required
or replevy, the collateral, from the mortgagor or from any person in by section sixteen of Act Numbered Eleven hundred and forty-seven (Now
possession Section 523 of the Administrative Code) shall be issued by the treasurer of
the municipality where the sale was held to the purchaser thereof.
Replevin – possessory in nature and determines nothing more than the
right of possession; only the person in possession needs to be impleaded Mortgagor is entitled to the balance (or surplus) of the price of sale over
the amounts required to be paid under Section 14
Section 14 of the Chattel Mortgage Law does not require that foreclosure
of the collateral is caused before instituting an action for replevin In case of insufficient proceeds, the mortgagor is likewise liable to pay the
Rationale: right of possession of the collateral is conditioned upon fact of deficiency (although the law is silent on the matter)
actual default of debtor, and this may be subject to controversy, hence
foreclosure cannot be the first recourse since the sheriff has no duty or
authority in the first instance to seize the collateral, but also because PAMECA Wood Treatment Plant Inc vs. Court of Appeals
whenever the sheriff proceeds under Section 14, he becomes a mere agent Concept: Chattel Mortgage
of the mortgagee. In this case, an action to recover possession or replevin Contracts Involved:
should be instituted first. (a) Contract of Loan: between PAMECA and DBP
(b) Chattel Mortgage: in favor of DBP over PAMECA properties in
Servicewide Specialists vs. CA Dumaguete
Concept: Right to Possession (Chattel Mortgage)
NB: No quoted contracts; only references to the exhibits where they were Brief Facts: Pameca loaned P2mil from DBP and executed a promissory
found. The terms of the contracts are shown underlined below, as culled note, secured by its inventory of furniture and equipment. A monthbefore
from the discussion by the Court. the mortgage contract, its supposed market value was P2.5mil. They
defaulted so DBP extrajudicially foreclosed on thechattels. It was the only
bidder so it was able to buy it for around P322,000. Then for the
deficiency, it filed a complaint against Pameca and its solidary debtors
(Teveses and Pulido) according to the promissory note it signed.
Doctrine: Since the Chattel Mortgage Law bars the creditor-mortgagee

from retaining the excess of the sale proceeds there is a corollary
obligation on the part of the debtor-mortgagee to pay the deficiency in
case of a reduction in the price at public auction

X. Insolvency half (1/2) or less of the voting power of an enterprise when there is power:
(1) over more than one-half (1/2) of the voting rights by virtue of
I. THE CONCEPT OF INSOLVENCY an agreement with investors;
(2) to direct or govern the financial and operating policies of the
Art. 2236. The debtor is liable with all his property, present and future,
enterprise under a statute or an agreement;
for the fulfillment of his obligations, subject to the exemptions provided by
law. (1911a) (3) to appoint or remove the majority of the members of the board
of directors or equivalent governing body; or
(4) to cast the majority votes at meetings of the board of directors
Art. 2237. Insolvency shall be governed by special laws insofar as they are
or equivalent governing body.
not inconsistent with this Code. (n)
(g) Court shall refer to the court designated by the Supreme Court to hear
RA 10142, Sec. 2 Declaration of Policy - It is the policy of the State to and determine, at the first instance, the cases brought under this Act.
encourage debtors, both juridical and natural persons, and their creditors
to collectively and realistically resolve and adjust competing claims and (h) Creditor shall refer to a natural or juridical person which has a
property rights. In furtherance thereof, the State shall ensure a timely, fair, claim against the debtor that arose on or before the commencement
transparent, effective and efficient rehabilitation or liquidation of debtors. date.
The rehabilitation or liquidation shall be made with a view to ensure or
maintain certainly and predictability in commercial affairs, preserve and (i) Date of liquidation shall refer to the date on which the court issues the
maximize the value of the assets of these debtors, recognize creditor rights Liquidation Order.
and respect priority of claims, and ensure equitable treatment of creditors
who are similarly situated. When rehabilitation is not feasible, it is in the (j) Days shall refer to calendar days unless otherwise specifically stated in
interest of the State to facilities a speedy and orderly liquidation of these this Act.
debtor's assets and the settlement of their obligations.
(k) Debtor shall refer to, unless specifically excluded by a provision
RA 10142, Sec. 4 (h, k, n, o) Definition of Terms - As used in this Act, the of this Act, a sole proprietorship duly registered with the
term: Department of Trade and Industry (DTI), a partnership duly
registered with the Securities and Exchange Commission (SEC), a
(a) Administrative expenses shall refer to those reasonable and necessary corporation duly organized and existing under Philippine laws, or an
expenses: individual debtor who has become insolvent as defined herein.
(1) incurred or arising from the filing of a petition under the
provisions of this Act; (l) Encumbered property shall refer to real or personal property of the
(2) arising from, or in connection with, the conduct of the debtor upon which a lien attaches.
proceedings under this Act, including those incurred for the
rehabilitation or liquidation of the debtor; (m) General unsecured creditor shall refer to a creditor whose claim or a
portion thereof its neither secured, preferred nor subordinated under this
(3) incurred in the ordinary course of business of the debtor after Act.
the commencement date;
(4) for the payment of new obligations obtained after the (n) Group of debtors shall refer to and can cover only: (1)
commencement date to finance the rehabilitation of the debtor; corporations that are financially related to one another as parent
(5) incurred for the fees of the rehabilitation receiver or liquidator corporations, subsidiaries or affiliates; (2) partnerships that are
and of the professionals engaged by them; and owned more than fifty percent (50%) by the same person; and (3)
(6) that are otherwise authorized or mandated under this Act or single proprietorships that are owned by the same person. When the
such other expenses as may be allowed by the Supreme Court in petition covers a group of debtors, all reference under these rules to
its rules. debtor shall include and apply to the group of debtors.
(b) Affiliate shall refer to a corporation that directly or indirectly, through (o) Individual debtor shall refer to a natural person who is a resident
one or more intermediaries, is controlled by, or is under the common and citizen of the Philippines that has become insolvent as defined
control of another corporation. herein.
(c) Claim shall refer to all claims or demands of whatever nature or (p) Insolvent shall refer to the financial condition of a debtor that is
character against the debtor or its property, whether for money or generally unable to pay its or his liabilities as they fall due in the ordinary
otherwise, liquidated or unliquidated, fixed or contingent, matured or course of business or has liabilities that are greater than its or his assets.
unmatured, disputed or undisputed, including, but not limited to; (1) all
claims of the government, whether national or local, including taxes, (q) Insolvent debtor's estate shall refer to the estate of the insolvent
tariffs and customs duties; and (2) claims against directors and officers of debtor, which includes all the property and assets of the debtor as of
the debtor arising from acts done in the discharge of their functions falling commencement date, plus the property and assets acquired by the
within the scope of their authority: Provided, That, this inclusion does not rehabilitation receiver or liquidator after that date, as well as all other
prohibit the creditors or third parties from filing cases against the property and assets in which the debtor has an ownership interest,
directors and officers acting in their personal capacities. whether or not these property and assets are in the debtor's possession as
of commencement date: Provided, That trust assets and bailment, and
(d) Commencement date shall refer to the date on which the court issues other property and assets of a third party that are in the possession of the
the Commencement Order, which shall be retroactive to the date of filing debtor as of commencement date, are excluded therefrom.
of the petition for voluntary or involuntary proceedings.
(r) Involuntary proceedings shall refer to proceedings initiated by
(e) Commencement Order shall refer to the order issued by the court creditors.
under Section 16 of this Act.
(s) Liabilities shall refer to monetary claims against the debtor, including
(f) Control shall refer to the power of a parent corporation to direct or stockholder's advances that have been recorded in the debtor's audited
govern the financial and operating policies of an enterprise so as to obtain financial statements as advances for future subscriptions.
benefits from its activities. Control is presumed to exist when the parent
owns, directly or indirectly through subsidiaries or affiliates, more than (t) Lien shall refer to a statutory or contractual claim or judicial charge on
one-half (1/2) of the voting power of an enterprise unless, in exceptional real or personal property that legality entities a creditor to resort to said
circumstances, it can clearly be demonstrated that such ownership does property for payment of the claim or debt secured by such lien.
not constitute control. Control also exists even when the parent owns one-
(u) Liquidation shall refer to the proceedings under Chapter V of this Act. (ll) Secured party shall refer to a secured creditor or the agent or
representative of such secured creditor.
(v) Liquidation Order shall refer to the Order issued by the court under
Section 112 of this Act. (mm) Securities market participant shall refer to a broker dealer,
underwriter, transfer agent or other juridical persons transacting
(w) Liquidator shall refer to the natural person or juridical entity securities in the capital market.
appointed as such by the court and entrusted with such powers and duties
as set forth in this Act: Provided, That, if the liquidator is a juridical (nn) Stakeholder shall refer, in addition to a holder of shares of a
entity, it must designated a natural person who possesses all the corporation, to a member of a nonstock corporation or association or a
qualifications and none of the disqualifications as its representative, it partner in a partnership.
being understood that the juridical entity and the representative are
solidarity liable for all obligations and responsibilities of the liquidator. (oo) Subsidiary shall refer to a corporation more than fifty percent (50%) of
the voting stock of which is owned or controlled directly or indirectly
(x) Officer shall refer to a natural person holding a management position through one or more intermediaries by another corporation, which
described in or contemplated by a juridical entity's articles of thereby becomes its parent corporation.
incorporation, bylaws or equivalent documents, except for the corporate
secretary, the assistant corporate secretary and the external auditor. (pp) Unsecured claim shall refer to a claim that is not secured by a lien.
(y) Ordinary course of business shall refer to transactions in the pursuit of (qq) Unsecured creditor shall refer to a creditor with an unsecured claim.
the individual debtor's or debtor's business operations prior to
rehabilitation or insolvency proceedings and on ordinary business terms. (rr) Voluntary proceedings shall refer to proceedings initiated by the
debtor.
(z) Ownership interest shall refer to the ownership interest of third parties
in property held by the debtor, including those covered by trust receipts or (ss) Voting creditor shall refer to a creditor that is a member of a class of
assignments of receivables. creditors, the consent of which is necessary for the approval of a
Rehabilitation Plan under this Act.
(aa) Parent shall refer to a corporation which has control over another
corporation either directly or indirectly through one or more RA 10142, Sec. 146 Application to Pending Insolvency, Suspension of
intermediaries. Payments and Rehabilitation Cases. - This Act shall govern all petitions filed
after it has taken effect. All further proceedings in insolvency, suspension
(bb) Party to the proceedings shall refer to the debtor, a creditor, the of payments and rehabilitation cases then pending, except to the extent
unsecured creditors' committee, a stakeholder, a party with an ownership that in opinion of the court their application would not be feasible or
interest in property held by the debtor, a secured creditor, the would work injustice, in which event the procedures set forth in prior laws
rehabilitation receiver, liquidator or any other juridical or natural person and regulations shall apply.
who stands to be benefited or injured by the outcome of the proceedings
and whose notice of appearance is accepted by the court.
RA 10142, Sec. 147 Application to Pending Contracts. - This Act shall apply
(cc) Possessory lien shall refer to a lien on property, the possession of to all contracts of the debtor regardless of the date of perfection.
which has been transferred to a creditor or a representative or agent
thereof. RA 10142, Sec. 148 Repeating Clause. - The Insolvency Law (Act No.
1956). As amended is hereby repealed. All other laws, orders, rules and
(dd) Proceedings shall refer to judicial proceedings commenced by the regulations or parts thereof inconsistent with any provision of this Act are
court's acceptance of a petition filed under this Act. hereby repealed or modified accordingly.
Debtor is constitutionally guaranteed non-imprisonment for a debt, but

(ee) Property of others shall refer to property held by the debtor in which CC subjects all the debtor’s property, present and future, to the fulfillment
other persons have an ownership interest. of the debtor’s obligations
(ff) Publication notice shall refer to notice through publication in a Provided the requirements of the law are followed, a creditor is given the
newspaper of general circulation in the Philippines on a business day for right to: attach, garnish, foreclose, execute upon, and otherwise seize the
two (2) consecutive weeks. property of a debtor for the fulfillment of the obligations to the creditor
(gg) Rehabilitation shall refer to the restoration of the debtor to a Debtor is allowed to reserve only the property that is exempted by law
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, PROCEEDINGS IN INSOLVENCY
more if the debtor continues as a going concern than if it is immediately Bankruptcy, in other jurisdictions
liquidated. From Latin bancus ruptus, or broken table
From medieval Italian custom of banca rotta, literally, the
(hh) Rehabilitation receiver shall refer to the person or persons, natural or breaking of the counter of a financially failed merchant
juridical, appointed as such by the court pursuant to this Act and which
shall be entrusted with such powers and duties as set forth herein. Needed because there is a risk that the debtor will still be unable to pay its
debt as they fall due in the usual course of business or as they mature
(ii) Rehabilitation Plan shall refer to a plan by which the financial well-
being and viability of an insolvent debtor can be restored using various Civil Code recognizes that even if the law requires the debtor to answer
means including, but not limited to, debt forgiveness, debt rescheduling, with all of its property for the fulfillment of its obligations, there is that
reorganization or quasi-reorganization, dacion en pago, debt-equity risk
conversion and sale of the business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed in Section 62 hereof, or INSOLVENCY PROCEEDINGS
other similar arrangements as may be approved by the court or creditors. Statutory procedures by which a debtor obtains financial relief and
undergoes judicially supervised reorganization or liquidation of its assets
(jj) Secured claim shall refer to a claim that is secured by a lien. for the benefit of its creditors
(kk) Secured creditor shall refer to a creditor with a secured claim. With the express repeal of Act No. 1956, or the Insolvency Law, the
FRIA, is the special law that currently governs insolvency
B. CIVIL AND CRIMINAL LIABILITY IN INSOLVENCY
Purpose of insolvency proceedings: PROCEEDINGS
To encourage insolvent debtors, and their creditors to collectively and RA 10142, Sec. 10 Liability of Individual Debtor, Owner of a Sole
realistically resolve and adjust competing claims and property rights,
Proprietorship, Partners in a Partnership, or Directors and Officers - Individual
while maintaining certainty and predictability in commercial affairs,
debtor, owner of a sole proprietorship, partners in a partnership, or
preserving and maximizing creditor rights and respecting priority of
directors and officers of a debtor shall be liable for double the value of the
claims, and ensuring equitable treatment of creditors who are similarly
property sold, embezzled or disposed of or double the amount of the
situated
transaction involved, whichever is higher to be recovered for benefit of the
debtor and the creditors, if they, having notice of the commencement of
Condition of being insolvent: the proceedings, or having reason to believe that proceedings are about to
Under the FRIA, and insofar as the debtor is concerned, the condition of be commenced, or in contemplation of the proceedings, willfully commit
being insolvent is defined as follows: the following acts:
(p) Insolvent shall refer to the financial condition of a debtor that is (a) Dispose or cause to be disposed of any property of the debtor
generally unable to pay its or his liabilities as they fall due in the other than in the ordinary course of business or authorize or
ordinary course of business or has liabilities that are greater than its approve any transaction in fraud of creditors or in a manner
or his assets. grossly disadvantageous to the debtor and/or creditors; or
(s) Liabilities shall refer to monetary claims against the debtor, including (b) Conceal or authorize or approve the concealment, from the
stockholder's advances that have been recorded in the debtor's creditors, or embezzles or misappropriates, any property of the
audited financial statements as advances for future subscriptions. debtor.
FRIA has broadened the concept of insolvency by including in its ambit The court shall determine the extent of the liability of an owner, partner,
illiquidity or equity insolvency, or the financial condition of a debtor director or officer under this section. In this connection, in case of
that may possess sufficient property but is unable to pay its liabilities partnerships and corporations, the court shall consider the amount of the
when they fall due, as well as balance sheet insolvency, or the financial shareholding or partnership or equity interest of such partner, director or
condition of a debtor that has liabilities that are greater than, or that officer, the degree of control of such partner, director or officer over the
exceed, its assets debtor, and the extent of the involvement of such partner, director or
debtor in the actual management of the operations of the debtor.
Under the FRIA definition, an illiquid debtor is an insolvent debtor
Under the FRIA, the state of being insolvent is calculated based on RA 10142, Sec. 145 Penalties - An owner, partner, director, officer or
liabilities, that is, the monetary claims against the debtor other employee of the debtor who commits any one of the following acts
shall, upon conviction thereof, be punished by a fine of not more than One
million pesos (Php 1, 000,000.00) and imprisonment for not less than
three(3) months nor more than five (5) years for each offense;
A. NATURE OF INSOLVENCY PROCEEDINGS (a) if he shall, having notice of the commencement of the
RA 10142, Sec. 3 Nature of Proceedings. - The proceedings under this Act proceedings, or having reason to believe that proceedings are
shall be in rem. Jurisdiction over all persons affected by the proceedings about to be commented, or in contemplation of the proceedings
shall be considered as acquired upon publication of the notice of the hide or conceal, or destroy or cause to be destroyed or hidden
commencement of the proceedings in any newspaper of general circulation any property belonging to the debtor or if he shall hide, destroy,
in the Philippines in the manner prescribed by the rules of procedure to be after mutilate or falsify, or cause to be hidden, destroyed,
promulgated by the Supreme Court. altered, mutilated or falsified, any book, deed, document or
The proceedings shall be conducted in a summary and non-adversarial writing relating thereto; if he shall, with intent to defraud the
manner consistent with the declared policies of this Act and in accordance creditors of the debtor, make any payment sale, assignment,
with the rules of procedure that the Supreme Court may promulgate. transfer or conveyance of any property belongings to the debtor
(b) if he shall, having knowledge belief of any person having proved
RA 10142, Sec. 7 Substantive and Procedural Consolidation. - Each juridical a false or fictitious claim against the debtor, fail to disclose the
entity shall be considered as a separate entity under the proceedings in same to the rehabilitation receiver of liquidator within one (1)
this Act. Under these proceedings, the assets and liabilities of a debtor month after coming to said knowledge or belief; or if he shall
may not be commingled or aggregated with those of another, unless the attempt to account for any of the debtors property by fictitious
latter is a related enterprise that is owned or controlled directly or losses or expense; or
indirectly by the same interests: Provided, however, That the commingling (c) (c) if he shall knowingly violate a prohibition or knowingly fail
or aggregation of assets and liabilities of the debtor with those of a related to undertake an obligation established by this Act.
enterprise may only be allowed where:
(a) there was commingling in fact of assets and liabilities of the debtor and
the related enterprise prior to the commencement of the proceedings;
(b) the debtor and the related enterprise have common creditors and it will
be more convenient to treat them together rather than separately;
(c) the related enterprise voluntarily accedes to join the debtor as party
petitioner and to commingle its assets and liabilities with the debtor's; and
(d) The consolidation of assets and liabilities of the debtor and the related
enterprise is beneficial to all concerned and promotes the objectives of
rehabilitation.
Provided, finally, That nothing in this section shall prevent the court from
joining other entities affiliated with the debtor as parties pursuant to the
rules of procedure as may be promulgated by the Supreme Court.
RA 10142, Sec. 6 Designation of Courts and Promulgation of Procedural

Rules. - The Supreme Court shall designate the court or courts that will
hear and resolve cases brought under this Act and shall promulgate the
rules of pleading, practice and procedure to govern the proceedings
brought under this Act.

II. CONCURRENCE & PREFERENCE OF CREDITS other applicable tax authorities;
(t) include a certified copy of a certificate of tax clearance or evidence of a

A. GENERAL CONCEPTS compromise settlement with the BIR;
RA 10142, Sec. 62 Contents of a Rehabilitation Plan – The Rehabilitation
Plan shall, as a minimum: (u) include a valid and binding r(,solution of a meeting of the debtor's
stockholders to increase the shares by the required amount in cases where
(a) specify the underlying assumptions, the financial goals and the the Plan contemplates an additional issuance of shares by the debtor;
procedures proposed to accomplish such goals;
(v) state the compensation and status, if any, of the rehabilitation receiver
(b) compare the amounts expected to be received by the creditors under after the approval of the Plan; and
the Rehabilitation Plan with those that they will receive if liquidation
ensues within the next one hundred twenty (120) days; (w) contain provisions for conciliation and/or mediation as a prerequisite
to court assistance or intervention in the event of any disagreement in the
(c) contain information sufficient to give the various classes of creditors a interpretation or implementation of the Rehabilitation Plan.
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 RA 10142, Sec. 133 Concurrence and Preference of Credits - The Liquidation
to the creditors; Plan and its Implementation shall ensure that the concurrence and
preference of credits as enumerated in the Civil Code of the Philippines
(d) establish classes of voting creditors; and other relevant laws shall be observed, unless a preferred creditor
voluntarily waives his preferred right. For purposes of this chapter, credits
(e) establish subclasses of voting creditors if prior approval has been for services rendered by employees or laborers to the debtor shall enjoy
granted by the court; first preference under Article 2244 of the Civil Code, unless the claims
constitute legal liens under Article 2241 and 2242 thereof.
(f) indicate how the insolvent debtor will be rehabilitated including, but
not limited to, debt forgiveness, debt rescheduling, reorganization or The Civil Code establishes a system of concurrence and preference of
quasi-reorganization. dacion en pago, debt-equity conversion and sale of credits in the context of insolvency proceedings in order to properly
the business (or parts of it) as a going concern, or setting-up of a new recognize creditor rights, respect priority of claims, and ensure the
business entity or other similar arrangements as may be necessary to equitable treatment of similarly situated creditors. Such a situation arises
restore the financial well-being and visibility of the insolvent debtor; only when the debtor cannot pay his debts in full.
(g) specify the treatment of each class or subclass described in subsections There is concurrence of credits when property of the debtor is subjected
(d) and (e); to the claims of two or more creditors and the value of such property is
insufficient to pay in full all the claims. As a result thereof, some creditors
(h) provide for equal treatment of all claims within the same class or will not be paid or some creditors will not obtain the full satisfaction of
subclass, unless a particular creditor voluntarily agrees to less favorable their claims. In such a situation, the claims may be paid concurrently and
treatment; pro-rata, that is, in proportion to the amount of the respective credits; or a
preference of credits may be established to determine the priority of
(i) ensure that the payments made under the plan follow the priority payments or which of the creditors will be paid ahead of the others.
established under the provisions of the Civil Code on concurrence and
preference of credits and other applicable laws; A preference of credits does not necessarily create a lien on property.
While a lien creates a charge on a particular property, a preference of
(j) maintain the security interest of secured creditors and preserve the credits is merely a method adopted to determine and specify the order in
liquidation value of the security unless such has been waived or modified which credits should be paid.
voluntarily; Clearly, the aforementioned provisions do not apply when the situation
does not involve two or more creditors having separate and distinct claims
(k) disclose all payments to creditors for pre-commencement debts made against the same debtor who has insufficient property.
during the proceedings and the justifications thereof;
Elements: (impliedly)
(l) describe the disputed claims and the provisioning of funds to account (a) That a debtor has two or more creditors, each having a separate
for appropriate payments should the claim be ruled valid or its amount and distinct claims against him
adjusted; (b) That the debtor do not have sufficient property to satisfy all the
valid claims against him
(m) identify the debtor's role in the implementation of the Plan;
Consequently, concurrence and preference of credits can only be
(n) state any rehabilitation covenants of the debtor, the breach of which ascertained in the context of some proceedings such as insolvency
shall be considered a material breach of the Plan; proceedings, where the claims of all the creditors may be bindingly
adjudicated. Under the FRIA or Financial Rehabilitation and Insolvency
(o) identify those responsible for the future management of the debtor and Act, both rehabilitation proceedings and liquidation proceedings are
the supervision and implementation of the Plan, their affiliation with the considered insolvency proceedings, and the rules on concurrence and
debtor and their remuneration; preference of credits are applicable to both.
(p) address the treatment of claims arising after the confirmation of the
Rehabilitation Plan;
B. CLASSIFICATION OF CREDITS
(q) require the debtor and its counter-parties to adhere to the terms of all
contracts that the debtor has chosen to confirm; 1. SPECIAL PREFERRED CREDITS
Art. 2241 With reference to specific movable property of the debtor, the
(r) arrange for the payment of all outstanding administrative expenses as a following claims or liens shall be preferred:
condition to the Plan's approval unless such condition has been waived in
writing by the creditors concerned; (1) Duties, taxes and fees due thereon to the State or any subdivision
thereof;
(s) arrange for the payment" of all outstanding taxes and assessments, or
an adjusted amount pursuant to a compromise settlement with the BlR Or (2) Claims arising from misappropriation, breach of trust, or malfeasance
by public officials committed in the performance of their duties, on the (7) Credits annotated in the Registry of Property, in virtue of a judicial
movables, money or securities obtained by them; order, by attachments or executions, upon the property affected, and only
as to later credits;
(3) Claims for the unpaid price of movables sold, on said movables, so long
as they are in the possession of the debtor, up to the value of the same; and (8) Claims of co-heirs for warranty in the partition of an immovable among
if the movable has been resold by the debtor and the price is still unpaid, them, upon the real property thus divided;
the lien may be enforced on the price; this right is not lost by the
immobilization of the thing by destination, provided it has not lost its (9) Claims of donors or real property for pecuniary charges or other
form, substance and identity; neither is the right lost by the sale of the conditions imposed upon the donee, upon the immovable donated;
thing together with other property for a lump sum, when the price thereof
can be determined proportionally; (10) Credits of insurers, upon the property insured, for the insurance
premium for two years.
(4) Credits guaranteed with a pledge so long as the things pledged are in
the hands of the creditor, or those guaranteed by a chattel mortgage, upon
the things pledged or mortgaged, up to the value thereof; RA 10142, Sec. 136 Liquidation of a Securities Market Participant - The
foregoing provisions of this chapter shall be without prejudice to the
(5) Credits for the making, repair, safekeeping or preservation of personal power of a regulatory agency or self- regulatory organization to liquidate
property, on the movable thus made, repaired, kept or possessed; trade-related claims of clients or customers of a securities market
participant which, for purposes of investor protection, are hereby deemed
(6) Claims for laborers' wages, on the goods manufactured or the work to have absolute priority over other claims of whatever nature or kind
done; insofar as trade-related assets are concerned.
(7) For expenses of salvage, upon the goods salvaged; For purposes of this section, trade -related assets include cash, securities,
trading right and other owned and used by the securities market
(8) Credits between the landlord and the tenant, arising from the contract participant in the ordinary course of this business.
of tenancy on shares, on the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the price of the Art. 2243 The claims or credits enumerated in the two preceding articles
contract and incidental expenses, until their delivery and for thirty days shall be considered as mortgages or pledges of real or personal property,
thereafter; or liens within the purview of legal provisions governing insolvency.
Taxes mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first
(10) Credits for lodging and supplies usually furnished to travellers by be satisfied.
hotel keepers, on the movables belonging to the guest as long as such
movables are in the hotel, but not for money loaned to the guests; Art. 2246 Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal
(11) Credits for seeds and expenses for cultivation and harvest advanced to property to which the preference refers.
the debtor, upon the fruits harvested;
Art. 2247 If there are two or more credits with respect to the same
specific movable property, they shall be satisfied pro rata, after the
(12) Credits for rent for one year, upon the personal property of the lessee payment of duties, taxes and fees due the State or any subdivision thereof.
existing on the immovable leased and on the fruits of the same, but not on
money or instruments of credit;
Art. 2248 Those credits which enjoy preference in relation to specific real
(13) Claims in favor of the depositor if the depositary has wrongfully sold property or real rights, exclude all others to the extent of the value of the
the thing deposited, upon the price of the sale. immovable or real right to which the preference refers.
In the foregoing cases, if the movables to which the lien or preference Art. 2249 If there are two or more credits with respect to the same
attaches have been wrongfully taken, the creditor may demand them from specific real property or real rights, they shall be satisfied pro rata, after
any possessor, within thirty days from the unlawful seizure. the payment of the taxes and assessments upon the immovable property or
real right.
Art. 2242 With reference to specific immovable property and real rights
of the debtor, the following claims, mortgages and liens shall be preferred, Art. 2250 The excess, if any, after the payment of the credits which enjoy
and shall constitute an encumbrance on the immovable or real right: preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment of
(1) Taxes due upon the land or building; the other credits.
(2) For the unpaid price of real property sold, upon the immovable sold; Art. 2241 and 2242 enumerate the special preferred credits that enjoy
preference with respect to specific movable and specific immovable
(3) Claims of laborers, masons, mechanics and other workmen, as well as property of the debtor, and exclude all other claims to the extent of the
of architects, engineers and contractors, engaged in the construction, value of the affected property.
reconstruction or repair of buildings, canals or other works, upon said
buildings, canals or other works; Moreover, these claims are considered as liens within the purview of legal
provisions governing insolvency.
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works, upon said Among those enumerated, only taxes enjoy preference; the claims listed in
buildings, canals or other works; Art. 2241 (2) to (13) and Art. 2242 (2) to (1), all come after taxes in order
of precedence.
(5) Mortgage credits recorded in the Registry of Property, upon the real Although such claims enjoy their privileged character as liens, they are not
estate mortgaged; preferred over any other inter se; there is only a concurrence of credits.
(6) Expenses for the preservation or improvement of real property when Art. 2241 & 2242 and Art. 2246 & 2249 establish a two-tier order of
the law authorizes reimbursement, upon the immovable preserved or preference: the first tier includes only taxes, duties and fees due on specific
improved; movable or immovable property, while the second tier includes all other
special preferred credits, which are to be satisfied, pari passu and pro rata,
out of any residual value of the specific property to which such other debtor is subjected to the claims of several creditors and the value of such
credits relate. property of the debtor is insufficient to pay in full all the creditors) and the
question of preference will arise. This statutory lien should only be
However, Sec. 136 of FRIA creates a special preference of credit in favor enforced in the context of a proceeding where the claims of all the
or trade-related claims of clients or customers upon the trade-related preferred creditors may be bindingly adjudicated, such as insolvency
assets, such as cash, securities, and trading rights, of a securities market proceedings
participant. This special preferred credit enjoys absolute priority over
other claims and amends the order of preference in Art. 2241 and 2242. DBP vs. CA (2001) - Kapunan, J.
Petitioner: Development Bank of the Philippines
De Barreto vs. Villanueva (1961-1962) - Gutiérrez-David, J. Respondents: Remington Industrial Sales Corporation
Petitioners: Magdalena C. de Barreto, et al. (appellants)
Respondents: José G. Villanueva, et al. (appellees) Brief Facts: Marinduque Mining-Industrial Corporation (Marinduque
Concept: Special Preferred Credits (Insolvency) Mining), obtained from PNB various loan accommodations. To secure the
loans, Marinduque Mining executed on a Deed of Real Estate Mortgage
Brief Facts: Villanueva is indebted as a buyer of a parcel of land to and Chattel Mortgage in favor of PNB. The mortgage covered all of
Cruzado. She is also indebted as a borrower to Barreto. Her loan to Marinduque Mining's real properties, located at Surigao del Norte,
Barreto was secured by a real estate mortgage over the aforementioned Sipalay, Negros Occidental, and at Antipolo, Rizal, including the
land. She failed to perform her obligations to Cruzado and Barreto. improvements thereon.
Cruzado had her vendor’s lien annotated at the back of the certificate of
title issued to Villanueva. Barreto foreclosed the mortgage, but it was Doctrine: The preferences named in Articles 2261 and 2262 (now 2241 and
subjected to the vendor’s lien. 2242) are to be enforced in accordance with the Insolvency Law.
Doctrine in the original decision: Art. Art. 2249 in relation to Art. 2242 Contracts Involved:
is applicable to vendor’s lien even if it be unrecorded or unregistered and (a) Loan secured by Real Estate Mortgage and Chattel Mortgage in
even when the debtor is not insolvent. favor of PNB and DBP
(b) Contract of Sale between MMIC and Remington
2. ORDINARY PREFERRED CREDITS

Art. 2244 With reference to other property, real and personal, of the
debtor, the following claims or credits shall be preferred in the order
Doctrine in the resolution of the motion for reconsideration: Art.
named:
2249 in relation to Art. 2242 is applicable to the case of concurrent of
credits only when there has been a proceeding—insolvency proceeding, (1) Proper funeral expenses for the debtor, or children under his or
estate settlement, liquidation proceedings, and the likes—to ascertain the her parental authority who have no property of their own, when
claims of the concurrent creditors. approved by the court;
(2) Credits for services rendered the insolvent by employees,
Contracts Involved: laborers, or household helpers for one year preceding the
1. Loan between Cruzado and Rehabilitation Finance Corporation commencement of the proceedings in insolvency;
(RFC) (3) Expenses during the last illness of the debtor or of his or her
2. Real estate mortgage constituted by Cruzado to secure loan from spouse and children under his or her parental authority, if they
RFC (later foreclosed) have no property of their own;
3. Conditional sale of the foreclosed land by RFC to Cruzado (4) Compensation due the laborers or their dependents under laws
4. Sale of “rights, interest, title and dominion” on the land by Cruzado providing for indemnity for damages in cases of labor accident,
to Villanueva or illness resulting from the nature of the employment;
5. Loan between Villanueva and Barreto (5) Credits and advancements made to the debtor for support of
6. Real estate mortgage constituted by Villanueva to secure loan from himself or herself, and family, during the last year preceding the
Barreto insolvency;
(6) Support during the insolvency proceedings, and for three
J.L. Bernardo Construction v. CA (2000) – Gonzaga-Reyes, J. months thereafter;
Petitioner: J.L. Bernardo Construction, represented by attys-in-fact
Santiago Sugay, Edwin Sugay and Fernando Erana (7) Fines and civil indemnification arising from a criminal offense;
Respondent: CA and Mayor Jose Salonga (8) Legal expenses, and expenses incurred in the administration of
Concept: Concurrence and Preference of Credits: Classification of Credits the insolvent's estate for the common interest of the creditors,
– Special Preferred Credits when properly authorized and approved by the court;
Contracts Involved: (9) Taxes and assessments due the national government, other than
(c) Contracts of loan: Granted by the ESFS to the Municipality of San those mentioned in Articles 2241, No. 1, and 2242, No. 1;
Antonio (10) Taxes and assessments due any province, other than those
(d) Construction Agreement: Between J.L. Bernardo and the referred to in Articles 2241, No. 1, and 2242, No. 1;
Municipality of San Antonio (11) Taxes and assessments due any city or municipality, other than
those indicated in Articles 2241, No. 1, and 2242, No. 1;
Brief Facts: J.L. Bernardo et al. won the bid to construct the Public
(12) Damages for death or personal injuries caused by a quasi-delict;
Market of San Antonio. According to them, the Municipality undertook to
demolish, clear, and fill the site of the public market; however, upon the (13) Gifts due to public and private institutions of charity or
latter’s representation, the bidders were made to undertake the same, and beneficence;
would later be reimbursed. Despite demands, they were not reimbursed, so (14) (14) Credits which, without special privilege, appear in (a) a
they filed a complaint against the municipality. The TC granted a writ of public instrument; or (b) in a final judgment, if they have been
preliminary attachment due to alleged contractual fraud, and granted the subject of litigation. These credits shall have preference
possession and the right to operate the market in lieu because they stand among themselves in the order of priority of the dates of the
in the position of an unpaid contractor with a preferred lien. The CA instruments and of the judgments, respectively.
reversed, nullifying the writ and ruling that Art. 2242 does not apply, and
that its enforcement cannot be expanded to the use of the building. Labor Code, Art. 110 Worker preference in case of bankruptcy - In the event
of bankruptcy or liquidation of an employer’s business, his workers shall
Doctrine: Art. 2242 granting a preference of credits only finds application enjoy first preference as regards their wages and other monetary claims,
where there is a concurrence of credits (same specific property of the any provisions of law to the contrary notwithstanding. Such unpaid wages
and monetary claims shall be paid in full before claims of the government 3. COMMON CREDITS
and other creditors may be paid. Art. 2245 Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no preference.
RA 10142, Sec. 133 Concurrence and Preference of Credits - The Liquidation
Plan and its Implementation shall ensure that the concurrence and Art. 2251 Those credits which do not enjoy any preference with respect to
preference of credits as enumerated in the Civil Code of the Philippines specific property, and those which enjoy preference, as to the amount not
and other relevant laws shall be observed, unless a preferred creditor paid, shall be satisfied according to the following rules:
voluntarily waives his preferred right. For purposes of this chapter, credits
for services rendered by employees or laborers to the debtor shall enjoy (1) In the order established in Article 2244;
first preference under Article 2244 of the Civil Code, unless the claims
constitute legal liens under Article 2241 and 2242 thereof. (2) Common credits referred to in Article 2245 shall be paid pro rata
regardless of dates.
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 Art. 2245 enumerates the common credits that enjoy no preference and
paid, shall be satisfied according to the following rules: must only be paid after payment of the ordinary preferred credits.
(1) In the order established in Article 2244; As among these credits, there is only a concurrence of credits and these
must be paid pro-rata, that is, in proportion to the amount of the respective
(2) Common credits referred to in Article 2245 shall be paid pro rata credits, regardless of dates.
regardless of dates.
Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices (2007) –
Art. 2244 enumerates the ordinary preferred credits that enjoy a Corona, J.
preference, excluding the credits that are later in order, but only as Petitioner: Jose C. Cordova
against the value of property not otherwise subjected to any special Respondents: Reyes Daway Lim Bernardo Lindo Rosales Law Offices
preferred credit. (RLO), and the Securities and Exchange Commission (SEC)
Concept: Concurrence and Preference of Credits; Classification; Common
In contrast with Art. 2241 and 2242, Art. 2244 creates no lien on Credits
specific property but simply creates rights in favor of certain creditors to
have the free property of the debtor, or property not subjected to any Contracts Involved:
special preferred credit, applied in accordance with an order of (a) Contract of Sale, of CSPI certificates of stock and other shares of
preference. stock, between PhilFinance and Cordova.
o Cordova was issued a corresponding Confirmation of Sale.
Thus, special preferred credits must be discharged first out of the proceeds (b) Contract of Sale, of the same CSPI shares, between RLO (as
of the property to which they relate, before ordinary preferred credits are liquidators of PhilFinance) and Northeast Corp.
paid.
Brief Facts:
If the value of the specific property is greater than the total of the special Cordova bought certain shares, particularly CSPI shares, from
preferred credits, the residual value will form part of the free property of PhilFinance. When PhilFinance was placed under receivership by the
the insolvent. In contrast, if the value of the property is less than the total SEC, its appointed liquidators withdrew the CSPI shares and sold them
of the special preferred credits, the unsatisfied balance of the credits are to without Cordova’s knowledge and consent, and without the SEC’s
be treated as provided in Art. 2251. authority. The proceeds were included as PhilFinance’s assets in the
liquidation proceedings. Cordova now files a claim for the full amount of
Sec. 133 of FRIA reiterates jurisprudence to the effect that Art. 110, LC the shares, believing himself to be a preferred creditor. The SEC (as
does not create a lien in favor of workers or employees for unpaid wages affirmed by the CA) has held him to be an ordinary creditor/claimant and,
upon the property owned by the employer. Such claims for unpaid wages hence, should only receive 15% of the shares’ value, as it was the rate of
do not fall within the category of special preferred credits, except to the recovery approved by the SEC for PhilFinance’s creditors. Hence, the
extent that such claims are already covered by Art. 2241 (6) and 2242 (3). petition.
What Art. 110, LC actually does is it modifies the order of preference in Doctrine:
Art. 2244 by removing the 1 year limitation found in Art. 2244 (2) and by Common credits shall be paid pro rata regardless of dates.
moving claims for unpaid wages of laborers or workers from second
priority to first priority in the order of preference established by Art. 2244.
The taxes and assessments enumerated in Art. 2244 (9) to (11) do not have
the overriding preference that Art. 2241 (1) and 2242 (2) have.
Art. 2244 (14) further establishes a preference among credits that appear
in a public instrument or in a final judgment, if they have been subjects of
litigation, in the order of priority of the dates of the instruments or of the
judgments.

III. SUSPENSION OF PAYMENTS Partnerships and corporations may only properly avail of rehabilitation.
A. GENERAL CONCEPTS To be declared in a state of suspension of payments, an individual debtor
must be insolvent under the illiquidity or equity concept, i.e., he must be
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the State to illiquid
to collectively and realistically resolve and adjust competing claims and A debtor insolvent under the balance sheet concept, his only course of
property rights. In furtherance thereof, the State shall ensure a timely, fair, action is to file for liquidation
transparent, effective and efficient rehabilitation or liquidation of debtors.
The rehabilitation or liquidation shall be made with a view to ensure or 1. AUTOMATIC STAY
maintain certainly and predictability in commercial affairs, preserve and
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by the
maximize the value of the assets of these debtors, recognize creditor rights
individual debtor, the court may issue an order suspending any pending
execution against the individual debtor. Provide, That properties held as
who are similarly situated. When rehabilitation is not feasible, it is in the
security by secured creditors shall not be the subject of such suspension
interest of the State to facilities a speedy and orderly liquidation of these
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.
RA 10142, Sec. 4
(p) Insolvent shall refer to the financial condition of a debtor that is No creditor shall sue or institute proceedings to collect his claim from the
generally unable to pay its or his liabilities as they fall due in the ordinary debtor from the time of the filing of the petition for suspension of
course of business or has liabilities that are greater than its or his assets. payments and for as long as proceedings remain pending except:
(a) those creditors having claims for personal labor, maintenance,
(s) Liabilities shall refer to monetary claims against the debtor, including expense of last illness and funeral of the wife or children of the
stockholder's advances that have been recorded in the debtor's audited debtor incurred in the sixty (60) days immediately prior to the
financial statements as advances for future subscriptions. filing of the petition; and
(b) (b) secured creditors.
RA 10142, Sec. 94 Petition. - An individual debtor who, possessing
sufficient property to cover all his debts but foreseeing the impossibility of From the time of the filing of the petition for suspension of payments and
meeting them when they respectively fall due, may file a verified petition for so long as the proceedings are pending, there is an automatic stay
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 During the automatic stay, no creditor, except those specifically excepted
filing of his petition. He shall attach to his petition, as a minimum: (a) a by law, shall sue or institute proceedings to collect its claim
schedule of debts and liabilities; (b) an inventory of assess; and (c) a
proposed agreement with his creditors. 2. SUSPENSION ORDER
RA 10142, Sec. 96 [see above]
RA 10142, Sec. 95 Action on the Petition. - If the court finds the petition
sufficient in form and substance, it shall, within five (5) working days from It is only upon motion filed by the individual debtor, and from the time the
the filing of the petition, issue an Order: court issues a suspension order, that any pending execution against the
(a) calling a meeting of all the creditors named in the schedule of debts individual debtor may be suspended.
and liabilities at such time not less than fifteen (15) days nor more
than forty (40) days from the date of such Order and designating the The suspension order shall lapse after three months have passed without
date, time and place of the meeting; the proposed agreement being accepted by the creditors, or as soon as the
(b) directing such creditors to prepare and present written evidence of agreement is denied.
their claims before the scheduled creditors' meeting;
(c) directing the publication of the said order in a newspaper of general
circulation published in the province or city in which the petition is
filed once a week for two (2) consecutive weeks, with the first
publication to be made within seven (7) days from the time of the
issuance of the Order;
(d) directing the clerk of court to cause the sending of a copy of the
Order by registered mail, postage prepaid, to all creditors named in
the schedule of debts and liabilities;
(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
(g) appointing a commissioner to preside over the creditors' meeting.
Suspension of payment: 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 is a statutory device allowing a distressed debtor
to defer payment of his debts by presenting a plan to repay creditors over
time.
It is always voluntary and may be properly availed of and instituted only

by an individual debtor, i.e., a natural person who is a resident and citizen
of the Philippines that has become insolvent as defined under the FRIA.
3. INJUNCTION AGAINST DEBTOR C. CREDITORS’ MEETING
RA 10142, Sec. 95 Action on the Petition. - If the court finds the petition RA 10142, Sec. 97 Creditors' Meeting. - The presence of creditors
sufficient in form and substance, it shall, within five (5) working days from holding claims amounting to at least three-fifths (3/5) of the liabilities
the filing of the petition, issue an Order: 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
xxx the secretary thereof, subject to the following rules:
(e) forbidding the individual debtor from selling, transferring, (a) The clerk shall record the creditors present and amount of their
encumbering or disposing in any manner of his property, except respective claims;
those used in the ordinary operations of commerce or of industry in
which the petitioning individual debtor is engaged so long as the (b) The commissioner shall examine the written evidence of the claims. If
proceedings relative to the suspension of payments are pending; 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
(f) prohibiting the individual debtor from making any payment business;
outside of the necessary or legitimate expenses of his business or
industry, so long as the proceedings relative to the suspension of (c) The creditors and individual debtor shall discuss the propositions in
payments are pending; and the proposed agreement and put them to a vote;
(g) appointing a commissioner to preside over the creditors' meeting. (d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors voting unite upon the
If the petition is found to be sufficient in form and substance, from the same proposition; and
time the court issues an order and for long as the proceedings are pending, (2) that the claims represented by said majority vote amount to at
the individual debtor is subjected to an injunction order against: least three-fifths (3/5) of the total liabilities of the debtor
(a) Selling, transferring, encumbering or disposing, in any manner, mentioned in the petition; and
of his property, except those used in the ordinary operations of
commerce or of industry in which the individual debtor is (e) After the result of the voting has been announced, all protests made
engaged; and against the majority vote shall be drawn up, and the commissioner and the
(b) Making any payment outside of the necessary or legitimate individual debtor together with all creditors taking part in the voting shall
expenses of his business or industry. sign the affirmed propositions.
No creditor who incurred his credit within ninety (90) days prior to the
B. COMMISSIONER filing of the petition shall be entitled to vote.
RA 10142, Sec. 95 Action on the Petition. - If the court finds the petition RA 10142, Sec. 99 Rejection of the Proposed Agreement. - The proposed
sufficient in form and substance, it shall, within five (5) working days from agreement shall be deemed rejected if the number of creditors required for
the filing of the petition, issue an Order: holding a meeting do not attend thereat, or if the two (2) majorities
xxx mentioned in Section 97 hereof are not in favor thereof. In such instances,
(g) appointing a commissioner to preside over the creditors' meeting. the proceeding shall be terminated without recourse and the parties
concerned shall be at liberty to enforce the rights which may correspond
to them.
RA 10142, Sec. 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 RA 10142, Sec. 100 Objections. - If the proposal of the individual debtor,
the court shall preside over the meeting and the clerk of court shall act as or any amendment thereof made during the creditors' meeting, is approved
the secretary thereof, subject to the following rules: by the majority of creditors in accordance with Section 97 hereof, any
creditor who attended the meeting and who dissented from and protested
(a) The clerk shall record the creditors present and amount of their against the vote of the majority may file an objection with the court within
respective claims; ten (10) days from the date of the last creditors' meeting. The causes for
which objection may be made to the decision made by the majority during
(b) The commissioner shall examine the written evidence of the the meeting shall be: (a) defects in the call for the meeting, in the holding
claims. If the creditors present hold at least three-fifths (3/5) of the thereof and in the deliberations had thereat which prejudice the rights of
liabilities of the individual debtor, the commissioner shall declare the the creditors; (b) fraudulent connivance between one or more creditors and
meeting open for business; the individual debtor to vote in favor of the proposed agreement; or (c)
fraudulent conveyance of claims for the purpose of obtaining a majority.
(c) The creditors and individual debtor shall discuss the propositions in The court shall hear and pass upon such objection as soon as possible and
the proposed agreement and put them to a vote; in a summary manner.
(d) To form a majority, it is necessary: In case the decision of the majority of creditors to approve the individual
debtor's proposal or any amendment thereof made during the creditors'
(1) that two-thirds (2/3) of the creditors voting unite upon the same meeting is annulled by the court, the court shall declare the proceedings
proposition; and terminated and the creditors shall be at liberty to exercise the rights
which may correspond to them.
(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 A suspension of payments is only effective if the required majority vote of
petition; and creditors is obtained approving the proposed agreement or any
amendments to the agreement.
(e) After the result of the voting has been announced, all protests
made against the majority vote shall be drawn up, and the A quorum of creditors holding claims amo8nting to 3/5 of the liabilities
commissioner and the individual debtor together with all creditors shall be necessary
taking part in the voting shall sign the affirmed propositions.
Determination of majority vote:
No creditor who incurred his credit within ninety (90) days prior to the (a) As to the number of creditors-2/3 of the creditors voting
filing of the petition shall be entitled to vote. approve the proposed agreement; and

(b) As to value of the claims-the claims represented by the majority
vote amount to at least 3/5 of the total liabilities of the debtor. E. TREATMENT OF CLAIMS
RA 10142, Sec. 96 Actions Suspended. - Upon motion filed by the

D. PROPOSED AGREEMENT individual debtor, the court may issue an order suspending any pending
execution against the individual debtor. Provide, That properties held as
RA 10142, Sec. 94 Petition. - An individual debtor who, possessing security by secured creditors shall not be the subject of such suspension
sufficient property to cover all his debts but foreseeing the impossibility of order. The suspension order shall lapse when three (3) months shall have
meeting them when they respectively fall due, may file a verified petition passed without the proposed agreement being accepted by the creditors or
that he be declared in the state of suspension of payments by the court of as soon as such agreement is denied.
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 No creditor shall sue or institute proceedings to collect his claim from the
schedule of debts and liabilities; (b) an inventory of assess; and (c) a debtor from the time of the filing of the petition for suspension of
proposed agreement with his creditors. payments and for as long as proceedings remain pending except:
(a) those creditors having claims for personal labor, maintenance,
RA 10142, Sec. 101 Effects of Approval of Proposed Agreement. - If the expense of last illness and funeral of the wife or children of the
decision of the majority of the creditors to approve the proposed debtor incurred in the sixty (60) days immediately prior to the
agreement or any amendment thereof made during the creditors' meeting filing of the petition; and
is uphold by the court, or when no opposition or objection to said decision (b) secured creditors.
has been presented, the court shall order that the agreement be carried out
and all parties bound thereby to comply with its terms. RA 10142, Sec. 98 Persons Who May Refrain From Voting. - Creditors
who are unaffected by the Suspension Order may refrain from attending
The court may also issue all orders which may be necessary or proper to the meeting and from voting therein. Such persons shall not be bound by
enforce the agreement on motion of any affected party. The Order any agreement determined upon at such meeting, but if they should join in
confirming the approval of the proposed agreement or any amendment the voting they shall be bound in the same manner as are the other
thereof made during the creditors' meeting shall be binding upon all creditors.
creditors whose claims are included in the schedule of debts and liabilities
submitted by the individual debtor and who were properly summoned, but RA 10142, Sec. 101 Effects of Approval of Proposed Agreement. - If the
not upon: (a) those creditors having claims for personal labor, decision of the majority of the creditors to approve the proposed
maintenance, expenses of last illness and funeral of the wife or children of agreement or any amendment thereof made during the creditors' meeting
the debtor incurred in the sixty (60) days immediately prior to the filing of is uphold by the court, or when no opposition or objection to said decision
the petition; and (b) secured creditors who failed to attend the meeting or has been presented, the court shall order that the agreement be carried out
refrained from voting therein. and all parties bound thereby to comply with its terms.
RA 10142, Sec. 102 Failure of Individual Debtor to Perform Agreement. The court may also issue all orders which may be necessary or proper to
- If the individual debtor fails, wholly or in part, to perform the agreement enforce the agreement on motion of any affected party. The Order
decided upon at the meeting of the creditors, all the rights which the confirming the approval of the proposed agreement or any amendment
creditors had against the individual debtor before the agreement shall thereof made during the creditors' meeting shall be binding upon all
revest in them. In such case the individual debtor may be made subject to creditors whose claims are included in the schedule of debts and liabilities
the insolvency proceedings in the manner established by this Act. submitted by the individual debtor and who were properly summoned, but
not upon: (a) those creditors having claims for personal labor,
maintenance, expenses 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 who failed to attend the meeting or
refrained from voting therein.
1. SECURED CREDITOR CLAIMS
RA 10142, Sec. 4
(kk) Secured creditor shall refer to a creditor with a secured claim.
(jj) Secured claim shall refer to a claim that is secured by a lien.
(t) Lien shall refer to a statutory or contractual claim or judicial charge on

real or personal property that legality entities a creditor to resort to said
property for payment of the claim or debt secured by such lien.
In a suspension of payments proceeding, the treatment of secured creditor

claims is as follows:
(a) The claims of secured creditors are not covered by the
automatic stay
(b) The property held as security is not covered by any suspension
order that may be issued against pending executions against the
debtor
(c) Secured creditors need not attend or vote during the creditors’
meeting and are not bound by the proposed agreement
approved during the meeting, unless they waive this right by
voting during the meeting.
(d) Secured creditors are not bound by the proposed agreement
confirmed by the court, unless they waive this right by voting
during the meeting.

2. EXEMPT CLAIMS
“Those creditors having claims for personal labor, maintenance, expenses
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.” (RA
10142, Sec. 101, par. 2, (a))
Notes:
In a suspension of payments proceeding, the treatment of such exempt
claims is as follows:
(a) The exempt claims are not covered by the automatic stay of all
suits and proceedings for the collection of claims against the
debtor.
(b) Exempt creditors need not attend or vote during the creditors’
meeting and are not bound by the proposed agreement
approved during the meeting, unless they waive this right by
voting during the meeting.
(c) Exempt creditors are not bound by the proposed agreement
confirmed by the court, unless they waive this right by voting
during the meeting.
3. EXCLUDED CLAIMS
“Creditors whose claims are [not] included in the schedule of debts and
liabilities submitted by the individual debtor and [creditors] who were
[not] properly summoned.” (RA 10142, Sec. 101, par. 2, 2nd sentence)
In a suspension of payments proceedings, creditors whose claims are

excluded are not bound by the proposed agreement confirmed by the
court.

XI. REHABILITATION Pryce Corp v China Banking Corp (2014) – Leonen, J.
Petitioner: Pryce Corporation
A. General Concepts Respondents: China Banking Corporation
Concept: General Concepts
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the State to
encourage debtors, both juridical and natural persons, and their creditors Brief Facts: Pryce Corp incurred heavy losses after the 1997 Asian
to collectively and realistically resolve and adjust competing claims and financial crisis. It filed with the RTC a petition for rehabilitation. China
property rights. In furtherance thereof, the State shall ensure a timely, fair, Banking Corp contends that in approving the rehabilitation plan, the RTC
transparent, effective and efficient rehabilitation or liquidation of debtors. impaired the obligation of contracts.
maintain certainly and predictability in commercial affairs, preserve and Doctrine: The seriousness test states that there must exist a clear and
maximize the value of the assets of these debtors, recognize creditor rights imminent danger of losing the corporate assets if a receiver is not
and respect priority of claims, and ensure equitable treatment of creditors appointed. Absent such danger, such as where there are sufficient assets to
who are similarly situated. When rehabilitation is not feasible, it is in the sustain the rehabilitation plan and both investors and creditors are amply
interest of the State to facilities a speedy and orderly liquidation of these protected, the need for appointing a receiver does not exist.
Rehabilitation in the context of insolvency, is the process of reorganizing

B. Court-Supervised Rehabilitation
a debtor’s financial affairs so that the debtor may continue to exist as a
financial entity, with creditors satisfying their claims from the debtors 1. VOLUNTARY PROCEEDINGS
future earnings.
RA 10142, Sec. 4
Invariably triggered by a crisis that unaduly strains the financial affairs of (rr) Voluntary proceedings shall refer to proceedings initiated by the
a previously solvent debtor debtor.
Purpose is to enable an insolvent debtor to have a new lease on life, while RA 10142, Sec. 12 Petition to Initiate Voluntary Proceedings by Debtor. -
allowing creditors to be paid from the debtor’s earnings. When approved by the owner in case of a sole proprietorship, or by a
majority of the partners in case of a partnership, or in case of a
Rehabilitation benefits debtors employees, creditors, and a larger sense, corporation, by a majority vote of the board of directors or trustees and
the general public authorized by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of nonstock corporation,
During rehabilitation, the assets of the debtor are held in trust for the by the vote of at least two-thirds (2/3) of the members, in a stockholder's
equal benefit of all creditors to preclude one from obtaining an advantage or member's meeting duly called for the purpose, an insolvent debtor may
or preference over the other; as between creditors, the key phrase is initiate voluntary proceedings under this Act by filing a petition for
equality is equity rehabilitation with the court and on the grounds hereinafter specifically
provided. The petition shall be verified to establish the insolvency of the
Sec. 4 debtor and the viability of its rehabilitation, and include, whether as an
(gg) Rehabilitation shall refer to the restoration of the debtor to a attachment or as part of the body of the petition, as a minimum the
condition of successful operation and solvency, if it is shown that its following:
continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan, (a) Identification of the debtor, its principal activities and its addresses;
more if the debtor continues as a going concern than if it is immediately
liquidated. (b) Statement of the fact of and the cause of the debtor's insolvency or
inability to pay its obligations as they become due;
Definition of rehabilitation provided by jurisprudence has thus been
expanded by FRIA to include two conditions (c) The specific relief sought pursuant to this Act;
(1) economic feasibility and
(2) present value recovery (d) The grounds upon which the petition is based;
If these two conditions are not present, the proper recourse is not (e) Other information that may be required under this Act depending on
rehabilitation but liquidation the form of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors
3 MODES OF REHABILITATION UNDER FRIA with their addresses, amounts of claims and collaterals, or securities, if
(1) Court-supervised rehabilitation: judicial, may either be any;
voluntary or involuntary
(2) Pre-negotiated rehabilitation (g) An inventory of all its assets including receivables and claims against
(3) Out-of-court rehabilitation 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.
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. form of relief requested; and
Judicial insolvency proceedings inititated by debtor that may be a (g) other documents required to be filed with the petition pursuant to this
(a) Sole proprietorship Act and the rules of procedure as may be promulgated by the Supreme
(b) Partnership Court.
(c) Corporation
Judicial insolvency proceedings instituted by creditor or a group of
In every case, the debtor is insolvent either under the illiquidity concept: creditors against an insolvent debtor, provided that the requirements of
the debtor is illiquid, possessing sufficient property to cover all its law on the number of creditors or value of claims, or both, is met, and
liabilities but foreseeing the impossibility of meeting them when they provided the circumstance requiring rehabilitation is alleged and
respectively fall due thereafter, established
Or the balance sheet concept: the assets of the debtor are insufficient to For involuntary rehabilitation, FRIA imposes a value requirement of at
cover its liabilities least p1 million or at least 25% of the subscribed capital stock or partners’
contributions, whichever is higher, without regard to the number of
Sec. 4 creditors who file
(p) 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 Sec. 4
course of business or has liabilities that are greater than its or his assets. (c) Claim shall refer to all claims or demands of whatever nature or
character against the debtor or its property, whether for money or
(s) Liabilities shall refer to monetary claims against the debtor, including otherwise, liquidated or unliquidated, fixed or contingent, matured or
stockholder's advances that have been recorded in the debtor's audited unmatured, disputed or undisputed, including, but not limited to; (1) all
financial statements as advances for future subscriptions. claims of the government, whether national or local, including taxes,
tariffs and customs duties; and (2) claims against directors and officers of
Since the purpose of the rehabilitation is to restore and reinstate a debtor the debtor arising from acts done in the discharge of their functions falling
to its former position, an individual debtor that is not a sole proprietorship within the scope of their authority: Provided, That, this inclusion does not
may not institute voluntary arbitration proceedings. Available recourses prohibit the creditors or third parties from filing cases against the
are: to petition for suspension of payments or liquidation directors and officers acting in their personal capacities.
FRIA does not impose a value requirement with respect to the amount of Although the status of being insolvent is calculated based on liabilities
debts of the insolvent debtor (monetary claims), the FRIA bases the value requirement for involuntary
rehabilitation proceedings on the creditor’s claims
2. INVOLUNTARY PROCEEDINGS CIRCUMSTANCES REQUIRING REHABILITATION:

(a) No genuine issue of fact or law on the claims of the creditors and that
RA 10142, Sec. 4 the due and demandable payments have not been made for at least 60
(r) Involuntary proceedings shall refer to proceedings initiated by days
creditors. (b) The debtor has failed generally to meet its liabilities as they fall due
(c) A creditor, other than the petitioners, has inititated foreclosure
RA 10142, Sec. 13 Circumstances Necessary to Initiate Involuntary proceedings against the debtor that will prevent the debtor from
Proceedings. - Any creditor or group of creditors with a claim of, or the paying its debts as they become due or will render it insolvent
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
(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.
RA 10142, Sec. 14 Petition to Initiate Involuntary 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
3. PROVISIONS COMMON TO VOLUNTARY AND (m) set the case for initial hearing, which shall not be more than forty (40)
INVOLUNTARY REHABILITATION PROCEEDINGS 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;
A. COMMENCEMENT ORDER (n) make available copies of the petition and rehabilitation plan for
examination and copying by any interested party;
RA 10142, Sec. 4
(e) Commencement Order shall refer to the order issued by the court (o) indicate the location or locations at which documents regarding the
under Section 16 of this Act. debtor and the proceedings under Act may be reviewed and copied;
(d) Commencement date shall refer to the date on which the court issues (p) state that any creditor or debtor who is not the petitioner, may submit
the Commencement Order, which shall be retroactive to the date of filing the name or nominate any other qualified person to the position of
of the petition for voluntary or involuntary proceedings. rehabilitation receiver at least five (5) days before the initial hearing;
RA 10142, Sec. 15 Action on the Petition. - If the court finds the petition (q) include s Stay or Suspension Order which shall:
for rehabilitation to be sufficient in form and substance, it shall, within five (1) suspend all actions or proceedings, in court or otherwise, for the
(5) working days from the filing of the petition, issue a Commencement enforcement of claims against the debtor;
Order. If, within the same period, the court finds the petition deficient in (2) suspend all actions to enforce any judgment, attachment or
form or substance, the court may, in its discretion, give the petitioner/s a other provisional remedies against the debtor;
reasonable period of time within which to amend or supplement the (3) prohibit the debtor from selling, encumbering, transferring or
petition, or to submit such documents as may be necessary or proper to disposing in any manner any of its properties except in the
put the petition in proper order. In such case, the five (5) working days ordinary course of business; and
provided above for the issuance of the Commencement Order shall be
reckoned from the date of the filing of the amended or supplemental
(4) (4) prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date except as
petition or the submission of such documents.
may be provided herein.
RA 10142, Sec. 16 Commencement of Proceedings and Issuance of a
Commencement Order. - The rehabilitation proceedings shall commence RA 10142, Sec. 17 Effects of the Commencement Order. - Unless
upon the issuance of the Commencement Order, which shall: otherwise provided for in this Act, the court's issuance of a
(a) identify the debtor, its principal business or activity/ies and its Commencement Order shall, in addition to the effects of a Stay or
principal place of business; Suspension Order described in Section 16 hereof:
(b) summarize the ground/s for initiating the proceedings; (a) vest the rehabilitation with all the powers and functions provided for
this Act, such as the right to review and obtain records to which the
(c) state the relief sought under this Act and any requirement or procedure debtor's management and directors have access, including bank accounts
particular to the relief sought; or whatever nature of the debtor subject to the approval by the court of
the performance bond filed by the rehabilitation receiver;
(d) state the legal effects of the Commencement Order, including those
mentioned in Section 17 hereof; (b) prohibit or otherwise serve as the legal basis rendering null and void
the results of any extrajudicial activity or process to seize property, sell
(e) declare that the debtor is under rehabilitation; encumbered property, or otherwise attempt to collection or enforce a claim
against the debtor after commencement date unless otherwise allowed in
(f) direct the publication of the Commencement Order in a newspaper of this Act, subject to the provisions of Section 50 hereof;
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) (c) serve as the legal basis for rendering null and void any setoff after the
days from the time of its issuance; commencement date of any debt owed to the debtor by any of the debtor's
creditors;
(g) 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 (d) serve as the legal basis for rendering null and void the perfection of any
the total liabilities of the debtor as determined from the schedule attached lien against the debtor's property after the commencement date; and
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 (e) consolidate the resolution of all legal proceedings by and against the
debtor within five (5) days; debtor to the court Provided. However, That the court may allow the
continuation of cases on other courts where the debtor had initiated the
(h) appoint a rehabilitation receiver who may or not be from among the suit.
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 Attempts to seek legal of other resource against the debtor outside these
Court will promulgate; proceedings shall be sufficient to support a finding of indirect contempt of
court.
(i) summarize the requirements and deadlines for creditors to establish
their claims against the debtor and direct all creditors to their claims with RA 10142, Sec. 19 Waiver of taxes and Fees Due to the National
the court at least five (5) days before the initial hearing; Government and to Local Government Units (LGUs). - Upon issuance of
the Commencement Order by the court, and until the approval of the
(j) direct Bureau of internal Revenue (BIR) to file and serve on the debtor Rehabilitation Plan or dismissal of the petition, whichever is earlier, the
its comment on or opposition to the petition or its claim/s against the imposition of all taxes and fees including penalties, interests and charges
debtor under such procedures as the Supreme Court provide; thereof due to the national government or to LGUs shall be considered
waived, in furtherance of the objectives of rehabilitation.
(k) 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 RA 10142, Sec. 21 Effectivity and Duration of Commencement Order. -
long as the debtor makes payments for the services or goods supplied after Unless lifted by the court, the Commencement Order shall be for the
the issuance of the Commencement Order; effective for the duration of the rehabilitation proceedings for as long as
there is a substantial likelihood that the debtor will be successfully
(l) authorize the payment of administrative expenses as they become due; rehabilitated. In determining whether there is substantial likelihood for
the debtor to be successfully rehabilitated, the court shall ensure that the liabilities outstanding as of the commencement date except as
following minimum requirements are met: may be provided herein.
(a) The proposed Rehabilitation Plan submitted complies with the RA 10142, Sec. 4
minimum contents prescribed by this Act; (c) Claim shall refer to all claims or demands of whatever nature or
(b) There is sufficient monitoring by the rehabilitation receiver of the otherwise, liquidated or unliquidated, fixed or contingent, matured or
debtor's business for the protection of creditors; unmatured, disputed or undisputed, including, but not limited to; (1) all
claims of the government, whether national or local, including taxes,
(c) The debtor has met with its creditors to the extent reasonably possible tariffs and customs duties; and (2) claims against directors and officers of
in attempts to reach consensus on the proposed Rehabilitation Plan; the debtor arising from acts done in the discharge of their functions falling
within the scope of their authority: Provided, That, this inclusion does not
(d) The rehabilitation receiver submits a report, based on preliminary prohibit the creditors or third parties from filing cases against the
evaluation, stating that the underlying assumptions and the goals stated in directors and officers acting in their personal capacities.
the petitioner's Rehabilitation Plan are realistic reasonable and reasonable
or if not, there is, in any case, a substantial likelihood for the debtor to be
successfully rehabilitated because, among others: RA 10142, Sec. 20 Application of Stay or Suspension Order to
Government Financial Institutions. - The provisions of this Act
(1) there are sufficient assets with/which to rehabilitate the debtor; concerning the effects of the Commencement Order and the Stay or
(2) there is sufficient cash flow to maintain the operations of the Suspension Order on the suspension of rights to foreclose or otherwise
debtor; pursue legal remedies shall apply to government financial institutions,
(3) the debtor's, partners, stockholders, directors and officers have notwithstanding provisions in their charters or other laws to the contrary.
been acting in good faith and which due diligence;
(4) the petition is not s sham filing intended only to delay the 1) GENERAL CONCEPTS
enforcement of the rights of the creditor's or of any group of Stay or Suspension Order (2 Distinct Orders)
creditors; and 1. A stay order as against creditors:
(5) the debtor would likely be able to pursue a viable Rehabilitation a. Suspending all actions or proceedings, in court or otherwise,
Plan; for the enforcement of claims against the debtor; and
b. Suspending all actions to enforce any judgment, attachment or
(e) The petition, the Rehabilitation Plan and the attachments thereto do other provisional remedies against the debtor
not contain any materially false or misleading statement; 2. An injunction against the debtor:
a. Prohibiting the sale, encumbrance, transfer of disposal in any
(f) If the petitioner is the debtor, that the debtor has met with its manner of any of its properties except in the ordinary course of
creditor/s representing at least three-fourths (3/4) of its total obligations business; and
to the extent reasonably possible and made a good faith effort to reach a b. Prohibiting any payment of its liabilities outstanding as of the
consensus on the proposed Rehabilitation Plan if the petitioner/s is/are a commencement date except as provided in the FRIA
creditor or group of creditors, that/ the petitioner/s has/have met with
the debtor and made a good faith effort to reach a consensus on the Reason for the stay:
proposed Rehabilitation Plan; and To enable the receiver to effectively exercise its powers free from any
judicial or extrajudicial interference that might unduly hinder or prevent
(g) The debtor has not committed acts misrepresentation or in fraud of its the rescue of the debtor
creditor/s or a group of creditors.
To allow such other actions to continue would only add to the
burden of the receiver – time, effort and resources would be wasted in
The Commencement Order operates as a preservative measure to ensure defending claims against the debtor instead of being directed toward
that there is, and there will continue to be, a substantial likelihood for its rehabilitation
successful rehabilitation.
Suspension is intended to give enough breathing space for the receiver
Upon the issuance of the Commencement Order, the powers and functions to make the business of the debtor viable again, without having to divert
of the Rehabilitation Receiver are vested, with specific emphasis on its attention and resources
right to review and obtain all records of the debtor
When a debtor is under a receiver:
Moreover, after the commencement date, all extrajudicial attempts to All actions or proceedings for the enforcement of claims against it must
collect or enforce a claim, all setoff of claims, and the perfection of all liens yield to the greater imperative of rehabilitation
are voided. All legal proceedings against the debtor, except those excepted If the action or proceeding were to proceed (and creditor’s claim
by the FRIA or by order of the rehabilitation court, are consolidated in the granted), the creditor would be in a position to assert a preference
rehabilitation court, and any attempt to circumvent the mandate
over other creditors  debtor would then be compelled to dispose of
constitutes indirect contempt of court.
its property to satisfy said claim
This would amount to a defiance of the injunction on selling,
B. STAY OR SUSPENSION ORDER encumbering, transferring, or disposing (in any manner) of the
debtor’s properties
Commencement Order. - The rehabilitation proceedings shall commence Purpose of injunction: to ensure that the debtor will not commit any act
upon the issuance of the Commencement Order, which shall: that defrauds its creditors or results in an undue preference of creditors
xxx
(q) include s Stay or Suspension Order which shall: Rizal Commercial Banking Corporation v. Intermediate Appellate Court (1999)
(1) suspend all actions or proceedings, in court or otherwise, for the – Melo, J.
enforcement of claims against the debtor; Petitioner: Rizal Commercial Banking Corporation (RCBC)
(2) suspend all actions to enforce any judgment, attachment or Respondent: BF Homes
other provisional remedies against the debtor; Concept: Court-Supervised Rehabilitation; Stay or Suspension Order
(3) prohibit the debtor from selling, encumbering, transferring or Contracts Involved:
disposing in any manner any of its properties except in the (1) Real Estate Mortgage executed by BF Homes in favor of RCBC
ordinary course of business; and
(4) (4) prohibit the debtor from making any payment of its Brief Facts: BF Homes had a subsisting loan obtained from RCBC, which
was secured by a real estate mortgage. BF Homes filed a petition for
rehabilitation with SEC. Prior to the appointment of a management Stay or Suspension Order shall not apply:
committee or receiver, RCBC extrajudicially foreclosed the mortgage. BF
Homes contends that the same cannot be done, as upon its filing of (a) to cases already pending appeal in the Supreme Court as of
petition for rehabilitation, RCBC stood on an equal footing with other commencement date Provided, That any final and executory judgment
creditors, both secured and unsecured, and may only assert its claim in the arising from such appeal shall be referred to the court for appropriate
rehabilitation proceedings. action;
Doctrine: Preferred creditors of distressed corporations stand on equal (b) subject to the discretion of the court, to cases pending or filed at a
footing with all other creditors only upon the appointment of a specialized court or quasi-judicial agency which, upon determination by
management committee, rehabilitation receiver, board, or body. It is only the court is capable of resolving the claim more quickly, fairly and
upon such appointment that suspension of payments happens. A mortgage efficiently than the court: Provided, That any final and executory
creditor may foreclose a mortgage even after the filing of a petition for judgment of such court or agency shall be referred to the court and shall
rehabilitation, but before the appointment of a management committee or be treated as a non-disputed claim;
receiver.
(c) to the enforcement of claims against sureties and other persons
solidarily liable with the debtor, and third party or accommodation
Sobrejuanite vs. ASB Development Corporation – Ynares -Santiago, J. mortgagors as well as issuers of letters of credit, unless the property
Petitioners: Sps. Sobrejuanite subject of the third party or accommodation mortgage is necessary for the
Respondents: ASB Development Corporation (ASBDC) rehabilitation of the debtor as determined by the court upon
Concept: Provisions Common to Voluntary and Involuntary recommendation by the rehabilitation receiver;
Rehabilitation Proceedings: Stay or Suspension Order
Contracts Involved: (d) to any form of action of customers or clients of a securities market
participant to recover or otherwise claim moneys and securities entrusted
Brief Facts: ASBDC failed to comply with its obligation to deliver the to the latter in the ordinary course of the latter's business as well as any
condo unit the spouses purchased from them. Spouses filed a complaint to action of such securities market participant or the appropriate regulatory
rescind the contract with HLURB. However, ASBDC filed a motion to agency or self-regulatory organization to pay or settle such claims or
suspend the proceedings in view of the SEC’s approval of their liabilities;
rehabilitation plan and the appointment of a rehabilitation receiver, citing
Sec. 6(c) of PD No. 902-A. (e) 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
Doctrine: The purpose of the suspension of the proceedings is to prevent settlement of securities transactions in accordance with the provisions of
a creditor from obtaining an advantage or preference over another and to the Securities Regulation Code and its implementing rules and
protect and preserve the rights of party litigants as well as the interest of regulations;
the investing public or creditors. Such suspension is intended to give
enough breathing space for the management committee or rehabilitation (f) the clearing and settlement of financial transactions through the
receiver to make business viable again, without having to divert attention facilities of a clearing agency or similar entities duly authorized, registered
and resources to litigations in various fora, and enable the receiver to and/or recognized by the appropriate regulatory agency like the Bangko
exercise its powers free from any judicial or extra-judicial interference that Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of
might duly hinder or prevent the rescue of the debtor company. such agencies or entities to reimburse themselves for any transactions
settled for the debtor; and
(g) any criminal action against individual debtor or owner, partner,

Town and Country Enterprises, Inc. vs. Honorable Norberto J. Quisumbing, Jr., director or officer of a debtor shall not be affected by any proceeding
et al.; Town and Country Enterprises, Inc. vs. Metropolitan Bank and Trust Co. commend under this Act.
(2012) – Pérez
Petitioner: Town and Country Enterprises, Inc. (TCEI)
Respondents: Norberto J. Quisumbing, Jr. (Quisumbing) and
Commencement Order. - The rehabilitation proceedings shall commence
Metropolitan Bank and Trust Co. (Metrobank)
upon the issuance of the Commencement Order, which shall:
Concept: Stay or suspension order
xxx
(k) prohibit the debtor's suppliers of goods or services from withholding
Brief Facts: TCEI failed to pay its debt to Metrobank. Metrobank
the supply of goods and services in the ordinary course of business for as
foreclosed the real estate mortgage. TCEI did not exercise its right of
long as the debtor makes payments for the services or goods supplied after
redemption within the 3-month redemption period. Months after the end
the issuance of the Commencement Order;
of the redemption period, TCEI filed rehabilitation proceedings. A stay
order was issued and rehabilitation plan was approved. Metrobank filed
(l) authorize the payment of administrative expenses as they become due;
for writ of possession of the foreclosed property. The writ was issued.
TCEI claimed that writ could not issue because the property was subject
to the possession of the rehabilitation receiver and that it would violate the RA 10142, Sec. 4
stay order. (a) Administrative expenses shall refer to those reasonable and necessary
expenses:
Doctrine: Properties already foreclosed and whose ownership was (1) incurred or arising from the filing of a petition under the
consolidated before rehabilitation proceedings cannot be affected by a stay provisions of this Act;
order. First, there is no longer a debt/claim to stay and second, ownership (2) arising from, or in connection with, the conduct of the
already passed to the purchaser. proceedings under this Act, including those incurred for the
rehabilitation or liquidation of the debtor;
Contracts: (3) incurred in the ordinary course of business of the debtor after
1. Loan: PHP 12,000,000; TCEI as Debtor; Metrobank as creditor the commencement date;
2. Real Estate Mortgage over 20 parcels of land; TCEI as mortgagor;
Metrobank as mortgagee
(4) for the payment of new obligations obtained after the
commencement date to finance the rehabilitation of the debtor;
(5) incurred for the fees of the rehabilitation receiver or liquidator
2) EXCEPTIONS TO STAY OR SUSPENSION ORDER and of the professionals engaged by them; and
(6) that are otherwise authorized or mandated under this Act or
such other expenses as may be allowed by the Supreme Court in
RA 10142, Sec. 18 Exceptions to the Stay or Suspension Order. - The
its rules.
Stay or Suspension Order
(y) Ordinary course of business shall refer to transactions in the pursuit of Acts as a stay order against the creditors and an injunction against the
the individual debtor's or debtor's business operations prior to debtor
rehabilitation or insolvency proceedings and on ordinary business terms.
Exceptions to Stay Order (against the creditor)
Listed in the FRIA – matters expressly excepted
Exceptions (Sec. 18):

(1) Cases already pending appeal in the SC as of commencement date;
provided, that any final and executory judgment arising from such
appeal shall be referred to the court for appropriate action;
(2) 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;
(3) 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;
(4) 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;
(5) 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;
(6) 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
(7) Any criminal action against the individual debtor or owner, partner,
director or officer of a debtor shall not be affected by any proceeding
commenced under this Act
Exceptions to Injunction (against the debtor)

Administrative expenses is critical
GR: All claims for administrative expenses are excepted

Reason: purpose of rehabilitation is to restore and reinstate a debtor to its
former position of successful operation and solvency  payment of
administrative expenses allows the debtor to effectively continue its
financial life and activities
MWSS vs. Daway and Maynilad—Azcuna, J.

Petitioner: Metropolitan Waterworks and Sewerage System
Respondents: Hon. Reynaldo Daway and Maynilad Water Services
Concept: Provisions Common to Voluntary and Involuntary
Rehabilitation Proceedings  Stay or Suspension Order  Exceptions to
Stay or Suspension Order
Brief Facts: MWSS granted MWSI a 20-year period to manage, operate,

repair,decommission and refurbish the existing MWSS water delivery and
sewerage services in the WestZone Service Area, for which MWSI
undertook to pay the corresponding concession fees.To secure the
concessionaire’s performance of its obligations, MWSI was required to put
up a bond, bank guarantee or other security acceptable to MWSS. In
compliance with this requirement, MWSI arranged for a 3-year facility
with a number of foreign banks, led by Citicorp International Limited, for
the issuance of an Irrevocable Standby Letter of Credit in favor of MWSS.
A few years later, MWSI served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations
under the agreement.

Doctrine: Being a solidary obligation, the letter of credit is excluded from the (a) give due course to the petition upon a finding that:
jurisdiction of the rehabilitation court (1) the debtor is insolvent; and
(2) there is a substantial likelihood for the debtor to be successfully
rehabilitated;
Panlilio v. RTC, Br. 51, City of Manila (2011) – Peralta, J.
Petitioner: Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris & Mario (b) dismiss the petition upon a finding that:
T. Cristobal (1) debtor is not insolvent;
Respondent: RTC, Br. 51, City of Manila, represented by Hon. Presiding
(2) the petition i8 a sham filing intended only to delay the
Judge Antonio M. Rosales; People of the Philippines; and the Social
enforcement of the rights of the creditor/s or of any group of
Security System
creditors;
Concept: Provisions Common to Voluntary and Involuntary
Rehabilitation Proceedings  Stay or Suspension Order  Exceptions to (3) the petition, the Rehabilitation Plan and the attachments
Stay or Suspension Order thereto contain any materially false or misleading statements; or
(4) the debtor has committed acts of misrepresentation or in fraud
Brief Facts: Corporate officers of Silahis Int’l Hotel filed a petition for of its creditor/s or a group of creditors;
suspension of payments and rehabilitation with the SEC, while there were
pending criminal cases against them for violation of the SSS Law, in (c) convert the proceedings into one for the liquidation of the debtor upon
relation to Art. 315 RPC (on estafa). They petitioned the court to suspend a finding that:
the criminal proceedings, saying that the suspension order issued by the (1) the debtor is insolvent; and
RTC should affect said criminal cases as well. (2) (2) there is no substantial likelihood for the debtor to be
successfully rehabilitated as determined in accordance with the
Doctrine: Criminal cases against the corporate officers are personal in rules to be promulgated by the Supreme Court.
nature. They are not affected by the stay or suspension order issued by the
court in relation to rehabilitation proceedings.
RA 10142, Sec. 26 Petition Given Due Course. - If the petition is given
due course, the court shall direct the rehabilitation receiver to review,
C. SUBSEQUENT ACTIONS revise and/or recommend action on the Rehabilitation Plan and submit
the same or a new one to the court within a period of not more than ninety
RA 10142, Sec. 22 Action at the Initial Hearing. - At the initial hearing, (90) days.
the court shall:
The court may refer any dispute relating to the Rehabilitation Plan or the
(a) determine the creditors who have made timely and proper filing of rehabilitation proceedings pending before it to arbitration or other modes
their notice of claims; of dispute resolution, as provided for under Republic Act No. 9285, Or the
Alternative Dispute Resolution Act of 2004, should it determine that such
(b) hear and determine any objection to the qualifications of the mode will resolve the dispute more quickly, fairly and efficiently than the
appointment of the rehabilitation receiver and, if necessary appoint a new court.
one in accordance with this Act;
RA 10142, Sec. 27 Dismissal of Petition. - If the petition is dismissed
(c) direct the creditors to comment on the petition and the Rehabilitation pursuant to paragraph (b) of Section 25 hereof, then the court may, in its
Plan, and to submit the same to the court and to the rehabilitation receiver discretion, order the petitioner to pay damages to any creditor or to the
within a period of not more than twenty (20) days; and debtor, as the case may be, who may have been injured by the filing of the
petition, to the extent of any such injury.
(d) direct the rehabilitation receiver to evaluate the financial condition of
the debtor and to prepare and submit to the court within forty (40) days
from initial hearing the report provided in Section 24 hereof. PROCEDURE IN INITIAL HEARING
The Court is tasked to do the following:
(a) Determine which creditors have timely and properly filed their
RA 10142, Sec. 24 Report of the Rehabilitation Receiver. - Within forty notice of claims.
(40) days from the initial hearing and with or without the comments of the (b) Hear and determine objections to the qualifications or the
creditors or any of them, the rehabilitation receiver shall submit a report appointment of the rehabilitation receiver. And if necessary,
to the court stating his preliminary findings and recommendations on appoint a new one.
whether: (c) Direct creditors to comment of the petition and the
Rehabilitation Plan, and to submit them to the court and the
(a) the debtor is insolvent and if so, the causes thereof and any unlawful or receiver within a period of not more than 20 days.
irregular act or acts committed by the owner/s of a sole proprietorship (d) Direct the receiver to evaluate the financial condition of the
partners of a partnership or directors or officers of a corporation in debtor and, within 40 days from the initial hearing, submit the
contemplation of the insolvency of the debtor or which may have report.
contributed to the insolvency of the debtor;
PROCEDURE IN DISPOSING OF THE PETITION
(b) the underlying assumptions, the financial goals and the procedures to
Within 10 days after receiving the receiver’s report, the Court has 3
accomplish such goals as stated in the petitioner's Rehabilitation Plan are
courses of action that it may take, with respect to the petition:
realistic, feasible and reasonable;
(1) Give Due Course
(c) there is a substantial likelihood for the debtor to be successfully (a) Requisites for Granting
rehabilitated; i. Debtor is insolvent; and,
ii. There is substantial likelihood for debtor’s successful
(d) the petition should be dismissed; and rehabilitation
(b) Actions To Be Taken
(e) the debtor should be dissolved and/or liquidated. i. Court will direct the receiver to review, revise and or
recommend action on the Rehabilitation Plan and submit
the same plan or a new one to court within a period of not
RA 10142, Sec. 25 Giving Due Course to or Dismissal of Petition, or more than 90 days.
Conversion of Proceedings. - Within ten (10) days from receipt of the ii. If there is any dispute relating to the Rehabilitation Plan
report of the rehabilitation receiver mentioned in Section 24 hereof the or to the proceedings pending before it, the court may
court may: refer it to arbitration or other modes of dispute resolution,
should it determine that such method will be more quick,
fair and efficient than resolving it in court.
(2) Dismissal RA 10142, Sec. 30 Initial Appointment of the Rehabilitation Receiver. -

(a) Grounds for Dismissal The court shall initially appoint the rehabilitation receiver, who mayor
i. Debtor is NOT insolvent may not be from among the nominees of the petitioner, However, at the
ii. The petition is a sham filing, intended to delay creditors initial hearing of the petition, the creditors and the debtor who are not
(or a group of creditors) in enforcing their rights. petitioners may nominate other persons to the position. The court may
iii. The petition, Rehabilitation Plan and the attachments retain the rehabilitation receiver initially appointed or appoint another
thereto contain any materially false or misleading who mayor may not be from among those nominated.
statements.
iv. Debtor has committed acts of misrepresentation or in In case the debtor is a securities market participant, the court shall give
fraud of its creditors (or a group of creditors) priority to the nominee of the appropriate securities or investor protection
(b) Actions To Be Taken fund.
Along with the dismissal of the petition, the court, in its
discretion, may require the petitioner to pay damages to any If a qualified natural person or entity is nominated by more than fifty
creditor or to the debtor, as the case may be, who have been percent (50%) of the secured creditors and the general unsecured creditors,
injured by the filing of the petition. and satisfactory evidence is submitted, the court shall appoint the
creditors' nominee as rehabilitation receiver.
(3) Conversion to Liquidation Proceedings
Requisites for Conversion RA 10142, Sec. 32 Removal of the Rehabilitation Receiver. – The
(1) Debtor is insolvent; and, rehabilitation receiver may be removed at any time by the court either
motu proprio or upon motion by any creditor/s holding more than fifty
(2) No substantial likelihood of debtor’s successful rehabilitation
percent (50%) of the total obligations of the debtor, on such grounds as the
rules of procedure may provide which shall include, but are not limited to,
D. REHABILITATION RECEIVER the following:
1) GENERAL CONCEPTS (a) Incompetence, gross negligence, failure to perform or failure to

exercise the proper degree of care in the performance of his duties and
RA 10142, Sec. 4 powers;
(hh) Rehabilitation receiver shall refer to the person or persons, natural or
juridical, appointed as such by the court pursuant to this Act and which (b) Lack of a particular or specialized competency required by the specific
shall be entrusted with such powers and duties as set forth herein. case;
(c) Illegal acts or conduct in the performance of his duties and powers;
RA 10142, Sec. 28 Who May Serve as a Rehabilitation Receiver. - Any
qualified natural or juridical person may serve as a rehabilitation receiver: (d) Lack of qualification or presence of any disqualification;
Provided, That if the rehabilitation receiver is a juridical entity, it must
designate a natural person/s who possess/es all the qualifications and (e) Conflict of interest that arises after his appointment; and
none of the disqualification’s as its representative, it being understood that
the juridical entity and the representative/s are solidarily liable for all (f) Manifest lack of independence that is detrimental to the general body of
obligations and responsibilities of the rehabilitation receiver. the stakeholders.
RA 10142, Sec. 29 Qualifications of a Rehabilitation Receiver. - The RA 10142, Sec. 33 Compensation and Terms of Service. The
rehabilitation receiver shall have the following minimum qualifications: rehabilitation receiver and his direct employees or independent
contractors shall be entitled to compensation for reasonable fees and
(a) A citizen of the Philippines or a resident of the Philippines in the six (6) expenses from the debtor according to the terms approved by the court
months immediately preceding his nomination; after notice and hearing. Prior to such hearing, the rehabilitation receiver
and his direct employees shall be entitled to reasonable compensation
(b) Of good moral character and with acknowledged integrity, impartiality based on quantum meruit. Such costs shall be considered administrative
and independence; expenses.
(c) Has the requisite knowledge of insolvency and other relevant
commercial laws, rules and procedures, as well as the relevant training RA 10142, Sec. 34 Oath and Bond of the Rehabilitation Receiver. Prior to
and/or experience that may be necessary to enable him to properly entering upon his powers, duties and responsibilities, the rehabilitation
discharge the duties and obligations of a rehabilitation receiver; and receiver shall take an oath and file a bond, in such amount to be fixed by
the court, conditioned upon the faithful and proper discharge of his
(d) Has no conflict of interest: Provided, That such conflict of interest may powers, duties and responsibilities.
be waived, expressly or impliedly, by a party who may be prejudiced
thereby. RA 10142, Sec. 35 Vacancy. - Incase the position of rehabilitation
receiver is vacated for any reason whatsoever. the court shall direct the
Other qualifications and disqualification’s of the rehabilitation receiver debtor and the creditors to submit the name/s of their nominee/s to the
shall be set forth in procedural rules, taking into consideration the nature position. The court may appoint any of the qualified nominees. or any
of the business of the debtor and the need to protect the interest of all other person qualified for the position.
stakeholders concerned.
RA 10142, Sec. 40 Conflict of Interest. - No person may be appointed as a
rehabilitation receiver, member of a_ management committee, or be
employed by the rehabilitation receiver or the management committee if
he has a conflict of interest.
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. Without limiting the generality of
the foregoing, an individual shall be deemed to have a conflict of interest

if: - The Court may, either motu proprio, OR upon motion by any
(1) he is a creditor, owner, partner or stockholder of the debtor; creditor(s) holding more than 50% of the debtor’s total obligations,
(2) he is engaged in a line of business which competes with that of the remove the receiver on the following grounds:
debtor; - Those provided by the rules of procedure; and/or
(3) he is, or was, within five (5) years from the filing of the petition, a - Including the ff. but not limited to:
director, officer, owner, partner or employee of the debtor or any of the o Incompetence, gross negligence, failure to perform, or failure to
creditors, or the auditor or accountant of the debtor; exercise the proper degree of care in the performance of duties
o Lack of particular or required specialized competency required
(4) he is, or was, within two (2) years from the filing of the petition, an by the case
underwriter of the outstanding securities of the debtor; o Illegal acts or conduct in the performance of duties
(5) he is related by consanguinity or affinity within the fourth civil degree o Lack of qualification or presence of any disqualification
to any individual creditor, owners of a sale proprietorship-debtor, o Conflict of interest, which arose after appointment
partners of a partnership- debtor or to any stockholder, director, officer, o Manifest lack of independence that is detrimental to the
employee or underwriter of a corporation-debtor; or stakeholders
(6) he has any other direct or indirect material interest in the
debtor or any of the creditors.
Any rehabilitation receiver, member of the management committee or

persons employed or contracted by them possessing any conflict of
interest shall make the appropriate disclosure either to the court or to the
creditors in case of out-of-court rehabilitation proceedings.
Any party to the proceeding adversely affected by the appointment of any

person with a conflict of interest to any of the positions enumerated above
may however waive his right to object to such appointment and, if the
waiver is unreasonably withheld, the court may disregard the conflict of
interest, taking into account the general interest of the stakeholders.
Rules on Rehabilitation Receivers

The Rehabilitation Receiver
- May be a natural or juridical person.
- If it is a juridical person, it must designate one or more natural
persons who shall possess all the qualifications and none of the
disqualifications (see below) as its representative.
o The representative(s) shall be solidarily liable with the juridical
entity for the obligations and responsibilities as the appointed
receiver
Qualifications
- Citizen of the Phils., OR a resident of the Phils. for at least 6 months
preceding his/her/its nomination
- Of good moral character and with acknowledged integrity,
impartiality and independence
- Has requisite knowledge of insolvency laws, and other relevant
commercial laws, rules, and procedures, as well as relevant training
and/or experience
- No conflict of interest (see more rules below)
- This requirement may however be waived expressly or impliedly by
the party who may be prejudiced
- NOTE: Other qualifications and disqualifications shall be set forth in
the procedural rules, considering the nature of the debtor’s business,
and the interest of all stakeholders.
Appointment and Vacancy

- Court shall initially appoint the receiver (may or may not be among
the nominees of the petitioner)
- During the initial hearing, creditors and the debtor, who are not
petitioners, may nominate other persons.
- Court may retain the receiver initially appointed OR appoint a new
one (may or may not be among new nominees)
- PROV: If debtor is a securities market participant, the court shall
give priority to the nominee of the appropriate securities or investor
protection fund.
- If the qualified receiver is nominated by more than 50% of the
secured creditors and the general unsecured creditors, AND
satisfactory evidence is submitted, the said qualified receiver shall be
appointed by the court.
- In case the position becomes vacated for any reason, the court shall
direct the debtor and the creditors to submit names of nominees. The
court may appoint from this list or any other person qualified.
Removal
Compensation (e) the debtor should be dissolved and/or liquidated.
- The receiver, and his employees and/or independent contractors are
entitled to compensation on a quantum meruit basis, in accordance RA 10142, Sec. 31 Powers, Duties and Responsibilities of the
with terms approved by the court. Rehabilitation Receiver. - The rehabilitation receiver shall be deemed an
- The compensation of the receiver et. al. is considered as officer of the court with the principal duty of preserving and maximizing
administrative expenses the value of the assets of the debtor during the rehabilitation proceedings,
determining the viability of the rehabilitation of the debtor, preparing and
Oath and Bond recommending a Rehabilitation Plan to the court, and implementing the
- Prior to assumption of his duties, the receiver is required to take an approved Rehabilitation Plan, To this end, and without limiting the
oath and file a bond, the amount of which shall be fixed by the court. generality of the foregoing, the rehabilitation receiver shall have the
following powers, duties and responsibilities:
Conflicts of Interest
- GR: No person with conflict of interest may be appointed as receiver (a)To verify the accuracy of the factual allegations in the petition and its
or part of the management committee, or employed by both. annexes;
EX: The party, who may be injured, may expressly or impliedly
waive this disqualification. (b)To verify and correct, if necessary, the inventory of all of the assets of
PROV: If waiver is unreasonably withheld, the court may disregard the debtor, and their valuation;
the conflict of interest, with the general interest of the stakeholders
in mind. (c)To verify and correct, if necessary, the schedule of debts and liabilities
- Badges of Conflict of Interest: of the debtor;
 He is a creditor, owner, partner, or stockholder of the debtor
 Is a business competitor of the debtor (d)To evaluate the validity, genuineness and true amount of all the claims
 Was a director, officer, owner, partner, or employee of the debtor, against the debtor;
or any of the creditors, or the auditor or accountant of the debtor,
WITHIN the last 5 years preceding the filing of the petition (e)To take possession, custody and control, and to preserve the value of all
the property of the debtor;
 An underwriter of the outstanding securities of the debtor
WITHIN the last 2 years preceding the filing of the petition
(f)To sue and recover, with the approval of the court, all amounts owed to,
 Related to by consanguinity or affinity within the 4th civil degree
and all properties pertaining to the debtor;
to any of the ff:
 creditor, (g)To have access to all information necessary, proper or relevant to the
 owner(s) of a sole proprietorship-debtor, operations and business of the debtor and for its rehabilitation;
 partners of a partnership-debtor,
 Stockholder, director, officer, employee, or underwriter of (h) To sue and recover, with the. approval of the court, all property or
a corporation-debtor money of the debtor paid, transferred or disbursed in fraud of the debtor
 He has any other direct or indirect material interest in the debtor or its creditors, or which constitute undue preference of creditor/s;
or any of the creditors
- Conflicts of interest should be disclosed appropriately by the receiver (i) To monitor the operations and the business of the debtor to ensure that
or members of the management committee, to the court, or to the no payments or transfers of property are made other than in the ordinary
creditors (in case of out-of-court rehabilitation proceedings) course of business;
(j) With the court's approval, to engage the services of or to employ

2) POWERS, DUTIES AND RESPONSIBILITIES persons or entities to assist him in the discharge of his functions;
RA 10142, Sec. 47 Management. - Unless otherwise provided herein, the (k) To determine the manner by which the debtor may be best
management of the juridical debtor shall remain with the existing rehabilitated, to review) revise and/or recommend action on the
management subject to the applicable law/s and agreement/s, if any, on Rehabilitation Plan and submit the same or a new one to the court for
the election or appointment of directors, managers Or managing partner. approval;
However, all disbursements, payments or sale, disposal, assignment,
transfer or encumbrance of property, or any other act affecting title or (1) To implement the Rehabilitation Plan as approved by the court, if 80
interest in property, shall be subject to the approval of the rehabilitation provided under the Rehabilitation Plan;
receiver and/or the court, as provided in the following subchapter.
(m) To assume and exercise the powers of management of the debtor, if
RA 10142, Sec. 24 Report of the Rehabilitation Receiver. - Within forty directed by the court pursuant to Section 36 hereof;
(40) days from the initial hearing and with or without the comments of the
creditors or any of them, the rehabilitation receiver shall submit a report (n) To exercise such other powers as may, from time to time, be conferred
to the court stating his preliminary findings and recommendations on upon him by the court; and
whether:
To submit a status report on the rehabilitation proceedings every quarter
(a) the debtor is insolvent and if so, the causes thereof and any unlawful or or as may be required by the court motu proprio. or upon motion of any
irregular act or acts committed by the owner/s of a sole proprietorship creditor. or as may be provided, in the Rehabilitation Plan.
partners of a partnership or directors or officers of a corporation in
contemplation of the insolvency of the debtor or which may have Unless appointed by the court, pursuant to Section 36 hereof, the
contributed to the insolvency of the debtor; rehabilitation receiver shall not take over the management and control of
the debtor but may recommend the appointment of a management
(b) the underlying assumptions, the financial goals and the procedures to committee over the debtor in the cases provided by this Act.
accomplish such goals as stated in the petitioner's Rehabilitation Plan are
realistic, feasible and reasonable; RA 10142, Sec. 39 Employment of Professionals. - Upon approval of the
court, and after notice and hearing, the rehabilitation receiver or the
(c) there is a substantial likelihood for the debtor to be successfully management committee may employ specialized professionals and other
rehabilitated; experts to assist each in the performance of their duties. Such professionals
and other experts shall be considered either employees or independent
(d) the petition should be dismissed; and contractors of the rehabilitation receiver or the management committee, as
the case may be. The qualifications and disqualification’s of the

professionals and experts may be set forth in procedural rules, taking into the rehabilitation process.
consideration the nature of the business of the debtor and the need to
protect the interest of all stakeholders concerned. RA 10142, Sec. 8 Decisions of Creditors. - Decisions of creditors shall be
made according to the relevant provisions of the Corporation Code in the
RA 10142, Sec. 41 Immunity. - The rehabilitation receiver and all case of stock or nonstock corporations or the Civil Code in the case of
persons employed by him, and the members of the management committee partnerships that are not inconsistent with this Act.
and all persons employed by it, shall not be subject to any action. claim or
demand in connection with any act done or omitted to be done by them in RA 10142, Sec. 9 Creditors Representatives. - Creditors may designate
good faith in connection with the exercise of their powers and functions representatives to vote or otherwise act on their behalf by filing notice of
under this Act or other actions duly approved by the court.1awp++il such representation with the court and serving a copy on the rehabilitation
receiver or liquidator.
Since the purpose of rehabilitation is to preserve a floundering business as
a going concern, presuming that the assets of the business are more Classification of Creditors, in context of insolvency:
valuable if maintained, rather than liquidated.
- Secured Creditors – creditors who have in their favor special
preferred credits under Art. 2241 & 2242
“Going concern” – a concept in accounting which refers to an underlying
assumption that a company or other entity will be able to continue - Unsecured Creditors – creditors having only personal security
operating for a period of time that is sufficient to carry out its transactions in their favor
commitments, obligations, objectives, and so on. In other words, the
company will not have to liquidate or be forced out of business in the Rules on Creditors’ Committees
foreseeable future.1 - Classes of Creditors
o Secured
Hence, the effect is that the debtor maintains control of its business and o Unsecured
property, referred to as the principle of debtor-in-possession/debtor-in- o Trade Creditors and Suppliers
place. o Employees of the Debtor
Debtor-in-Possession or Debtor-in-Place - Formation

o Creditors belonging to a class may form a committee.
- GR: The debtor maintains control of his business and property.
o The creditors, as a whole, may also form a committee, with each
The receiver is instead tasked with the following responsibilities:
class having one representative each, sitting in the committee.
o Preserving and maximizing the value of the assets of the debtor
during the rehabilitation proceedings
o Determining the viability of the rehabilitation of the debtor - Role and Powers
o Preparing and recommending a Rehabilitation Plan to the court; o Assist the receiver in communicating with the creditors by acting
and, as the primary liaison of the class of creditors.
o Implementing the Rehabilitation Plan o GR: The committee cannot exercise or waive any rights of the
creditors they represent, nor give any consent on behalf of any
creditor.
- PROV: The debtor needs to secure the approval of the receiver or the
EX: Unless specifically authorized in writing by such creditor.
court for the ff. acts:
o The committee may be authorized by the court or by the
o Disbursements affecting title or interest in property
rehabilitation receiver to perform such other tasks and functions
o Payments affecting title or interest in property
as may be necessary.
o Sale, disposal, assignment, transfer, or encumbrance of property
o Any other act affecting title or property
F. MANAGEMENT COMMITTEE
E. CREDITORS’ COMMITTEES
RA 10142, Sec. 47 Management. - Unless otherwise provided herein, the
management of the juridical debtor shall remain with the existing
RA 10142, Sec. 42 Creditors' Committee. - After the creditors' meeting management subject to the applicable law/s and agreement/s, if any, on
called pursuant to Section 63 hereof, the creditors belonging to a class the election or appointment of directors, managers Or managing partner.
may formally organize a committee among However, all disbursements, payments or sale, disposal, assignment,
transfer or encumbrance of property , or any other act affecting title or
themselves. In addition, the creditors may, as a body, agree to form a interest in property, shall be subject to the approval of the rehabilitation
creditors' committee composed of a representative from each class of receiver and/or the court, as provided in the following subchapter.
creditors, such as the following:
(a) Secured creditors;
(b) Unsecured creditors; RA 10142, Sec. 36 Displacement of Existing Management by the
(c) Trade creditors and suppliers; and Rehabilitation Receiver or Management Committee. – Upon motion of any
(d) Employees of the debtor. interested party, the court may appoint and direct the rehabilitation
receiver to assume the powers of management of the debtor, or appoint a
In the . election of the creditors' representatives, the rehabilitation receiver management committee that will undertake the management of the
or his representative shall attend such meeting and extend the appropriate debtor. upon clear and convincing evidence of any of the following
assistance as may be defined in the procedural rules. circumstances:
(a) Actual or imminent danger of dissipation, loss, wastage or
destruction of the debtor’s assets or other properties;
RA 10142, Sec. 43 Role of Creditors' Committee. - The creditors' (b) Paralyzation of the business operations of the debtor; or
committee when constituted pursuant to Section 42 of this Act shall assist (c) Gross mismanagement of the debtor. or fraud or other wrongful
the rehabilitation receiver in communicating with the creditors and shall conduct on the part of, or gross or willful violation of this Act
be the primary liaison between the rehabilitation receiver and the by. existing management of the debtor Or the owner, partner,
creditors. The creditors' committee cannot exercise or waive any right or director, officer or representative/s in management of the
give any consent on behalf of any creditor unless specifically authorized in debtor.
writing by such creditor. The creditors' committee may be authorized by
the court or by the rehabilitation receiver to perform such other tasks and In case the court appoints the rehabilitation receiver to assume the powers
functions as may be defined by the procedural rules in order to facilitate of management of the debtor. the court may:
(1) require the rehabilitation receiver to post an additional bond;
1 Source: http://www.accountingcoach.com/blog/going-concern (2) authorize him to engage the services or to employ persona or
entities to assist him in the discharge of his managerial which shall include undisputed claims that have not been subject to
functions; and challenge.
(3) (3) authorize a commensurate increase in his compensation.
RA 10142, Sec. 46 Appeal. - Any decision of the rehabilitation receiver
RA 10142, Sec. 37 Role of the Management Committee. – When regarding a claim may be appealed to the court.
appointed pursuant to the foregoing section, the management committee
shall take the place of the management and the governing body of the Creditors should file the claims with the court at least 5 days before the
debtor and assume their rights and responsibilities. initial hearing
The specific powers and duties of the management committee, whose The claims must be supported by sufficient evidence, to be properly
members shall be considered as officers of the court, shall be prescribed by included in the registry of claims.
the procedural rules.
Claims may be subject to an opposition or a challenge as to their validity,
RA 10142, Sec. 38 Qualifications of Members of the Management within 30 days from the expiration of the 20-day period given to the
Committee. - The qualifications and disqualification’s of the members of receiver to make available the registry of claims.
the management committee shall be set forth in the procedural rules,
taking into consideration the nature of the business of the debtor and the
need to protect the interest of all stakeholders concerned.
GR: The principle of debtor-in-possession/debtor-in-place is observed.

EX: The FRIA authorizes the Receiver or a Management Committee,
when ordered by the court, to assume the powers of management of the
debtor’s business upon a showing of clear and convincing evidence of:
(1) Actual or imminent danger of dissipation, loss, wastage, or
destruction of the debtor’s assets or other properties; OR,
(2) Paralysis of the business operations of the debtor; OR,
(3) Gross mismanagement of the debtor, or fraud, or other
wrongful conduction on the part of, or gross or willful violation
of the FRIA by the existing management of the debtor, or the
owner, partner, director, officer, or representatives in
management of the debtor.
G. CLAIMS
RA 10142, Sec. 4
(c) Claim shall refer to all claims or demands of whatever nature 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: Provided, That, this inclusion does not
prohibit the creditors or third parties from filing cases against the
directors and officers acting in their personal capacities.
1) DETERMINATION OF CLAIMS

Commencement Order. - The rehabilitation proceedings shall commence
upon the issuance of the Commencement Order, which shall:
xxx
(i) 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;
RA 10142, Sec. 44 Registry of Claims. - Within twenty (20) days from his
assumption into office, the rehabilitation receiver shall establish a
preliminary registry of claims. The rehabilitation receiver shall make the
registry available for public inspection and provide publication notice to
the debtor, creditors and stakeholders on where and when they may
inspect it. All claims included in the registry of claims must be duly
supported by sufficient evidence.
RA 10142, Sec. 45 Opposition or Challenge of Claims. – Within thirty

(30) days from the expiration of the period stated in the immediately
preceding section, the debtor, creditors, stakeholders and other interested
parties may submit a challenge to claim/s to the court, serving a certified
copy on the rehabilitation receiver and the creditor holding the challenged
claim/so Upon the expiration of the thirty (30)-day period, the
rehabilitation receiver shall submit to the court the registry of claims
2) TREATMENT OF CLAIMS (b) The value of the claim secured by a lien on the property, which
is not necessary for rehabilitation, exceeds the fair market value
A) SECURED CREDITOR CLAIMS of the property.
(5) The Rehabilitation Plan shall specify the treatment of each class or
RA 10142, Sec. 4 subclass of creditors, and shall provide equal treatment of all claims
(kk) Secured creditor shall refer to a creditor with a secured claim. within the same class or subclass, UNLESS a particular creditor
voluntarily agrees to a less favorable treatment.
(6) The Rehabilitation Plan must ensure that the payments under the
RA 10142, Sec. 60 No Diminution of Secured Creditor Rights. The plan follow the priority established by the Civil Code on concurrence
issuance of the Commencement Order and the Suspension or Stay Order, and preference of credits, and MUST maintain the security interest of
and any other provision of this Act, shall not be deemed in any way to secured creditors and preserve the liquidation value of the security,
diminish or impair the security or lien of a secured creditor, or the value of UNLESS waived or modified voluntarily.
his lien or security, except that his right to enforce said security or lien
may be suspended during the term of the Stay Order.
B) EMPLOYEE CLAIMS
The court, upon motion or recommendation of the rehabilitation receiver,
may allow a secured creditor to enforce his security or lien, or foreclose RA 10142, Sec. 56 Treatment of Employees, Claims. Compensation of
upon property of the debtor securing his/its claim, if the said property is employees required to carry on the business shall be considered an
not necessary for the rehabilitation of the debtor. The secured creditor administrative expense. Claims of separation pay for months worked prior
and/or the other lien holders shall be admitted to the rehabilitation to the commencement date shall be considered a pre- ommencement claim.
proceedings only for the balance of his claim, if any. Claims for salary and separation pay for work performed after the
commencement date shall be an administrative expense.
RA 10142, Sec. 61 Lack of Adequate Protection. - The court, on motion
or motu proprio, may terminate, modify or set conditions for the RA 10142, Sec. 16 Commencement of Proceedings and Issuance of a
continuance of suspension of payment, or relieve a claim from the coverage Commencement Order. - The rehabilitation proceedings shall commence
thereof, upon showing that: (a) a creditor does not have adequate upon the issuance of the Commencement Order, which shall:
protection over property securing its claim; or xxx
(b) 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 xxx
the said property. (q) include s Stay or Suspension Order which shall:
For purposes of this section, a creditor shall be deemed to lack adequate xxx
protection if it can be shown that: (4) prohibit the debtor from making any payment of its liabilities
(a) the debtor fails or refuses to honor a pre-existing agreement outstanding as of the commencement date except as may be provided
with the creditor to keep the property insured; herein.
(b) the debtor fails or refuses to take commercially reasonable steps
to maintain the property; or Rules on Treatment of Employee Claims
(c) the property has depreciated to an extent that the creditor is
(1) Compensation of employees required to carry on the business are
under secured.
treated as administrative expenses.
Upon showing of a lack of protection, the court shall order the debtor or (2) Claims of separation pay for months worked PRIOR to the
the rehabilitation receiver to make arrangements to provide for the commencement date are treated as pre-commencement claims.
insurance or maintenance of the property; or to make payments or (3) Claims for salary and separation pay AFTER the commencement are
otherwise provide additional or replacement security such that the treated as administrative expenses.
obligation is fully secured. If such arrangements are not feasible, the court
may modify the Stay Order to allow the secured creditor lacking adequate C) EXCLUDED CLAIMS
protection to enforce its security claim against the debtor: Provided,
however, That the court may deny the creditor the remedies in this RA 10142, Sec. 23 Effect of Failure to File Notice of Claim. - A creditor
paragraph if the property subject of the enforcement is required for the whose claim is not listed in the schedule of debts and liabilities and who
rehabilitation of the debtor. fails to file a notice of claim in accordance with the Commencement Order
but subsequently files a belated claim shall not be entitled to participate in
Rules on Treatment of Secured Creditors the rehabilitation proceedings but shall be entitled to receive distributions
(1) Upon the issuance of the Commencement Order, all creditors, arising therefrom.
including secured creditors, are precluded by the Stay or Suspension
Order from obtaining an advantage or preference over one another.
The principle observed is ‘equality is equity,’ and all creditors,
secured or unsecured, stand on equal footing.
(2) The issuance of the said Commencement Order, however, does NOT
diminish or impair the security or lien of a secured creditor, nor its
value; it only suspends the right of the secured creditor to enforce the
security or lien during the term of the Stay or Suspension Order
accompanying the Commencement Order.
(3) During the proceedings, the Court, upon motion or recommendation
of the receiver, may allow a secured creditor to enforce the security
or lien, or foreclose upon the property, IF the property is not
necessary for the rehabilitation of the debtor.
(4) During the proceedings, the Court, either motu proprio or upon the
recommendation of the receiver, may terminate, modify, or set
conditions for the continuance of the Stay or Suspension Order,
or relieve a claim from its coverage, if:
(a) A secured creditor does not have adequate protection over its
security, or

H. TREATMENT OF ASSETS On Sale
The court may authorize the receiver’s application to sell the
unencumbered property of the debtor, outside the ordinary course of the
RA 10142, Sec. 47 Management. - Unless otherwise debtor’s business, upon showing that the property, by its nature or
provided herein, the management of the juridical debtor because of other circumstances, is
shall remain with the existing management subject to the o Perishable
applicable law/s and agreement/s, if any, on the election o Costly to maintain
or appointment of directors, managers Or managing o Susceptible to devaluation; or,
o Otherwise in jeopardy
partner. However, all disbursements, payments or sale,
disposal, assignment, transfer or encumbrance of property
2) ENCUMBERED ASSETS
, or any other act affecting title or interest in property, shall
be subject to the approval of the rehabilitation receiver
RA 10142, Sec. 4
and/or the court, as provided in the following subchapter. (l) Encumbered property shall refer to real or personal property of the
debtor upon which a lien attaches.
1) UNENCUMBERED ASSETS
RA 10142, Sec. 17 Effects of the Commencement Order. - Unless
RA 10142, Sec. 48 Use or Disposition of Assets. - Except as otherwise otherwise provided for in this Act, the court's issuance of a
provided herein, no funds or property of the debtor shall he used or Commencement Order shall, in addition to the effects of a Stay or
disposed of except in the ordinary course of business of the debtor, or Suspension Order described in Section 16 hereof:
unless necessary to finance the administrative expenses of the
rehabilitation proceedings. xxx
(b) prohibit or otherwise serve as the legal basis rendering null and void
RA 10142, Sec. 49 Sale of Assets. - The court, upon application of the the results of any extrajudicial activity or process to seize property, sell
rehabilitation receiver, may authorize the sale of unencumbered property encumbered property, or otherwise attempt to collection or enforce a claim
of the debtor outside the ordinary course of business upon a showing that against the debtor after commencement date unless otherwise allowed in
the property, by its nature or because of other circumstance, is perishable, this Act, subject to the provisions of Section 50 hereof;
costly to maintain, susceptible to devaluation or otherwise injeopardy. xxx
RA 10142, Sec. 52 Rescission or Nullity of Sale, Payment, Transfer or RA 10142, Sec. 50 Sale or Disposal of Encumbered Property of the Debtor
Conveyance of Assets. - The court may rescind or declare as null and void and Assets of Third Parties Held by Debtor. The court may authorize the
any sale, payment, transfer or conveyance of the debtor's unencumbered sale, transfer, conveyance or disposal of encumbered property of the
property or any encumbering thereof by the debtor or its agents or debtor, or property of others held by the debtor where there is a security
representatives after the commencement date which are not in the interest pertaining to third parties under a financial, credit or other similar
ordinary course of the business of the debtor: Provided, however, That the transactions if, upon application of the rehabilitation receiver and with the
unencumbered property may be sold, encumbered or otherwise disposed of consent of the affected owners of the property, or secured creditor/s in the
upon order of the court after notice and hearing: case of encumbered property of the debtor and, after notice and hearing,
(a) if such are in the interest of administering the debtor and facilitating the court determines that:
the preparation and implementation of a Rehabilitation Plan;
(b) in order to provide a substitute lien, mortgage or pledge of property (a) such sale, transfer, conveyance or disposal is necessary for the
under this Act; continued operation of the debtor's business; and
(c) for payments made to meet administrative expenses as they arise;
(d) for payments to victims of quasi delicts upon a showing that the (b) the debtor has made arrangements to provide a substitute lien or
claim is valid and the debtor has insurance to reimburse the debtor ownership right that provides an equal level of security for the counter-
for the payments made; party's claim or right.
(e) for payments made to repurchase property of the debtor that is
auctioned off in a judicial or extrajudicial sale under. This Act; or Provided, That properties held by the debtor where the debtor has
(f) for payments made to reclaim property of the debtor held pursuant to authority to sell such as trust receipt or consignment arrangements may
a possessory lien. be sold or disposed of by the .debtor, if such sale or disposal is necessary
for the operation of the debtor's business, and the debtor has made
arrangements to provide a substitute lien or ownership right that provides
Unencumbered Asset – property which has no lien attached thereto
an equal level of security for the counter-party's claim or right.
On Use and Disposition
Sale or disposal of property under this section shall not give rise to any
GR: No funds or property of the debtor shall be used or disposed of.
criminal liability under applicable laws.
EX: Except in the ff. cases:
o In the ordinary course of the debtor’s business; or,
o If necessary to finance the administrative expenses of the RA 10142, Sec. 51 Assets of Debtor Held by Third Parties. – In the case of
rehabilitation proceedings possessory pledges, mechanic's liens or similar claims, third parties who
have in their possession or control property of the debtor shall not
transfer, conveyor otherwise dispose of the same to persons other than the
debtor, unless upon prior approval of the rehabilitation receiver. The
rehabilitation receiver may also:
(a) demand the surrender or the transfer of the possession or control of

such property to the rehabilitation receiver or any other person, subject to
payment of the claims secured by any possessory Iien/s thereon;
(b) allow said third parties to retain possession or control, if such an

arrangement would more likely preserve or increase the value of the
property in question or the total value of the assets of the debtor; or
(c) undertake any otI1er disposition of the said property as may be

beneficial for the rehabilitation of the debtor, after notice and hearing, and

approval of the court. I. TREATMENT OF CONTRACTS
RA 10142, Sec. 53 Assets Subject to Rapid Obsolescence, Depreciation and 1) CONFIRMATION OR TERMINATION OF CONTRACTS
Diminution of Value. - Upon the application of a secured creditor holding
a lien against or holder of an ownership interest in property held by the RA 10142, Sec. 57 Treatment of Contracts. - Unless cancelled by virtue
debtor that is subject to potentially rapid obsolescence, depreciation or of a final judgment of a court of competent jurisdiction issued prior to the
diminution in value, the court shall, after notice and hearing, order the issuance of the Commencement Order, or at anytime thereafter by the
debtor or rehabilitation receiver to take reasonable steps necessary to court before which the rehabilitation proceedings are pending, all valid
prevent the depreciation. If depreciation cannot be avoided and such and subbsisting contracts of the debtor with creditors and other third
depreciation is jeopardizing the security or property interest of the secured parties as at the commencement date shall continue in force: Provided,
creditor or owner, the court shall: That within ninety (90) days following the commencement of proceedings,
the debtor, with the consent of the rehabilitation receiver, shall notify each
(a) allow the encumbered property to be foreclosed upon by the secured contractual counter-party of whether it is confirming the particular
creditor according to the relevant agreement between the debtor and the contract. Contractual obligations of the debtor arising or performed
secured creditor, applicable rules of procedure and relevant legislation: during this period, and afterwards for confirmed contracts, shall be
Provided. That the proceeds of the sale will be distributed in accordance considered administrative expenses. Contracts not confirmed within the
with the order prescribed under the rules of concurrence and preference of required deadline shall be considered terminated. Claims for actual
credits; or damages, if any, arising as a result of the election to terminate a contract
shall be considered a pre-commencement claim against the debtor.
(b) upon motion of, or with the consent of the affected secured creditor or Nothing contained herein shall prevent the cancellation or termination of
interest owner. order the conveyance of a lien against or ownership any contract of the debtor for any ground provided by law.
interest in substitute property of the debtor to the secured creditor:
Provided. That other creditors holding liens on such property, if any, do
not object thereto, or, if such property is not available; RA 10142, Sec. 16
Commencement of Proceedings and Issuance of a Commencement Order. -
(c) order the conveyance to the secured creditor or holder . of an The rehabilitation proceedings shall commence upon the issuance of the
ownership interest of a lien on the residual funds from the sale of Commencement Order, which shall:
encumbered property during the proceedings; or xxx
(d) allow the sale or disposition of the property: Provided. That the sale or xxx
disposition will maximize the value of the property for the benefit of the (q) include s Stay or Suspension Order which shall:
secured creditor and the debtor, and the proceeds of the sale will be xxx
distributed in accordance with the order prescribed under the rules of (4) prohibit the debtor from making any payment of its liabilities
concurrence and preference of credits. outstanding as of the commencement date except as may be provided
herein.
Encumbered Asset – property upon which a lien attaches
Confirmation – a valid and subsisting contract is confirmed by notice to
the contractual counter-party within 90 days from the commencement of
On Sale the proceedings
- Requisites
o Such sale, transfer, conveyance or disposal of encumbered Termination – a valid and subsisting contract is terminated if the 90-day
property is necessary for the continued operation of the business; period lapses without giving notice to the counter-party for confirmation,
and, but subject to a claim for actual damages arising from the termination
o Debtor has made arrangements to provide a substitute lien or
ownership right that provides an equal level of security for the
counter-party’s claim or right. 2) AVOIDANCE PROCEEDINGS
- Notice and hearing is required.
- Object RA 10142, Sec. 58 Rescission or Nullity of Certain Pre-commencement
o Encumbered property; or, Transactions. Any transaction occurring prior to commencement date
o Property of others held by the debtor where there is a security entered into by the debtor or involving its funds or assets may be
interest pertaining to third parties under a financial, credit or rescinded or declared null and void on the ground that the same was
other similar transactions executed with intent to defraud a creditor or creditors or which constitute
undue preference of creditors. Without limiting the generality of the
foregoing, a disputable presumption of such design shall arise if the
transaction:
(a) provides unreasonably inadequate consideration to the debtor and is

executed within ninety (90) days prior to the commencement date;
(b) involves an accelerated payment of a claim to a creditor within ninety

(90) days prior to the commencement date;
(c) provides security or additional security executed within ninety (90)

days prior to the commencement date;
(d) involves creditors, where a creditor obtained, or received the benefit of,
more than its pro rata share in the assets of the debtor, executed at a time
when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the ability of the creditors to

collect claims where the effect of the transaction is to put assets of the
debtor beyond the reach of creditors or to otherwise prejudice the
interests of creditors.
Provided, however, That nothing in this section shall prevent the court
from rescinding or declaring as null and void a transaction on other (a) specify the underlying assumptions, the financial goals and the
grounds provided by relevant legislation and jurisprudence: Provided, procedures proposed to accomplish such goals;
further, That the provisions of the Civil Code on rescission shall in any
case apply to these transactions. (b) compare the amounts expected to be received by the creditors under
the Rehabilitation Plan with those that they will receive if liquidation
RA 10142, Sec. 59 Actions for Rescission or Nullity. - (a) The ensues within the next one hundred twenty (120) days;
rehabilitation receiver or, with his conformity, any creditor may initiate
and prosecute any action to rescind, or declare null and void any (c) contain information sufficient to give the various classes of creditors a
transaction described in Section 58 hereof. If the rehabilitation receiver reasonable basis for determining whether supporting the Plan is in their
does not consent to the filing or prosecution of such action, financial interest when compared to the immediate liquidation of the
debtor, including any reduction of principal interest and penalties payable
(b) If leave of court is granted under subsection (a), the rehabilitation to the creditors;
receiver shall assign and transfer to the creditor all rights, title and
interest in the chose in action or subject matter of the proceeding, (d) establish classes of voting creditors;
including any document in support thereof.
(e) establish subclasses of voting creditors if prior approval has been
(c) Any benefit derived from a proceeding taken pursuant to subsection (a), granted by the court;
to the extent of his claim and the costs, belongs exclusively to the creditor
instituting the proceeding, and the surplus, if any, belongs to the estate. (f) indicate how the insolvent debtor will be rehabilitated including, but
not limited to, debt forgiveness, debt rescheduling, reorganization or
(d) Where, before an order is made under subsection (a), the rehabilitation quasi-reorganization. dacion en pago, debt-equity conversion and sale of
receiver (or liquidator) signifies to the court his readiness to institute the the business (or parts of it) as a going concern, or setting-up of a new
proceeding for the benefit of the creditors, the order shall fix the time business entity or other similar arrangements as may be necessary to
within which he shall do so and, m that case, the benefit derived from the restore the financial well-being and visibility of the insolvent debtor;
proceeding, if instituted within the time limits so fixed, belongs to the
estate. (g) specify the treatment of each class or subclass described in subsections
(d) and (e);
This proceeding permits certain transactions to be rescinded or nullified, (h) provide for equal treatment of all claims within the same class or
and the asset transferred pursuant to the said rescinded or nullified subclass, unless a particular creditor voluntarily agrees to less favorable
transaction to be recovered for the benefit of the creditors. treatment;
Requisites for Rescission/Nullification (i) ensure that the payments made under the plan follow the priority
(1) Transactions were entered into by the debtor or involve the debtor’s established under the provisions of the Civil Code on concurrence and
funds and assets; preference of credits and other applicable laws;
(2) Prior to the commencement date;
(3) Executed in fraud of creditors OR constitutes an undue preference of
creditors; generally, all fraudulent conveyances and all preferential (j) maintain the security interest of secured creditors and preserve the
transafers. liquidation value of the security unless such has been waived or modified
voluntarily;
Badges of Fraud or Undue Preference of Creditors (k) disclose all payments to creditors for pre-commencement debts made
The ff. transactions raise a disputable presumption of fraud or undue during the proceedings and the justifications thereof;
preference of creditors:
Those that provide unreasonably inadequate consideration to the (1) describe the disputed claims and the provisioning of funds to account
debtor and is executed 90 days prior to the commencement date for appropriate payments should the claim be ruled valid or its amount
Those which involves an accelerated payment of a claim to a creditor adjusted;
within the 90 days prior to the commencement date
Those which provide security or additional security executed within (m) identify the debtor's role in the implementation of the Plan;
the 90 days prior to the commencement date
Those involving creditors, where a creditor obtained or received the (n) state any rehabilitation covenants of the debtor, the breach of which
benefit of more than its pro rata share in the assets of the debtor, shall be considered a material breach of the Plan;
which was executed during the time that debtor was insolvent
(o) identify those responsible for the future management of the debtor and
Those intended to defeat, delay, or hinder the ability of the creditors the supervision and implementation of the Plan, their affiliation with the
to collect claims where the effect of the transaction to put the assets debtor and their remuneration;
of the debtor beyond the creditors’ reach.
(p) address the treatment of claims arising after the confirmation of the
J. REHABILITATION PLAN Rehabilitation Plan;
1) GENERAL CONCEPTS (q) require the debtor and its counter-parties to adhere to the terms of all
contracts that the debtor has chosen to confirm;
RA 10142, Sec. 4
(r) arrange for the payment of all outstanding administrative expenses as a
(ii) Rehabilitation Plan shall refer to a plan by which the financial well-
condition to the Plan's approval unless such condition has been waived in
being and viability of an insolvent debtor can be restored using various
writing by the creditors concerned;
means including, but not limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion en pago, debt-equity
(s) arrange for the payment" of all outstanding taxes and assessments, or
conversion and sale of the business (or parts of it) as a going concern, or
an adjusted amount pursuant to a compromise settlement with the BlR Or
setting-up of new business entity as prescribed in Section 62 hereof, or
other applicable tax authorities;
other similar arrangements as may be approved by the court or creditors.
(t) include a certified copy of a certificate of tax clearance or evidence of a
RA 10142, Sec. 62 Contents of a Rehabilitation Plan. – The Rehabilitation compromise settlement with the BIR;
Plan shall, as a minimum:
(u) include a valid and binding r(,solution of a meeting of the debtor's
stockholders to increase the shares by the required amount in cases where FRIA – provides means for execution of the Rehabilitation Plan, which
the Plan contemplates an additional issuance of shares by the debtor; may include:
(a) Debt forgiveness, or Condonation or waiver of certain claims
(v) state the compensation and status, if any, of the rehabilitation receiver (b) Debt rescheduling, or extension of time for payment of claim
after the approval of the Plan; and (c) Reorganization or quasi-reorganization, or change in equity,
corporate or operating structure of the debtor
(w) contain provisions for conciliation and/or mediation as a prerequisite (d) Dacion en pago, or the assignment of assets as payment for
to court assistance or intervention in the event of any disagreement in the certain claims
interpretation or implementation of the Rehabilitation Plan. (e) Debt to equity conversion, or the issuance of ownership
interests as payment for certain claims
RA 10142, Sec. 4 (f) Sale of the business to generate income to pay off claims
(ss) Voting creditor shall refer to a creditor that is a member of a class of (g) Setting up of new business entities, as part of a
creditors, the consent of which is necessary for the approval of a reorganization
Rehabilitation Plan under this Act.
2) CRAM DOWN EFFECT
RA 10142, Sec. 54 Post-commencement Interest. - The rate and term of
interest, if any, on secured and unsecured claims shall be determined and RA 10142, Sec. 63 Consultation with Debtor and Creditors. – if the court
provided for in the approved Rehabilitation Plan. gives due course to the petition, the rehabilitation receiver shall confer
with the debtor and all the classes of creditors, and may consider their
RA 10142, Sec. 55 Post-commencement Loans and Obligations. - With the views and proposals ill the review, revision or preparation of a new
approval of the court upon the recommendation of the rehabilitation Rehabilitation Plan.
receiver, the debtor, in order to enhance its rehabilitation. may:
RA 10142, Sec. 64 Creditor Approval of Rehabilitation Plan. – The
(a) enter into credit arrangements; or rehabilitation receiver shall notify the creditors and stakeholders that the
Plan is ready for their examination. Within twenty (2Q) days from the said
(b) enter into credit arrangements, secured by mortgages of its notification, the rehabilitation receiver shall convene the creditors, either
unencumbered property or secondary mortgages of encumbered property as a whole or per class, for purposes of voting on the approval of the Plan.
with the approval of senior secured parties with regard to the encumbered The Plan shall be deemed rejected unless approved by all classes of
property; or creditors w hose rights are adversely modified or affected by the Plan. For
purposes of this section, the Plan is deemed to have been approved by a
(c) incur other obligations as may be essential for its rehabilitation. class of creditors if members of the said class holding more than fifty
percent (50%) of the total claims of the said class vote in favor of the Plan.
The payment of the foregoing obligations shall be considered The votes of the creditors shall be based solely on the amount of their
administrative expenses under this Act. respective claims based on the registry of claims submitted by the
rehabilitation receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may

confirm the Rehabilitation Plan if all of the following circumstances are
present:
(a)The Rehabilitation Plan complies with the requirements specified in this

Act.
(b) The rehabilitation receiver recommends the confirmation of the

Rehabilitation Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at

least their controlling interest as a result of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting class of
creditors with compensation which has a net present value greater than
that which they would have received if the debtor were under liquidation.
RA 10142, Sec. 65 Submission of Rehabilitation Plan to the Court. – If the

Rehabilitation Plan is approved, the rehabilitation receiver shall submit
the same to the court for confirmation. Within five (5) days from receipt of
the Rehabilitation Plan, the court shall notify the creditors that the
Rehabilitation Plan has been submitted for confirmation, that any creditor
may obtain copies of the Rehabilitation Plan and that any creditor may file
an objection thereto.
RA 10142, Sec. 66 Filing of Objections to Rehabilitation Plan. – A creditor

may file an objection to the Rehabilitation Plan within twenty (20) days
from receipt of notice from the court that the Rehabilitation Plan has been
submitted for confirmation. Objections to a Rehabilitation Plan shall be
limited to the following:
(a) The creditors' support was induced by fraud;
(b)The documents or data relied upon in the Rehabilitation Plan are

materially false or misleading; or the filing of the petition to confirm a Rehabilitation Plan.
(c)The Rehabilitation Plan is in fact not supported by the voting creditors. If no Rehabilitation Plan is confirmed within the said period, the
proceedings may upon motion or motu propio, be converted into one for
RA 10142, Sec. 67 Hearing on the Objections. - If objections have been the liquidation of the debtor .
submitted during the relevant period, the court shall issue an order setting RA 10142, Sec. 73 Accounting Discharge of Rehabilitation Receiver. -
the time and date for the hearing or hearings on the objections. Upon the confirmation of the Rehabilitation Plan, the rehabilitation
receiver shall provide a final report and accounting to the court. Unless
If the court finds merit in the objection, it shall order the rehabilitation the Rehabilitation Plan specifically requires and describes the role of the
receiver or other party to cure the defect, whenever feasible. If the court rehabilitation receiver after the approval of the Rehabilitation Plan, the
determines that the debtor acted in bad faith, or that it is not feasible to court shall discharge the rehabilitation receiver of his duties.
cure the defect, the court shall convert the proceedings into one for the
liquidation of the debtor under Chapter V of this Act. (1) Creditors may approve a Rehabilitation Plan
- Provided all classes of creditors whose rights are adversely modified
RA 10142, Sec. 68 Confirmation of the Rehabilitation Plan. – If no or affected by the Rehabilitation Plan approve it
objections are filed within the relevant period or, if objections are filed, the - Rehabilitation plan is deemed approved by a class of creditors if
court finds them lacking in merit, or determines that the basis for the members holding more than 50% of the total claims of the said
objection has been cured, or determines that the debtor has complied with class vote in favor of the Plan
an order to cure the objection, the court shall issue an order confirming - FRIA refers to claims for calculating the minimum required vote
the Rehabilitation Plan.
(2) The Court may confirm a Rehabilitation Plan over the objection of
The court may confirm the Rehabilitation Plan notwithstanding the creditors
unresolved disputes over claims if the Rehabilitation Plan has made
- Referred to as a CRAM DOWN
adequate provisions for paying such claims.
- The effect is that the confirmed Rehabilitation Plan binds not only
For the avoidance of doubt, the provisions of other laws to the contrary the insolvent debtor but also all persons affected by it, including
notwithstanding, the court shall have the power to approve or implement creditors, whether or not such persons participated in the
the Rehabilitation Plan despite the lack of approval, or objection from the proceedings or opposed the Rehabilitation Plan, or whether or not
owners, partners or stockholders of the insolvent debtor: Provided, That their claims were scheduled
the terms thereof are necessary to restore the financial well-being and - Although contracts and other arrangements between the debtor and
viability of the insolvent debtor. its creditors are interpreted as continuing to apply, this is only
applicable to the extent that the contracts and arrangements do not
RA 10142, Sec. 69 Effect of Confirmation of the Rehabilitation Plan, - conflict with the provisions of the Rehabilitation Plan
The confirmation of the Rehabilitation Plan by the court shall result in the - Requisites for a CRAM DOWN (must concur):
following: (a) The Rehabilitation Plan complies with the requirements
(a) The Rehabilitation Plan and its provisions shall be binding specified in the FRIA
upon the debtor and all persons who may be affected by . it, (b) The Rehabilitation Receiver recommends the confirmation
including the creditors, whether or not such persons have (c) The shareholders, owners or partners of the juridical debtor lose
participated in the proceedings or opposed the Rehabilitation at least their controlling interest as a result of the Rehabilitation
Plan or whether or not their claims have been scheduled; Plan
(b) The debtor shall comply with the provisions of the (d) The Rehabilitation Plan would likely provide the objecting class
Rehabilitation Plan and shall take all actions necessary to carry of creditors with compensation that has a net present value
out the Plan; greater than that which they would have received if the debtor
(c) Payments shall be made to the creditors in accordance with the were under liquidation
provisions of the Rehabilitation Plan;
(d) Contracts and other arrangements between the debtor and its (3) The Court may also confirm a Rehabilitation Plan over the objection
creditors shall be interpreted as continuing to apply to the of the owners, partners or stockholders of the insolvent debtor, if the
extent that they do not conflict with the provisions of the terms of the Plan are necessary to restore the financial wellbeing and
Rehabilitation Plan; viability of the insolvent debtor
(e) Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on creditors regardless BPI v. SEC (2007) – Tinga, J.
of whether or not the Plan is successfully implement; and Petitioner: Bank of the Philippine Islands (formerly the FEBTC)
(f) Claims arising after approval of the Plan that are otherwise not Respondents: SEC, ASB Holdings, et. al.
treated by the Plan are not subject to any Suspension Order. Concept: Rehabilitation Plan; Cram-Down Effect
The Order confirming the Plan shall comply with Rules 36 of the Rules of Brief Facts:
Court: Provided, however, That the court may maintain jurisdiction over BPI lent P86.8 million to ASB. ASB executed a REM over 2 properties in
the case in order to resolve claims against the debtor that remain Greenhills as security for the loan. ASB was subsequently placed under
contested and allegations that the debtor has breached the Plan. rehabilitation proceedings. The proposed Rehabilitation Plan in the said
proceedings contained a stipulation that one of the mortgaged properties
RA 10142, Sec. 70 Liability of General Partners of a Partnership for to BPI would be sold to fully satisfy the loan (a dacion en pago) while the
Unpaid Balances Under an Approved Plan. - The approval of the Plan remaining property mortgaged would be released to be part of the free
shall not affect the rights of creditors to pursue actions against the general property of ASB. BPI objected to the stipulation, claiming that it violated
partners of a partnership to the extent they are liable under relevant the right to and freedom of contract.
legislation for the debts thereof.
Doctrine:
RA 10142, Sec. 71 Treatment of Amounts of Indebtedness or Obligations - The right against non-impairment of contract has no application to an
Forgiven or Reduced. - Amounts of any indebtedness or obligations exercise of non-legislative power (i.e., judicial or administrative
reduced or forgiven in connection with a Plan's approval shall not be powers for example)
subject to any tax in furtherance of the purposes of this Act. - The inclusion of a dacion en pago provision in the Rehabilitation Plan
does not compel the creditor to accept such an arrangement. Dacion en
pago, being a form of sale and hence, contractual by nature, will always
RA 10142, Sec. 72 Period for Confirmation of the Rehabilitation Plan. - require the mutual consent of both parties.
The court shall have a maximum period of one (1) year from the date of
K. TERMINATION OF PROCEEDINGS
BPI v. Sarabia Manor Hotel Corp. (2013) – Perlas-Bernabe, J. RA 10142, Sec. 74 Termination of Proceedings. - The rehabilitation
Petitioner: Bank of the Philippine Islands (BPI) proceedings under Chapter II shall, upon motion by any stakeholder or the
Respondent: Sarabia Manor Hotel Corporation rehabilitation receiver be terminated by order of the court either declaring
Concept: Rehabilitation Plan a successful implementation of the Rehabilitation Plan or a failure of
rehabilitation.
Brief Facts: Sarabia obtained a loan from BPI to finance the construction
of a new hotel building. Sarabia’s contractor defaulted in the performance There is failure of rehabilitation in the following cases:
of its obligations which caused the delay in the completion of the new (a) Dismissal of the petition by the court;
building. Sarabia had to take over its construction, and as a result, its (b) The debtor fails to submit a Rehabilitation Plan;
projected revenues tilted. Sarabia filed a Petition for Rehabilitation as it (c) Under the Rehabilitation Plan submitted by the debtor, there is
foresaw the impossibility of meeting its maturing obligations when they no substantial likelihood that the debtor can be rehabilitated
fall due. The Rehabilitation Plan fixed a uniform interest rate of 6.75% p.a. within a reasonable period;
for all outstanding debts of Sarabia. BPI opposed the interest rate, (d) The Rehabilitation Plan or its amendment is approved by the
claiming that the same will not cover its cost of funds, which was at 10%. court but in the implementation thereof, the debtor fails to
perform its obligations thereunder or there is a failure to realize
Doctrine: A rehabilitation plan may be approved even over the the objectives, targets or goals set forth therein, including the
opposition of the creditors holding a majority of the corporation’s total timelines and conditions for the settlement of the obligations
liabilities if there is a showing that rehabilitation is feasible and the due to the creditors and other claimants;
opposition of the creditors is manifestly unreasonable. If a creditor, whose (e) The commission of fraud in securing the approval of the
interests remain well-preserved under the rehabilitation plan, still declines Rehabilitation Plan or its amendment; and
to accept interests pegged at reasonable rates and in turn proposes rates (f) Other analogous circumstances as may be defined by the rules
which are largely counter-productive to the rehabilitation, then it may be of procedure.
said that the creditor’s opposition is manifestly unreasonable.
Upon a breach of, or upon a failure of the Rehabilitation Plan the court,
upon motion by an affected party may:
(1) Issue an order directing that the breach be cured within a
specified period of time, falling which the proceedings may be
converted to a liquidation;
(2) Issue an order converting the proceedings to a liquidation;
(3) Allow the debtor or rehabilitation receiver to submit
amendments to the Rehabilitation Plan, the approval of which
shall be governed by the same requirements for the approval of
a Rehabilitation Plan under this subchapter;
(4) Issue any other order to remedy the breach consistent with the
present regulation, other applicable law and the best interests of
the creditors; or
(5) (5) Enforce the applicable provisions of the Rehabilitation Plan
through a writ of execution.
RA 10142, Sec. 75 Effects of Termination. - Termination of the

proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver subject to his submission of

a final accounting; and
(b) The lifting of the Stay Order and any other court order holding in
abeyance any action for the enforcement of a claim against the debtor.
Provided, however, That if the termination of proceedings is due to failure

of rehabilitation or dismissal of the petition for reasons other than
technical grounds, the proceedings shall be immediately converted to
liquidation as provided in Section 92 of this Act.
L. CONVERSION TO LIQUIDATION PROCEEDINGS
RA 10142, Sec. 92 Conversion by the Court into Liquidation

Proceedings. - During the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the court may order the conversion of
rehabilitation proceedings to liquidation proceedings pursuant to
(a) Section 25(c) of this Act; or
(b) Section 72 of this Act; or
(c) Section 75 of this Act; or
(d) (Section 90 of this Act; or at any other time upon the
recommendation of the rehabilitation receiver that the
rehabilitation of the debtor is not feasible. Thereupon, the court
shall issue the Liquidation Order mentioned in Section 112
hereof.
Sec. 25 Giving Due Course to or Dismissal of Petition, or Conversion of

Proceedings. - Within ten (10) days from receipt of the report of the
rehabilitation receiver mentioned in Section 24 hereof the court may: principal place of business;
(c)convert the proceedings into one for the liquidation of the debtor upon a
finding that: (b) declare that the debtor is under rehabilitation;
(1) the debtor is insolvent; and
(2) there is no substantial likelihood for the debtor to be (c) summarize the ground./s for the filling of the petition;
successfully rehabilitated as determined in accordance with the
rules to be promulgated by the Supreme Court. (d) direct the publication of the Order in a newspaper of 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
Sec. 72 Period for Confirmation of the Rehabilitation Plan. - The court time of its issuance;
shall have a maximum period of one (1) year from the date of the filing of
the petition to confirm a Rehabilitation Plan. (e) direct the service by personal delivery of a copy of the petition on each
creditor who is not a petitioner holding at least ten percent (10%) of the
If no Rehabilitation Plan is confirmed within the said period, the total liabilities of the debtor, as determined in the schedule attached to the
proceedings may upon motion or motu propio, be converted into one for petition, within three (3) days;
the liquidation of the debtor .
(f) state that copies of the petition and the Rehabilitation Plan are available
Sec. 75 Effects of Termination. - Termination of the proceedings shall for examination and copying by any interested party;
result in the following:
(a) The discharge of the rehabilitation receiver subject to his (g) state that creditors and other interested parties opposing the petition
submission of a final accounting; and or Rehabilitation Plan may file their objections or comments thereto
(b) The lifting of the Stay Order and any other court order holding within a period of not later than twenty (20) days from the second
in abeyance any action for the enforcement of a claim against publication of the Order;
the debtor.
(h) appoint a rehabilitation receiver, if provided for in the Plan; and
Provided, however, That if the termination of proceedings is due to failure
of rehabilitation or dismissal of the petition for reasons other than (i) include a Suspension or Stay Order as described in this Act.
technical grounds, the proceedings shall be immediately converted to
liquidation as provided in Section 92 of this Act. RA 10142, Sec. 78 Approval of the Plan. - Within ten (10) days from the
date of the second publication of the Order, the court shall approve the
Sec. 90 Voluntary Liquidation. – Rehabilitation Plan unless a creditor or other interested party submits an
xxx objection to it in accordance with the next succeeding section.
At any time during the pendency of court-supervised or pre-negotiated RA 10142, Sec. 79 Objection to the Petition or Rehabilitation Plan. - Any
rehabilitation proceedings, the debtor may also initiate liquidation creditor or other interested party may submit to the court a verified
proceedings by filing a motion in the same court where the rehabilitation objection to the petition or the Rehabilitation Plan not later than eight (8)
proceedings are pending to convert the rehabilitation proceedings into days from the date of the second publication of the Order mentioned in
liquidation proceedings. Section 77 hereof. The objections shall be limited to the following:
xxx
(a) The allegations in the petition or the Rehabilitation Plan or the
Rehabilitation and Liquidation cannot be undertaken at the same time attachments thereto are materially false or misleading;
Generally, it is only if there is a showing that the rehabilitation of the (b) The majority of any class of creditors do not in fact support the
insolvent debtor is no longer economically feasible or does not provide Rehabilitation Plan;
better present value recovery for the creditors that rehabilitation may be
converted into liquidation (c) The Rehabilitation Plan fails to accurately account for a claim against
the debtor and the claim in not categorically declared as a contested claim;
C. Pre-negotiated Rehabilitation or
RA 10142, Sec. 76 Petition by Debtor. - An insolvent debtor, by itself or (d) The support of the creditors, or any of them was induced by fraud.
jointly with any of its creditors, may file a verified petition with the court
for the approval of a pre-negotiated Rehabilitation Plan which has been Copies of any objection to the petition of the Rehabilitation Plan shall be
endorsed or approved by creditors holding at least two-thirds (2/3) of the served on the debtor, the rehabilitation receiver (if applicable), the secured
total liabilities of the debtor, including secured creditors holding more creditor with the largest claim and who supports the Rehabilitation Plan,
than fifty percent (50%) of the total secured claims of the debtor and and the unsecured creditor with the largest claim and who supports the
unsecured creditors holding more than fifty percent (50%) of the total Rehabilitation Plan.
unsecured claims of the debtor. The petition shall include as a minimum:
RA 10142, Sec. 80 Hearing on the Objections. - After receipt of an
(a) a schedule of the debtor's debts and liabilities; objection, the court shall set the same for hearing. The date of the hearing
shall be no earlier than twenty (20) days and no later than thirty (30) days
(b) an inventory of the debtor's assets; from the date of the second publication of the Order mentioned in Section
77 hereof. If the court finds merit in the objection, it shall direct the
(c) the pre-negotiated Rehabilitation Plan, including the names of at least debtor, when feasible to cure the detect within a reasonable period. If the
three (3) qualified nominees for rehabilitation receiver; and court determines that the debtor or creditors supporting the
Rehabilitation Plan acted in bad faith, or that the objection is non-curable,
(d) a summary of disputed claims against the debtor and a report on the the court may order the conversion of the proceedings into liquidation. A
provisioning of funds to account for appropriate payments should any such finding by the court that the objection has no substantial merit, or that the
claims be ruled valid or their amounts adjusted. same has been cured shall be deemed an approval of the Rehabilitation
Plan.
RA 10142, Sec. 77 Issuance of Order. - Within five (5) working days, and
after determination that the petition is sufficient in form and substance, RA 10142, Sec. 81 Period for Approval of Rehabilitation Plan. - The
the court shall issue an Order which shall; court shall have a maximum period of one hundred twenty (120) days from
the date of the filing of the petition to approve the Rehabilitation Plan. If
(a) identify the debtor, its principal business of activity/ies and its
the court fails to act within the said period, the Rehabilitation Plan shall be (b) It must be approved by creditors representing at least sixty-seven
deemed approved. (67%) of the secured obligations of the debtor;
RA 10142, Sec. 82 Effect of Approval. - Approval of a Plan under this (c) It must be approved by creditors representing at least seventy-five
chapter shall have the same legal effect as confirmation of a Plan under percent (75%) of the unsecured obligations of the debtor; and
Chapter II of this Act.
(d) It must be approved by creditors holding at least eighty-five percent
(85%) of the total liabilities, secured and unsecured, of the debtor.
RA 10142, Sec. 92 Conversion by the Court into Liquidation
Proceedings. - During the pendency of court-supervised or pre-negotiated
rehabilitation proceedings, the court may order the conversion of
rehabilitation proceedings to liquidation proceedings pursuant to (a) 1. GENERAL CONCEPTS
Section 25(c) of this Act; or (b) Section 72 of this Act; or (c) Section 75 of Out-of-Court Rehabilitation is an extra-judicial insolvency proceeding
this Act; or (d) Section 90 of this Act; or at any other time upon the which involves the negotiation and eventual approval of an Out-of-court
recommendation of the rehabilitation receiver that the rehabilitation of the or Informal Restructuring Agreement/ Informal Workout
debtor is not feasible. Thereupon, the court shall issue the Liquidation Agreement/ Informal Rehabilitation Plan, a consensual contract
Order mentioned in Section 112 hereof. between an insolvent debtor and its creditors that amends or modifies the
terms of the claims against the debtor.
Pre-negotiated Rehabilitation - This implies that that the insolvent debtor and is creditors have
An insolvency proceeding that commences as an extrajudicial proceeding agreed on a restructuring of the claims against the debtor without
but terminates as a judicial one having filed a petition in court.
- It may be preceded by a standstill agreement, wherein the debtor is
Involves the negotiation and eventual approval of a Pre-negotiated allowed to not pay its liabilities as they fall due and prevents the
Rehabilitation Plan creditors from taking further action or enforcing its claims, usually
during the period of negotiation of the Out-of-Court Restructuring
PRE-NEGOTIATED REHABILITATION PLAN Agreement.
A consensual contract between an insolvent debtor and its creditors that - Like any contract, such agreements generally bind only the
amends or modifies the terms of the claims against the debtor contracting parties.
Implies that the insolvent debtor has been able to obtain the endorsement
or approval of its creditors FRIA imposes a minimum vote requirement for Out-of-court
Restructuring Agreements as follows:
If the minimum vote requirement is reached, the debtor, by itself or 1. It must be approved by the debtor.
jointly with any of its creditors, may file a verified petition for the 2. It must be approved by secured creditors representing at least 67% of
court approval of the Pre-negotiated Rehabilitation Plan the secured obligations of the debtor;
3. It must be approved by unsecured creditors representing at least 75%
If the minimum vote requirement is not reached, the alternative is to file a of the unsecured obligations of the debtor; and
petition under the provisions on Court-Supervised Rehabilitation 4. It must be approved by creditors holding at least 85% of the total
liabilities, secured and unsecured, of the debtor.
The MINIMUM VOTE REQUIREMENT under the FRIA for Pre-
negotiated Rehabilitation Plan is:
(1) Approval of the creditors holding at least 2/3 of the total 2. BENEFITS OF OUT-OF-COURT REHABILITATION
liabilities of the debtor, including:
(2) Secured creditors holding more than 50% of the total RA 10142, Sec. 85 Standstill Period. - A standstill period that may be
secured claims of the debtor, and agreed upon by the parties pending negotiation and finalization of the out-
(3) Unsecured creditors holding more than 50% of the total of-court or informal restructuring/workout agreement or Rehabilitation
unsecured claims of the debtor Plan contemplated herein shall be effective and enforceable not only
against the contracting parties but also against the other creditors:
FRIA refers to liabilities insofar as all creditors are concerned but refers Provided, That (a) such agreement is approved by creditors representing
to claims insofar as the two classes of creditors are concerned. more than fifty percent (50%) of the total liabilities of the debtor; (b) notice
Ma’am Somera: Is the distinction appropriate, given the expansive thereof is publishing in a newspaper of general circulation in the
definition of claims? Philippines once a week for two (2) consecutive weeks; and (c) the
standstill period does not exceed one hundred twenty (120) days from the
The confirmation of the Pre-negotiated Rehabilitation Plan by the court date of effectivity. The notice must invite creditors to participate in the
shall result in a CRAM DOWN—it binds not only the insolvent debtor negotiation for out-of-court rehabilitation or restructuring agreement and
but also all persons affected by it notify them that said agreement will be binding on all creditors if the
required majority votes prescribed in Section 84 of this Act are met.
D. Out-of-Court Rehabilitation
RA 10142, Sec. 86 Cram Down Effect. - A restructuring/workout
RA 10142, Sec. 83 Out-of-Court or Informal Restructuring Agreements agreement or Rehabilitation Plan that is approved pursuant to an informal
and Rehabilitation Plans. - An out-of-curt or informal restructuring workout framework referred to in this chapter shall have the same legal
agreement or Rehabilitation Plan that meets the minimum requirements effect as confirmation of a Plan under Section 69 hereof. The notice of the
prescribed in this chapter is hereby recognized as consistent with the Rehabilitation Plan or restructuring agreement or Plan shall be published
objectives of this Act. once a week for at least three (3) consecutive weeks in a newspaper of
general circulation in the Philippines. The Rehabilitation Plan or
restructuring agreement shall take effect upon the lapse of fifteen (15) days
RA 10142, Sec. 84 Minimum Requirements of Out-of-Court or Informal from the date of the last publication of the notice thereof.
Restructuring Agreements and Rehabilitation Plans. - For an out-of-court
or informal restructuring/workout agreement or Rehabilitation Plan to
qualify under this chapter, it must meet the following minimum RA 10142, Sec. 87 Amendment or Modification. - Any amendment of an
requirements: out-of-court restructuring/workout agreement or Rehabilitation Plan
must be made in accordance with the terms of the agreement and with due
(a) The debtor must agree to the out-of-court or informal notice on all creditors.
restructuring/workout agreement or Rehabilitation Plan;
RA 10142, Sec. 88 Effect of Court Action or Other Proceedings. - Any
court action or other proceedings arising from, or relating to, the out-of-
court or informal restructuring/workout agreement or Rehabilitation
Plan shall not stay its implementation, unless the relevant party is able to
secure a temporary restraining order or injunctive relief from the Court of
Appeals.
RA 10142, Sec. 89 Court Assistance. - The insolvent debtor and/or

creditor may seek court assistance for the execution or implementation of
a Rehabilitation Plan under this Chapter, under such rules of procedure as
may be promulgated by the Supreme Court.
Under the FRIA:

1. Any standstill agreement between the debtor and creditors upon
pending the negotiation of the Out-of-Court Restructuring
Agreement (OOCRA) is effective and enforceable not only against
the contracting parties but also against the other creditors, provided
that:
a. The standstill agreement is approved by creditors representing
more than 50% of the total liabilities of the debtor
b. Notice of the standstill agreement is published in a newspaper of
general circulation in the PH once a week for two consecutive
weeks. The notice must invite creditors to participate in the
negotiation of the OOCRA and inform them that the agreement
would bind all creditors if the minimum vote requirements were
met.
c. The standstill period does not exceed 120 days from the date of
effectivity.
2. The OOCRA that meets the minimum vote requirement shall result
in a cram down, as it binds not only the insolvent debtor but also all
persons who may be affected by it, including the creditors, whether
or not such persons have participated in the proceedings or opposed
the OOCRA or whether or not their claims have been scheduled,
provided that:
a. The notice of the OOCRA shall be published once a week for at
least three consecutive weeks in a newspaper of general
circulation in the PH
b. The OOCRA shall take effect upon the lapse of 15 days from the
date of the last publication of the notice.
c. Any court action or other proceedings arising from, or relating
to, the OOCRA that meets the minimum vote requirement shall
not stay its implementation, unless the relevant party is able to
secure a TRO or injunctive relief from the CA
d. In Out-of-Court Rehabilitation, no petitions are filed with the
court, but the parties may seek court assistance for the
execution or implementation of the OOCRA that meets the
minimum requirement

Liquidation may apply to:
XII. LIQUIDATION 1. An insolvent individual debtor [Sec. 4 (o)]
A. General Concepts (o) Individual debtor shall refer to a natural person who is a resident
and citizen of the Philippines that has become insolvent as defined
Art. 2238 So long as the conjugal partnership or absolute community herein.
subsists, its property shall not be among the assets to be taken possession 2. An insolvent juridical debtor, which the FRIA does not define, but by
of by the assignee for the payment of the insolvent debtor's obligations, process of exclusion, it is referred to in [Sec. 4 (k)]
except insofar as the latter have redounded to the benefit of the family. If it (k) Debtor shall refer to, unless specifically excluded by a provision of
is the husband who is insolvent, the administration of the conjugal this Act, a sole proprietorship duly registered with the Department
partnership of absolute community may, by order of the court, be of Trade and Industry (DTI), a partnership duly registered with the
transferred to the wife or to a third person other than the assignee. (n) Securities and Exchange Commission (SEC), a corporation duly
organized and existing under Philippine laws, or an individual debtor
Art. 2239 If there is property, other than that mentioned in the preceding who has become insolvent as defined herein.
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 B. Liquidation of Insolvent Individual Debtor
be taken possession of by the assignee for the payment of the insolvent
debtor's obligations. (n) 1. VOLUNTARY LIQUIDATION
Art. 2240 Property held by the insolvent debtor as a trustee of an express
RA 10142, Sec. 4
or implied trust, shall be excluded from the insolvency proceedings. (n)
(rr) Voluntary proceedings shall refer to proceedings initiated by the
debtor.
RA 10142, Sec. 2 Declaration of Policy. - It is the policy of the State to
RA 10142, Sec. 103 Application. - An individual debtor whose properties
to collectively and realistically resolve and adjust competing claims and
are not sufficient to cover his liabilities, and owing debts exceeding Five
property rights. In furtherance thereof, the State shall ensure a timely, fair,
hundred thousand pesos (Php500,000.00), may apply to be discharged
transparent, effective and efficient rehabilitation or liquidation of debtors.
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
maintain certainly and predictability in commercial affairs, preserve and
filing of such petition. He shall attach to his petition a schedule of debts
maximize the value of the assets of these debtors, recognize creditor rights
and liabilities and an inventory of assets. The filing of such petition shall
be an act of insolvency.
who are similarly situated. When rehabilitation is not feasible, it is in the
interest of the State to facilities a speedy and orderly liquidation of these
debtor's assets and the settlement of their obligations. RA 10142, Sec. 104 Liquidation Order. - If the court finds the petition
sufficient in form and substance it shall, within five (5) working days issue
the Liquidation Order mentioned in Section 112 hereof.
RA 10142, Sec. 4
(u) Liquidation shall refer to the proceedings under Chapter V of this Act.
Voluntary Liquidation is a judicial insolvency proceeding instituted by a
debtor that is insolvent.
Liquidation in insolvency generally connotes a winding up; it is the
settling of debtors with their creditors so that the debtor’s assets may be In the case of an individual debtor, he must be insolvent in the
distributed to those entitled to receive them. balance sheet concept (assets are insufficient to cover liabilities)
Purpose of VL is for the debtor to seek a discharge from his debts
It is the process of reducing the debtor’s assets to cash, discharging its and liabilities, thus freeing the debtor of legal responsibility for
liabilities, and dividing the surplus or re-allocating the loss. certain specified obligations.
The concept of liquidation is therefore diametrically opposed to the FRIA imposes a value requirement of more than P500, 000 on the
concept of rehabilitation, and both cannot be undertaken at the same time. debts of the individual debtor.
The filing by the insolvent debtor of a petition for voluntary
While FRIA fails to define liquidation, a definition may be derived from insolvency is an act of insolvency
Sec. 119 on powers, duties and responsibilities of the Liquidator and Sec.
131 on the sale of assets in liquidation:
Liquidation is a judicial insolvency proceeding by which assets of an
insolvent debtor are recovered and their value preserved and 2. INVOLUNTARY LIQUIDATION
maximized for the purpose of converting the same into money, and A. ACTS OF INSOLVENCY
discharging, to the extent possible, all the claims against the RA 10142, Sec. 105 Petition; Acts of Insolvency. - Any creditor or group
insolvent debtor. 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
It is a procedure in rem and is binding against the whole world, binding all liquidation with the court of the province or city in which the individual
interested persons regardless of knowledge of the parties, and notice debtor resides.
regarding such proceedings.
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;

after trial, the issues are found in favor of the petitioning creditors the
(e) That he has suffered his property to remain under attachment or legal court shall issue the Liquidation Order mentioned in Section 112 hereof.
process for three (3) days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors; A show-cause order is issued upon the filing of a petition for involuntary
liquidation but an injunction order, issued prior to the Liquidation Order,
(f) That he has confessed or offered to allow judgment in favor of any forbidding the individual debtor from making payments of his debts and
creditor or claimant for the purpose of hindering or delaying the transferring property belonging to him, is only issued upon good cause.
liquidation or of defrauding any creditors or claimant;
However, an injunction issued pursuant to Sec. 106 cannot impair the
(g) That he has willfully suffered judgment to be taken against him by rights of a secured creditor to enforce its lien.
default for the purpose of hindering or delaying the liquidation or of
defrauding his creditors; C. ABSENT INDIVIDUAL DEBTOR
(h) That he has suffered or procured his property to be taken on legal RA 10142, Sec. 108 Absent Individual Debtor. - In all cases where the
process with intent to give a preference to one or more of his creditors and individual debtor resides out of the Republic of the Philippines; or has
thereby hinder or delay the liquidation or defraud any one of his creditors; departed therefrom; or cannot, after due diligence, be found therein; or
conceals himself to avoid service of the Order to show cause, or any other
(i) That he has made any assignment, gift, sale, conveyance or transfer of preliminary process or orders in the matter, then the petitioning creditors,
his estate, property, rights or credits with intent to hinder or delay the upon submitting the affidavits requisite to procedure an Order of
liquidation or defraud his creditors; publication, and presenting a bond in double the amount of the aggregate
sum of their claims against the individual debtor, shall be entitled to an
(j) That he has, in contemplation of insolvency, made any payment, gift, Order of the court directing the sheriff of the province or city in which the
grant, sale, conveyance or transfer of his estate, property, rights or credits; matter is pending to take into his custody a sufficient amount of property
of the individual debtor to satisfy the demands of the petitioning creditors
(k) That being a merchant or tradesman, he has generally defaulted in the and the costs of the proceedings. Upon receiving such Order of the court
payment of his current obligations for a period of thirty (30) days; to take into custody of the property of the individual debtor, it shall be the
duty of the sheriff to take possession of the property and effects of the
(l) That for a period of thirty (30) days, he has failed, after demand, to pay individual debtor, not exempt from execution, to an extent sufficient to
any moneys deposited with him or received by him in a fiduciary; and 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
(m) That an execution having been issued against him on final judgment property so taken, and to return it to the court as soon as completed. The
for money, he shall have been found to be without sufficient property time for taking the inventory and making return thereof may be extended
subject to execution to satisfy the judgment. 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
The petitioning creditor/s shall post a bond in such as the court shall each, from the books of the debtor, or from such other papers or data of
direct, conditioned that if the petition for liquidation is dismissed by the the individual debtor available as may come to his possession, and shall file
court, or withdrawn by the petitioner, or if the debtor shall not be declared such schedule or list of creditors and inventory with the clerk of court.
an insolvent the petitioners will pay to the debtor all costs, expenses,
damages occasioned by the proceedings and attorney's fees. D. CUSTODY OF PROPERTY; SALE OF PROPERTY
Involuntary Liquidation is a judicial insolvency proceeding instituted by RA 10142, Sec. 109 All Property Taken to be Held for All Creditors;
a creditor or group of creditors against an insolvent debtor, provided the Appeal Bonds; Exemptions to Sureties. - In all cases where property is
requirements of the law on number of creditors or value of claims, or both, taken into custody by the sheriff, if it does not embrace all the property
is met, and provided an act of insolvency is alleged and thereafter and effects of the debtor not exempt from execution, any other creditor or
established. creditors of the individual debtor, upon giving bond to be approved by the
- Value Requirement by FRIA: at least P500, 000 on the amount of court in double the amount of their claims, singly or jointly, shall be
claims, regardless of the number of creditors who fie. entitled to similar orders and to like action, by the sheriff; until all claims
- It is sufficient that the petition allege only one act of insolvency. be provided for, if there be sufficient property or effects. All property taken
into custody by the sheriff by virtue of the giving of any such bonds shall
G.R.: It is necessary to establish the intent or purpose of the act was to be held by him for the benefit of all creditors of the individual debtor
delay liquidation or defraud creditors whose claims shall be duly proved as provided in this Act. The bonds
XPN: When intent or purpose is irrelevant: provided for in this section and the preceding section to procure the order
1. Debtor is a merchant or tradesman has generally defaulted in the for custody of the property and effects of the individual debtor shall be
payment of current obligations for a period of 30 days. conditioned that if, upon final hearing of the petition in insolvency, the
2. Debtor has failed, for a period of 30 days, and after demand, to pay court shall find in favor of the petitioners, such bonds and all of them shall
more money deposited with him or received by him in a fiduciary be void; if the decision be in favor of the individual debtor, the proceedings
capacity. shall be dismissed, and the individual debtor, his heirs, administrators,
3. Debtor shall be without sufficient property to satisfy and execution executors or assigns shall be entitled to recover such sum of money as
issued against him on a final judgment for money. shall be sufficient to cover the damages sustained by him, not to exceed
the amount of the respective bonds. Such damages shall be fixed and
B. SHOW CAUSE ORDER; INJUNCTION; DEFAULT allowed by the court. If either the petitioners or the debtor shall appeal
from the decision of the court, upon final hearing of the petition, the
appellant shall be required to give bond to the successful party in a sum
RA 10142, Sec. 106 Order to Individual Debtor to Show Cause. - Upon double the amount of the value of the property in controversy, and for the
the filing of such creditors' petition, the court shall issue an Order costs of the proceedings.
requiring the individual debtor to show cause, at a time and place to be
fixed by the said court, why he should not be adjudged an insolvent. Upon Any person interested in the estate may take exception to the sufficiency
good cause shown, the court may issue an Order forbidding the individual of the sureties on such bond or bonds. When excepted to the petitioner's
debtor from making payments of any of his debts, and transferring any sureties, upon notice to the person excepting of not less than two (2) nor
property belonging to him. However, nothing contained herein shall affect more than five (5) days, must justify as to their sufficiency; and upon
or impair the rights of a secured creditor to enforce his lien in accordance failure to justify, or of others in their place fail to justify at the time and
with its terms. place appointed the judge shall issue an Order vacating the order to take
the property of the individual debtor into the custody of the sheriff, or
RA 10142, Sec. 107 Default. - If the individual debtor shall default or if, denying the appeal, as the case may be.

C. Liquidation of Insolvent Juridical Debtors
RA 10142, Sec. 110 Sale Under Execution. - If, in any case, proper
affidavits and bonds are presented to the court or a judge thereof, asking RA 10142, Sec. 93 Powers of the Securities and Exchange Commission
for and obtaining an Order of publication and an Order for the custody of (SEC). - The provisions of this chapter shall not affect the regulatory
the property of the individual debtor and thereafter the petitioners shall powers of the SEC under Section 6 of Presidential Decree No. 902-A, as
make it appear satisfactorily to the court or a judge thereof that the amended, with respect to any dissolution and liquidation proceeding
interest of the parties to the proceedings will be subserved by a sale initiated and heard before it.
thereof, the court may order such property to be sold in the same manner
as property is sold under execution, the proceeds to de deposited in the
court to abide by the result of the proceedings.
1. VOLUNTARY LIQUIDATION
Taking of property under the custody by the Sheriff and the sale are
interim measures in liquidation proceedings of an individual debtor RA 10142, Sec. 90 Voluntary Liquidation. - An insolvent debtor may
apply for liquidation by filing a petition for liquidation with the court. The
Giving of a bond by the creditors is necessary
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
Sheriff holds the property for the benefit of all the creditors; proceeds of
petition;
the sale shall abide by the result of liquidation proceeding
(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.
If the petition or the motion, as the case may be, is sufficient in form and
substance, the court shall issue a Liquidation Order mentioned in Section
112 hereof.
In the case of juridical debtor, it must be insolvent either under the

illiquidity or equity concept, or the balance sheet concept.
But in every case, the rehabilitation of the juridical debtor is not

economically feasible or does not result in better present value recovery
for the creditors.
The purpose is to seek the dissolution of its juridical existence.
FRIA does not impose a value requirement with respect to the amount of
the debts of the insolvent debtor.
2. INVOLUNTARY LIQUIDATION
RA 10142, Sec. 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 (c) order the sheriff to take possession and control of all the property of
be verified, shall contain or set forth the same matters required in the the debtor, except those that may be exempt from execution;
preceding paragraph, and state that the movants are seeking the
immediate liquidation of the debtor. (d) order the publication of the petition or motion in a newspaper of
general circulation once a week for two (2) consecutive weeks;
If the petition or motion is sufficient in form and substance, the court shall
issue an Order: (e) direct payments of any claims and conveyance of any property due the
debtor to the liquidator;
(1) directing the publication of the petition or motion in a newspaper of
general circulation once a week for two (2) consecutive weeks; and (f) prohibit payments by the debtor and the transfer of any property by the
debtor;
(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 (g) direct all creditors to file their claims with the liquidator within the
date of last publication. period set by the rules of procedure;
If, after considering the comments filed, the court determines that the (h) authorize the payment of administrative expenses as they become due;
petition or motion is meritorious, it shall issue the Liquidation Order
mentioned in Section 112 hereof. (i) state that the debtor and creditors who are not petitioner/s may submit
the names of other nominees to the position of liquidator; and
Involuntary Liquidation is a judicial insolvency proceeding instituted by
a creditor or group of creditors against an insolvent debtor, provided the (j) set the case for hearing for the election and appointment of the
requirements of the law on number of creditors or value of claims, or both, liquidator, which date shall not be less than thirty (30) days nor more than
is met, and provided an act of insolvency is alleged and thereafter forty-five (45) days from the date of the last publication.
established.
- FRIA imposes a requirement on the number of creditors (at least
three) and the value of the claims (at least P1M or at last 25% of the
subscribed capital stock or partner’s contributions of the debtor,
whichever is higher)
- The acts of insolvency that must be alleged are:
1. Due and demandable payments on claims of creditors there
being no genuine issue of fact or law on the claims, have not
been made for at least 180 days, and there is no substantial
likelihood that the debtor may be rehabilitated; or
2. The debtor has failed generally to meet its liabilities as they fall
due, and there is no substantial likelihood that he may be
rehabilitated. RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the issuance
of the Liquidation Order:
D. Provisions Common to Liquidation of (a) the juridical debtor shall be deemed dissolved and its corporate or
Individual and Juridical Debtors juridical existence terminated;
(b) legal title to and control of all the assets of the debtor, except those
RA 10142, Sec. 111 Use of Term Debtor. - For purposes of this chapter, that may be exempt from execution, shall be deemed vested in the
the term debtor shall include both individual debtor as defined in Section liquidator or, pending his election or appointment, with the court;
4(o) and debtor as defined in Section 4(k) of this Act.
(c) all contracts of the debtor shall be deemed terminated and/or breached,
unless the liquidator, within ninety (90) days from the date of his
RA 10142, Sec. 4
assumption of office, declares otherwise and the contracting party agrees;
(o) Individual debtor shall refer to a natural person who is a resident and
citizen of the Philippines that has become insolvent as defined herein.
(d) no separate action for the collection of an unsecured claim shall be
allowed. Such actions already pending will be transferred to the Liquidator
(k) Debtor shall refer to, unless specifically excluded by a provision of this
for him to accept and settle or contest. If the liquidator contests or
Act, to a sole proprietorship duly registered with the Department of Trade
disputes the claim, the court shall allow, hear and resolve such contest
and Industry (DTI), a partnership duly registered with the Securities and
except when the case is already on appeal. In such a case, the suit may
Exchange Commission (SEC), a corporation duly organized and existing
proceed to judgment, and any final and executor judgment therein for a
under Philippine laws, or an individual debtor who has become insolvent
claim against the debtor shall be filed and allowed in court; and
as defined herein.
(e) no foreclosure proceeding shall be allowed for a period of one hundred
1. LIQUIDATION ORDER eighty (180) days.
RA 10142, Sec. 4 Declaration of insolvency (or adjudication of insolvency) in the

(v) Liquidation order shall refer to the Order issued by the court under liquidation order is the trigger event that results in the application of legal
Section 112 of this Act. provisions that require the status of insolvency.
(i) Date of liquidation shall refer to the date on which the court issues the Upon the issuance of the liquidation order, the benefit of excussion of a
Liquidation Order. guarantor is lost, and special preferred credits acquire the status of pledges
and mortgages.
RA 10142, Sec. 112 Liquidation Order. - The Liquidation Order shall:
The legal postulate that a creditor may enforce its right to collect payment
(a) declare the debtor insolvent; from surety becomes more cogent.
(b) order the liquidation of the debtor and, in the case of a juridical debtor, A case against a surety is not affected by an insolvency proceeding
declare it as dissolved; instituted. The surety is also not freed from liability.

Liquidation order should properly result not only in the dissolution of a and/or experience that may be necessary to enable him to properly
juridical debtor, but also in the discharge of an individual debtor. discharge the duties and obligations of a rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such conflict of interest may

2. LIQUIDATOR be waived, expressly or impliedly, by a party who may be prejudiced
thereby.
A. GENERAL CONCEPTS Other qualifications and disqualification’s of the rehabilitation receiver
shall be set forth in procedural rules, taking into consideration the nature
RA 10142, Sec. 4 of the business of the debtor and the need to protect the interest of all
(w) Liquidator shall refer to the natural person or juridical entity stakeholders concerned.
appointed as such by the court and entrusted with such powers and duties
as set forth in this Act: Provided, That, if the liquidator is a juridical entity, RA 10142, Sec. 120 Compensation of the Liquidator. - The liquidator and
it must designated a natural person who possesses all the qualifications the persons and entities engaged or employed by him to assist in the
and none of the disqualifications as its representative, it being understood discharge of his powers and duties shall be entitled to such reasonable
that the juridical entity and the representative are solidarity liable for all compensation as may determined by the liquidation court, which shall not
obligations and responsibilities of the liquidator. exceed the maximum amount as may be prescribed by the Supreme Court.
RA 10142, Sec. 115 Election of Liquidator. - Only creditors who have RA 10142, Sec. 122 Discharge of Liquidator. - In preparation for the final
filed their claims within the period set by the court, and whose claims are settlement of all the claims against the debtor , the liquidator will notify
not barred by the statute of limitations, will be allowed to vote in the all the creditors, either by publication in a newspaper of general
election of the liquidator. A secured creditor will not be allowed to vote, circulation or such other mode as the court may direct or allow, that will
unless: (a) he waives his security or lien; or (b) has the value of the apply with the court for the settlement of his account and his discharge
property subject of his security or lien fixed by agreement with the from liability as liquidator. The liquidator will file a final accounting with
liquidator, and is admitted for the balance of his claim. the court, with proof of notice to all creditors. The accounting will be set
for hearing. If the court finds the same in order, the court will discharge
The creditors entitled to vote will elect the liquidator in open court. The the liquidator.
nominee receiving the highest number of votes cast in terms of amount of
claims, ad who is qualified pursuant to Section 118 hereof, shall be
appointed as the liquidator.
RA 10142, Sec. 116 Court-Appointed Liquidator. - The court may B. POWERS, DUTIES AND RESPONSIBILITIES
appoint the liquidator if:
(a) on the date set for the election of the liquidator, the creditors do not RA 10142, Sec. 119 Powers, Duties and Responsibilities of the
attend; Liquidator. - The liquidator shall be deemed an officer of the court with
the principal duly of preserving and maximizing the value and recovering
(b) the creditors who attend, fail or refuse to elect a liquidator; the assets of the debtor, with the end of liquidating them and discharging
to the extent possible all the claims against the debtor. The powers, duties
(c) after being elected, the liquidator fails to qualify; or and responsibilities of the liquidator shall include, but not limited to:
(d) a vacancy occurs for any reason whatsoever, In any of the cases (a) to sue and recover all the assets, debts and claims, belonging or due to
provided herein, the court may instead set another hearing of the election the debtor;
of the liquidator.
(b) to take possession of all the property of the debtor except property
Provided further, That nothing in this section shall be construed to exempt by law from execution;
prevent a rehabilitation receiver, who was administering the debtor prior
to the commencement of the liquidation, from being appointed as a (c) to sell, with the approval of the court, any property of the debtor which
liquidator. has come into his possession or control;
(d) to redeem all mortgages and pledges, and so satisfy any judgement
RA 10142, Sec. 117 Oath and Bond of the Liquidator. -Prior to entering
which may be an encumbrance on any property sold by him;
upon his powers, duties and responsibilities, the liquidator shall take an
oath and file a bond, In such amount to be fixed by the court, conditioned
(e) to settle all accounts between the debtor and his creditors, subject to
upon the proper and faithful discharge of his powers, duties and
the approval of the court;
responsibilities.
(f) to recover any property or its value, fraudulently conveyed by the
RA 10142, Sec. 118 Qualifications of the Liquidator. - The liquidator debtor;
shall have the qualifications enumerated in Section 29 hereof. He may be
removed at any time by the court for cause, either motu propio or upon (g) to recommend to the court the creation of a creditors' committee which
motion of any creditor entitled to vote for the election of the liquidator. will assist him in the discharge of the functions and which shall have
powers as the court deems just, reasonable and necessary; and
RA 10142, Sec. 29 Qualifications of a Rehabilitation Receiver. - The
rehabilitation receiver shall have the following minimum qualifications: (h) upon approval of the court, to engage such professional as may be
necessary and reasonable to assist him in the discharge of his duties.
(a)A citizen of the Philippines or a resident of the Philippines in the six (6)
months immediately preceding his nomination; In addition to the rights and duties of a rehabilitation receiver, the
liquidator, shall have the right and duty to take all reasonable steps to
(b)Of good moral character and with acknowledged integrity, impartiality manage and dispose of the debtor's assets with a view towards maximizing
and independence; the proceedings therefrom, to pay creditors and stockholders, and to
terminate the debtor's legal existence. Other duties of the liquidator in
(c)Has the requisite knowledge of insolvency and other relevant accordance with this section may be established by procedural rules.
commercial laws, rules and procedures, as well as the relevant training
A liquidator shall be subject to removal pursuant to procedures for
removing a rehabilitation receiver.
A. DETERMINATION OF CLAIMS
RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the issuance
of the Liquidation Order: RA 10142, Sec. 112 Liquidation Order. - The Liquidation Order shall:
(g) direct all creditors to file their claims with the liquidator within the
(b) legal title to and control of all the assets of the debtor, except those period set by the rules of procedure;
that may be exempt from execution, shall be deemed vested in the
liquidator or, pending his election or appointment, with the court;
RA 10142, Sec. 123 Registry of Claims. - Within twenty (20) days from
his assumption into office the liquidator shall prepare a preliminary
RA 10142, Sec. 123 Registry of Claims. - Within twenty (20) days from registry of claims of secured and unsecured creditors. Secured creditors
his assumption into office the liquidator shall prepare a preliminary who have waived their security or lien, or have fixed the value of the
registry of claims of secured and unsecured creditors. Secured creditors property subject of their security or lien by agreement with the liquidator
who have waived their security or lien, or have fixed the value of the and is admitted as a creditor for the balance , shall be considered as
property subject of their security or lien by agreement with the liquidator unsecured creditors. The liquidator shall make the registry available for
and is admitted as a creditor for the balance , shall be considered as public inspection and provide publication notice to creditors, individual
unsecured creditors. The liquidator shall make the registry available for debtors owner/s of the sole proprietorship-debtor, the partners of the
public inspection and provide publication notice to creditors, individual partnership-debtor and shareholders or members of the corporation-
debtors owner/s of the sole proprietorship-debtor, the partners of the debtor, on where and when they may inspect it. All claims must be duly
partnership-debtor and shareholders or members of the corporation- proven before being paid.
debtor, on where and when they may inspect it. All claims must be duly
proven before being paid.
RA 10142, Sec. 124 Right of Set-off. - If the debtor and creditor are
mutually debtor and creditor of each other one debt shall be set off against
RA 10142, Sec. 126 Submission of Disputed to the Court. - The the other, and only the balance, if any shall be allowed in the liquidation
liquidator shall resolve disputed claims and submit his findings thereon to proceedings.
the court for final approval. The liquidator may disallow claims.
RA 10142, Sec. 125 Opposition or Challenge to Claims. - Within thirty
RA 10142, Sec. 129 The Liquidation Plan. - Within three (3) months (30 ) days from the expiration of the period for filing of applications for
from his assumption into office, the Liquidator shall submit a Liquidation recognition of claims, creditors, individual debtors, owner/s of the sole
Plan to the court. The Liquidation Plan shall, as a minimum enumerate all proprietorship-debtor, partners of the partnership-debtor and
the assets of the debtor and a schedule of liquidation of the assets and shareholders or members of the corporation -debtor and other interested
payment of the claims. parties may submit a challenge to claim or claims to the court, serving a
certified copy on the liquidator and the creditor holding the challenged
RA 10142, Sec. 131 Sale of Assets in Liquidation. - The liquidator may claim. Upon the expiration of the (30) day period, the rehabilitation
sell the unencumbered assets of the debtor and convert the same into receiver shall submit to the court the registry of claims containing the
money. The sale shall be made at public auction. However, a private sale undisputed claims that have not been subject to challenge. Such claims
may be allowed with the approval of the court if; (a) the goods to be sold shall become final upon the filling of the register and may be subsequently
are of a perishable nature, or are liable to quickly deteriorate in value, or set aside only on grounds or fraud, accident, mistake or inexcusable
are disproportionately expensive to keep or maintain; or (b) the private neglect.
sale is for the best interest of the debtor and his creditors.
RA 10142, Sec. 126 Submission of Disputed to the Court. - The
With the approval of the court, unencumbered property of the debtor may liquidator shall resolve disputed claims and submit his findings thereon to
also be conveyed to a creditor in satisfaction of his claim or part thereof. the court for final approval. The liquidator may disallow claims.
RA 10142, Sec. 132 Manner of Implementing the Liquidation Plan. - The B. TREATMENT OF CLAIMS
Liquidator shall implement the Liquidation Plan as approved by the court.
Payments shall be made to the creditors only in accordance with the
1) SECURED CREDITOR CLAIMS
provisions of the Plan.
RA 10142, Sec. 4
RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidator shall
(kk) Secured creditor shall refer to a creditor with a secured claim.
make and keep a record of all moneys received and all disbursements mad
by him or under his authority as liquidator. He shall render a quarterly
(jj) Secured claim shall refer to a claim that is secured by a lien.
report thereof to the court , which report shall be made available to all
interested parties. The liquidator shall also submit such reports as may be
(t) Lien shall refer to a statutory or contractual claim or judicial charge on
required by the court from time to time as well as a final report at the end
real or personal property that legality entities a creditor to resort to said
of the liquidation proceedings.
property for payment of the claim or debt secured by such lien.
3. CLAIMS of the Liquidation Order:
(e) no foreclosure proceeding shall be allowed for a period of one hundred
RA 10142, Sec. 4 eighty (180) days.
(c) Claim shall refer to all claims or demands of whatever nature or
character against the debtor or its property, whether for money or RA 10142, Sec. 114 Rights of Secured Creditors. - The Liquidation Order
otherwise, liquidated or unliquidated, fixed or contingent, matured or shall not affect the right of a secured creditor to enforce his lien in
unmatured, disputed or undisputed, including, but not limited to; accordance with the applicable contract or law. A secured creditor may:
(1) all claims of the government, whether national or local, including
taxes, tariffs and customs duties; and (a) waive his right under the security or lien, prove his claim in the
(2) claims against directors and officers of the debtor arising from acts liquidation proceedings and share in the distribution of the assets of the
done in the discharge of their functions falling within the scope of their debtor; or
authority: Provided, That, this inclusion does not prohibit the creditors or
third parties from filing cases against the directors and officers acting in (b) maintain his rights under the security or lien:
their personal capacities.

If the secured creditor maintains his rights under the security or lien: years after, SEC determined that Arcam could not be rehabilitated and
ordered liquidation proceedings. PNB again commenced the extrajudicial
(1) the value of the property may be fixed in a manner agreed upon by the foreclosure proceedings. A TRO was issued, but it expired without the
creditor and the liquidator. When the value of the property is less than the issuance of an injunction. PNB proceeded with and terminated the
claim it secures, the liquidator may convey the property to the secured foreclosure proceedings.
creditor and the latter will be admitted in the liquidation proceedings as a
creditor for the balance. If its value exceeds the claim secured, the Doctrine:
liquidator may convey the property to the creditor and waive the debtor's A mortgagee retains the right to foreclose the mortgage property whether
right of redemption upon receiving the excess from the creditor; or not the debtor is under insolvency or liquidation proceedings.
Preference of credit is different from a lien. While a lien attaches to a
(2) the liquidator may sell the property and satisfy the secured creditor's specific property, preference of credit does not. The property subject to the
entire claim from the proceeds of the sale; or lien may be properly foreclosed by the holder of the lien for the lien
excludes all other claims as to the specific property. Preference of credit is
(3) the secure creditor may enforce the lien or foreclose on the property a method of determining the order of payment from the proceeds of
pursuant to applicable laws. properties not subject to any lien.
The treatment of secured creditors is as follows: 2) UNSECURED CREDITOR CLAIMS

a) Upon the issuance of the liquidation order, a secured creditor is
subject to the temporary stay of foreclosure proceedings for a period RA 10142, Sec. 4
of 180 days. (qq) Unsecured creditor shall refer to a creditor with an unsecured claim.
b) The liquidation plan shall ensure that the concurrence and preference
of credits as enumerated in the Civil Code shall be observed, unless a (pp) Unsecured claim shall refer to a claim that is not secured by a lien.
preferred creditor voluntarily waives its preferred right.
c) During the proceedings, a secured creditor may: (t) Lien shall refer to a statutory or contractual claim or judicial charge on
i. Waive its security or lien, prove its claim and share in the real or personal property that legality entities a creditor to resort to said
distribution of the assets of the debtor, in which case it will be property for payment of the claim or debt secured by such lien.
admitted as an unsecured creditor; or
ii. Maintain its rights under the security or lien, in which case
o The value of the property may be fixed in a manner RA 10142, Sec. 123 Registry of Claims. - Within twenty (20) days from
agreed upon by the creditor and the liquidator: his assumption into office the liquidator shall prepare a preliminary
 If the value of the property is less than the claim, the registry of claims of secured and unsecured creditors. Secured creditors
creditor will be admitted as an unsecured creditor who have waived their security or lien, or have fixed the value of the
for the balance; property subject of their security or lien by agreement with the liquidator
and is admitted as a creditor for the balance , shall be considered as
 If the value of the property is greater than the claim,
unsecured creditors. The liquidator shall make the registry available for
the liquidator may convey the property to the
public inspection and provide publication notice to creditors, individual
creditor, collect the surplus from the creditor, and
debtors owner/s of the sole proprietorship-debtor, the partners of the
waive the debtor’s right of redemption; or
partnership-debtor and shareholders or members of the corporation-
o The liquidator may sell the property and satisfy the
debtor, on where and when they may inspect it. All claims must be duly
secured creditor’s entire claim from the proceeds of the
proven before being paid.
sale; or
o The secured creditor may enforce the lien or foreclose
the property pursuant to applicable laws. RA 10142, Sec. 113 Effects of the Liquidation Order. - Upon the issuance
of the Liquidation Order:
(d) no separate action for the collection of an unsecured claim shall be
Consuelo Metal Corporation vs. Planters Development Bank (2008) – Carpio, J.
allowed. Such actions already pending will be transferred to the Liquidator
Petitioners: Consuelo Metal Corporation
for him to accept and settle or contest. If the liquidator contests or
Respondents: Planters Development Bank
disputes the claim, the court shall allow, hear and resolve such contest
Concept: Liquidation – Treatment of Claims except when the case is already on appeal. In such a case, the suit may
proceed to judgment, and any final and executor judgment therein for a
Brief Facts: CMC was put under rehabilitation by the SEC. Finding that claim against the debtor shall be filed and allowed in court; and
rehabilitation is no longer feasible, SEC ordered its dissolution and
liquidation. PDB, one of the creditors, extrajudicially foreclosed the REM
it constituted over property owned by CMC. CMC questioned the validity
of said foreclosure
Doctrine: Secured creditors may either pursue their security interest or

lien, or they may choose to abandon the preference and prove their credits
as ordinary claims. The right of the creditor-mortgagee to foreclose is
only suspended during rehabilitation proceedings, but may be exercised
after the proceedings have been lifted or terminated.
Yngsón vs. PNB – Villarama, Jr., J.

Petitioner: Manuel D. Yngsón, Jr. [in his capacity as the liquidator of
Arcam and Company, Inc. (Arcam)]
Respondent: Philippine National Bank (PNB)
Concept: Treatment of Claims
Contracts Involved:
a) Loan contract between Arcam and PNB (amount not mentioned)
b) Real estate mortgage and chattel mortgage securing the said loan
Brief Facts:
Arcam could not pay its debt to PNB. PNB initiated extrajudicial
foreclosure proceedings. Before the scheduled foreclosure sale, Arcam
applied for insolvency and a stay order. SEC granted Arcam’s petition. Six
(d) Where, before an orders is made under subsection (a) hereof, the
4. TREATMENT OF CONTRACTS liquidator signifies to the court his readiness to the institute the
proceeding for the benefit of the creditors, the order shall fix the time
A. TERMINATION OR BREACH OF CONTRACTS within which he shall do so and, in that case the benefit derived from the
proceedings, if instituted within the time limits so fixed, belongs to the
estate.
of the Liquidation Order: An avoidance proceeding, which permits certain transactions to be
(c) all contracts of the debtor shall be deemed terminated and/or breached, rescinded or nullified, and an asset transferred pursuant to the transaction,
unless the liquidator, within ninety (90) days from the date of his or its value, to be recovered for the benefit of the creditors, is also available
assumption of office, declares otherwise and the contracting party agrees; as a consequence of the liquidation of a debtor.
B. AVOIDANCE PROCEEDINGS Transactions that may be nullified of rescinded:

(1) those entered into by the debtor or involve the debtor’s assets
RA 10142, Sec. 127 Rescission or Nullity of Certain Transactions. - Any (2) prior to the issuance of the Liquidation Order, or prior to the
transaction occurring prior to the issuance of the Liquidation Order or, in commencement date of the rehabilitation proceeding, if converted
case of the conversion of the rehabilitation proceedings prior to the into a liquidation proceeding; and are
commencement date, entered into by the debtor or involving its assets, (3) excecuted in fraud of creditors, or constitutes and undue preference
may be rescinded or declared null and void on the ground that the same of creditors. Generally, all fraudulent conveyances, or transfers of
was executed with intent to defraud a creditor or creditors or which property made by an insolvent debtor for little or no consideration,
constitute undue preference of creditors. The presumptions set forth in made for the purpose of hindering of delaying creditors, or putting
Section 58 hereof shall apply. funds or assets beyond reach of creditors, and all preferential
transfers, or transfers made by the insolvent debtor to or for the
RA 10142, Sec. 58 Rescission or Nullity of Certain Pre-commencement benefit of a creditor, thereby allowing the creditor to receive more
Transactions. Any transaction occurring prior to commencement date than its proportionate share, may be rescinded or nullified.
entered into by the debtor or involving its funds or assets may be
rescinded or declared null and void on the ground that the same was
executed with intent to defraud a creditor or creditors or which constitute 5. LIQUIDATION PLAN
undue preference of creditors. Without limiting the generality of the
foregoing, a disputable presumption of such design shall arise if the
transaction: RA 10142, Sec. 129 The Liquidation Plan. - Within three (3) months
from his assumption into office, the Liquidator shall submit a Liquidation
(a) provides unreasonably inadequate consideration to the debtor and is Plan to the court. The Liquidation Plan shall, as a minimum enumerate all
executed within ninety (90) days prior to the commencement date; the assets of the debtor and a schedule of liquidation of the assets and
payment of the claims.
(b) involves an accelerated payment of a claim to a creditor within ninety
(90) days prior to the commencement date; RA 10142, Sec. 130 Exempt Property to be Set Apart. - It shall be the
duty of the court, upon petition and after hearing, to exempt and set apart,
(c) provides security or additional security executed within ninety (90) for the use and benefit of the said insolvent, such real and personal
days prior to the commencement date; property as is by law exempt from execution, and also a homestead; but no
such petition shall be heard as aforesaid until it is first proved that notice
(d) involves creditors, where a creditor obtained, or received the benefit of, of the hearing of the application therefor has been duly given by the clerk,
more than its pro rata share in the assets of the debtor, executed at a time by causing such notice to be posted it at least three (3) public places in the
when the debtor was insolvent; or province or city at least ten (10) days prior to the time of such hearing,
which notice shall set forth the name of the said insolvent debtor, and the
(e) is intended to defeat, delay or hinder the ability of the creditors to time and place appointed for the hearing of such application, and shall
collect claims where the effect of the transaction is to put assets of the briefly indicate the homestead sought to be exempted or the property
debtor beyond the reach of creditors or to otherwise prejudice the sought to be set aside; and the decree must show that such proof was made
interests of creditors. to the satisfaction of the court, and shall be conclusive evidence of that
fact.
Provided, however, That nothing in this section shall prevent the court
from rescinding or declaring as null and void a transaction on other RA 10142, Sec. 131 Sale of Assets in Liquidation. - The liquidator may
grounds provided by relevant legislation and jurisprudence: Provided, sell the unencumbered assets of the debtor and convert the same into
further, That the provisions of the Civil Code on rescission shall in any money. The sale shall be made at public auction. However, a private sale
case apply to these transactions. may be allowed with the approval of the court if; (a) the goods to be sold
are of a perishable nature, or are liable to quickly deteriorate in value, or
RA 10142, Sec. 128 Actions for Rescission or Nullity. - (a) The liquidator are disproportionately expensive to keep or maintain; or (b) the private
or, with his conformity, a creditor may initiate and prosecute any action to sale is for the best interest of the debtor and his creditors.
rescind, or declare null and void any transaction described in the
immediately preceding paragraph. If the liquidator does not consent to the With the approval of the court, unencumbered property of the debtor may
filling or prosecution of such action, any creditor may seek leave of the also be conveyed to a creditor in satisfaction of his claim or part thereof.
court to commence said action.
RA 10142, Sec. 132 Manner of Implementing the Liquidation Plan. - The
(b) if leave of court is granted under subsection (a) hereof, the liquidator Liquidator shall implement the Liquidation Plan as approved by the court.
shall assign and transfer to the creditor all rights, title and interest in the Payments shall be made to the creditors only in accordance with the
chose in action or subject matter of the proceeding, including any provisions of the Plan.
document in support thereof.
(c) Any benefit derived from a proceeding taken pursuant to subsection (a) RA 10142, Sec. 133 Concurrence and Preference of Credits. - The
hereof, to the extent of his claim and the costs, belongs exclusively to the Liquidation Plan and its Implementation shall ensure that the concurrence
creditor instituting the proceeding, and the surplus, if any, belongs to the and preference of credits as enumerated in the Civil Code of the
estate. Philippines and other relevant laws shall be observed, unless a preferred
creditor voluntarily waives his preferred right. For purposes of this
chapter, credits for services rendered by employees or laborers to the
debtor shall enjoy first preference under Article 2244 of the Civil Code, E. Ancillary Proceedings
unless the claims constitute legal liens under Article 2241 and 2242
thereof.
1. SECURITIES MARKET PARTICIPANT
Primary goal of liquidation proceedings, liquidator and liquidation plan is
to sell the assets of the insolvent debtor and convert the same into money RA 10142, Sec. 136 Liquidation of a Securities Market Participant. - The
for payment to the creditors foregoing provisions of this chapter shall be without prejudice to the
power of a regulatory agency or self- regulatory organization to liquidate
trade-related claims of clients or customers of a securities market
participant which, for purposes of investor protection, are hereby deemed
6. TERMINATION OF PROCEEDINGS to have absolute priority over other claims of whatever nature or kind
insofar as trade-related assets are concerned.
RA 10142, Sec. 121 Reporting Requiremen5ts. - The liquidator shall
make and keep a record of all moneys received and all disbursements mad For purposes of this section, trade -related assets include cash, securities,
by him or under his authority as liquidator. He shall render a quarterly trading right and other owned and used by the securities market
report thereof to the court , which report shall be made available to all participant in the ordinary course of this business.
interested parties. The liquidator shall also submit such reports as may be
required by the court from time to time as well as a final report at the end Sec. 136 of FRIA creates a special preference of credit in favor of trade-
of the liquidation proceedings. related claims of clients or customers upon the trade-related assets, such
as cash, securities and trading rights, of a securities market participant.
RA 10142, Sec. 134 Order Removing the Debtor from the List of This special preferred credit enjoys absolute priority over other claims.
Registered Entitles at the Securities and Exchange Commission. - Upon
determining that the liquidation has been completed according to this Act
and applicable law, the court shall issue an Order approving the report and 2. BANKS AND OTHER FINANCIAL INSTITUTIONS UNDER
ordering the SEC to remove the debtor from the registry of legal entities.
REHABILITATION RECEIVERSHIP PURSUANT TO A STATE-
RA 10142, Sec. 135 Termination of Proceedings. - Upon receipt of
FUNDED OR STATE-MANDATED INSURANCE SYSTEM
evidence showing that the debtor has been removed from the registry of
legal entities at the SEC. The court shall issue an Order terminating the RA 10142, Sec. 137 Provision of Assistance. - The court shall issue
proceedings. orders, adjudicate claims and provide other relief necessary to assist in the
liquidation of a financial under rehabilitation receivership established by a
As for the insolvent individual debtor, the liquidation proceeding state-funded or state-mandated insurance system.
logically terminates upon a determination that the liquidation has been
completed. RA 10142, Sec. 138 Application of Relevant Legislation. - The
liquidation of bank, financial institutions, insurance companies and pre-
need companies shall be determined by relevant legislation. The
provisions in this Act shall apply in a suppletory manner.

3. CROSS-BORDER INSOLVENCY PROCEEDINGS
RA 10142, Sec. 139 Adoption of UNCITRAL Model Law on Cross-

Border Insolvency. - Subject to the provision of Section 136 hereof and the
rules of procedure that may be adopted by the Supreme Court, the Model
Law on Cross-Border Insolvency of the United Nations Center for
International Trade and Development is hereby adopted as part of this
Act.
RA 10142, Sec. 140 Initiation of Proceedings. - The court shall set a

hearing in connection with an insolvency or rehabilitation proceeding
taking place in a foreign jurisdiction, upon the submission of a petition by
the representative of the foreign entity that is the subject of the foreign
proceeding.
RA 10142, Sec. 141 Provision of Relief. - The court may issue orders:
(a) suspending any action to enforce claims against the entity or otherwise
seize or foreclose on property of the foreign entity located in the
Philippines;
(b) requiring the surrender property of the foreign entity to the foreign
representative; or
(c) providing other necessary relief.
RA 10142, Sec. 142 Factors in Granting Relief. - In determining whether

to grant relief under this subchapter, the court shall consider;
(a) the protection of creditors in the Philippines and the inconvenience in

pursuing their claim in a foreign proceeding;
(b) the just treatment of all creditors through resort to a unified

insolvency or rehabilitation proceedings;
(c) whether other jurisdictions have given recognition to the foreign

proceeding;
(d) the extent that the foreign proceeding recognizes the rights of
creditors and other interested parties in a manner substantially in
accordance with the manner prescribed in this Act; and
(e) the extent that the foreign proceeding has recognized and shown
deference to proceedings under this Act and previous legislation.
Cross-border insolvency occurs when an insolvent debtor has assets in,

and creditors from, several States, giving rise to the possibility that
insolvency proceedings may be commenced in several jurisdictions
The Model Law on Cross-border Insolvency of the United Nations

Commission on International Trade Law (UNCITRAL), referred to in the
FRIA, focuses on the legislative framework needed to facilitate
cooperation and coordination in cross-border insolvency proceedings,
specifically cooperation between the courts and the other competent
authorities of the enacting states and foreign States involved, greater legal
certainty for trade and investment, fair and efficient administration of the
proceedings that protects the interests of all creditors and other interested
persons, including the debtor protection and maximization of the value of
the debtor’s assets, and facilitation of the rescue of financially troubled
businesses, thereby protecting investment and preserving employment.

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V.

PLEDGE AND MORTGAGE

Pledgor or mortgagor remains the owner of the collateral; no title passes

TIMELESS[B2017] +TTL | CREDIT TRANSACTIONS | MIGALLOS 1

A stipulation that allows the creditor to appropriate or otherwise

2. EFFECT ON PLEDGE OR MORTGAGE

Natalia P. Bustamante vs. Spouses Rodito F. Rosel and Normal A. Rosel—

Equitable mortgage: a contract, which, although lacking in some

Essential requisites of an equitable mortgage:

Why does the law provide for equitable mortgages? It is to prevent

What quantum of evidence is needed to prove an equitable

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(2) Shares of stock of agricultural, commercial and industrial entities,

What can be pledged? Any of the following can be pledged:

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Chu v. CA (1989) – Grino-Aquino, J.

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To bind third parties, a real estate mortgage must be recorded in the

An unregistered or unrecorded real estate mortgage still binds the

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(1) That they be constituted to secure the fulfillment of a principal

Art. 2130 A stipulation forbidding the owner from alienating the

Pactum de non alienando (Sp. pacto de non alienando) is prohibited by Art.

Pactum de non alienando:

A stipulation prohibiting the mortgagor from entering into second or

A grant of right of first refusal in favor of the mortgagee is valid

Garcia v. Villar (2012) – Leonardo-De Castro, J.

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Korea Exchange Bank vs. Filkor Business Integrated, Inc. (2002) –

Doctrine: It is a basic principle in Civil Procedure that what determines

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Where a right of redemption exists, the certificate of title in the name of

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In line with the responsibility of an Executive Judge under Administrative

(1) All applications for extra-judicial foreclosure of mortgage whether

(2) Upon receipt of an application for extra-judicial foreclosure of

a. receive and docket said application and to stamp thereon the

b. collect the filing fees therefore pursuant to rule 141, Section

c. examine, in case of real estate mortgage foreclosure, whether

d. sign and issue the certificate of sale, subject to the approval of

Where the application concerns the extrajudicial foreclosure of

How: By public auction

Who may participate:

Bidding: Through sealed bids, submitted to the Sheriff

Payment: In cash or in manager’s check (in Philippine currency), within 5

Fees: Collected by the Clerk of Court, NON-REFUNDABLE (even if

Certificate of Sale: Issued and signed by the Clerk of Court upon

Rabat v. PNB (2012) – Bersamin, J.

How: Rules of Court, Secs. 27-33

Extrajudicial foreclosure sale

How to determine if a right of redemption exists?

On the price of the sale of the collateral:

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XPN: Parties who acquire a right to the collateral under certain

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GR: The creditor-mortgagee, in a separate action, may recover the

EX: If the extrajudicial foreclosure of mortgage arises out of a settlement

Heirs of the Late Spouses Maglasang vs. Manila Banking Corporation –

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"Executed at the municipality of _, in the Province of ,