FINANCIAL REHABILITATION AND INSOLVENCY ACT (“FRIA”)

I. Concept and Governing Law- RA 10142

The Financial Rehabilitation and Insolvency Act (FRIA) of 2010, which lapsed
into law on July 18, 2010, expressly repealed the insolvency law. 

A. State Policy

Section 2. Declaration of Policy. - It is the policy of the State to encourage debtors, both
juridical and natural persons, and their creditors to collectively and realistically resolve
and adjust competing claims and property rights. In furtherance thereof, the State shall
ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of
debtors. The rehabilitation or liquidation shall be made with a view (1) to ensure or
maintain certainly and predictability in commercial affairs, (2)  preserve and maximize
the value of the assets of these debtors, (3) recognize creditor rights and (4) respect
priority of claims, and ensure equitable treatment of creditors who are similarly situated.
When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy
and orderly liquidation of these debtor's assets and the settlement of their obligations.

B. Nature of Proceedings

Section 3. Nature of Proceedings. - The proceedings under this Act shall be in rem.
Jurisdiction over all persons affected by the proceedings shall be considered as
acquired upon publication of the notice of the commencement of the proceedings in
any newspaper of general circulation in the Philippines in the manner prescribed by the
rules of procedure to be promulgated by the Supreme Court.

The proceedings shall be conducted in a summary and non-adversarial manner

consistent with the declared policies of this Act and in accordance with the rules of
procedure that the Supreme Court may promulgate.

NOTE: Key Definitions (Sec 4, FRIA cited by Sundiang and Aquino)

Debtor shall refer to, unless specifically excluded by a provision of this Act, a sole
proprietorship duly registered with the Department of Trade and Industry (DTI), a
partnership duly registered with the Securities and Exchange Commission (SEC), a
corporation duly organized and existing under Philippine laws, or an individual debtor
who has become insolvent as defined herein.

1. Individual debtor shall refer to a natural person who is a resident and

citizen of the Philippines that has become insolvent as defined herein.
 2. Group of debtors shall refer to and can cover only: (1) corporations
that are financially related to one another as parent corporations, subsidiaries or
affiliates; (2) partnerships that are owned more than fifty percent (50%) by the
same person; and (3) single proprietorships that are owned by the same person.
When the petition covers a group of debtors, all reference under these rules to
debtor shall include and apply to the group of debtors.

Insolvent shall refer to the financial condition of a debtor that is generally unable to pay
its or his liabilities as they fall due in the ordinary course of business or has liabilities that
are greater than its or his assets.

1. Liabilities shall refer to monetary claims against the debtor,

including stockholder's advances that have been recorded in the debtor's audited
financial statements as advances for future subscriptions.
2. Ordinary course of business shall refer to transactions in the pursuit
of the individual debtor's or debtor's business operations prior to rehabilitation or
insolvency proceedings and on ordinary business terms.

Creditor shall refer to a natural or juridical person which has a claim against the debtor
that arose on or before the commencement date.

Commencement date shall refer to the date on which the court issues the Commencement
Order, which shall be retroactive to the date of filing of the petition for voluntary or
involuntary proceedings. (See Sec 21 as to effectivity of commencement order

General unsecured creditor shall refer to a creditor whose claim or a portion thereof its
neither secured, preferred nor subordinated under this Act.

Secured creditor shall refer to a creditor with a secured claim.

1. Secured claim shall refer to a claim that is secured by a lien.

2. 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.

Rehabilitation shall refer to the restoration of the debtor to a condition of successful

operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected
in the plan, more if the debtor continues as a going concern than if it is immediately
liquidated.

C. Applicability to Pending Proceedings

NOTE:  itype ko sa thursday yung table sa book

Section 116. Court-Appointed Liquidator. - The court may appoint the liquidator if:

(a) on the date set for the election of the liquidator, the creditors do not attend;

(b) the creditors who attend, fail or refuse to elect a liquidator;

(c) after being elected, the liquidator fails to qualify; or

(d) a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the
court may instead set another hearing of the election of the liquidator.

Provided further, That nothing in this section shall be construed to prevent a rehabilitation

receiver, who was administering the debtor prior to the commencement of the liquidation,
from being appointed as a liquidator.

NOTE: Hindi ko rin gets kung bakit ito 

Situs Development Corp. vs Asiatrust 

GR No. 180036

Under the Rules, one of the effects of a Stay Order is the stay of the "enforcement of all
claims, whether for money or otherwise and whether such enforcement is by court action
or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the
debtor.”
As such , we rule that the Stay Order cannot suspend foreclosure proceedings already
commenced over properties belonging to spouses Chua. The Stay Order can only cover
those claims directed against petitioner corporations or their properties, againstpetitioners
guarantors, or against petitioners sureties who are not solidarily liable with them.Spouses
Chua may not be considered as "debtors."

The Interim Rules on Corporate Rehabilitation (the Rules) define the term "debtor" as
follows:ςrαlαω

"Debtor" shall mean any corporation, partnership, or association, whether supervised or

regulated by the Securities and Exchange Commission or other government agencies, on
whose behalf a petition for rehabilitation has been filed under these Rules.
Likewise, the enforcement of the mortgage lien cannot be considered as a claim against a
guarantor or a surety not solidarily liable with the debtor corporations.

While spouses Chua executed Continuing Guaranty and Comprehensive Surety

undertakings in favor of Allied Bank, the bank did not proceed against them as individual
guarantors or sureties. Rather, by initiating extrajudicial foreclosure proceedings, the
bank was directly proceeding against the property mortgaged to them by the spouses as
security. The Civil Code provides that the property upon which a mortgage is imposed
directly and immediately subjected to the fulfillment of the obligation for whose security
the mortgage was constituted. As such, a real estate mortgage is a lien on the property
itself, inseparable from the property upon which it was constituted.

In this case, we find that the undertaking of spouses Chua with respect to the loans of
petitioner corporations is the sale at public auction of certain real properties belonging to
them to satisfy the indebtedness of petitioner corporations in case of a default by the
latter. This undertaking is properly that of a third-party mortgagor or an accommodation
mortgagor, whereby one mortgages one s property to stand as security for the
indebtedness of another.

D. Construction of FRIA Rules

Asiatrust Development Bank vs Alkka Development,.Inc. 

GR No. 179958

The Court promulgated the Rules in order to provide a remedy for summary and non-
adversarial rehabilitation proceedings of distressed but viable corporations. These Rules
are to be construed liberally to obtain for the parties a just, expeditious, and
inexpensive disposition of the case.To be sure, strict compliance with the rules of
procedure is essential to the administration of justice. Nonetheless, technical rules of
procedure are mere tools designed to facilitate the attainment of justice. Their strict and
rigid application should be relaxed when they hinder rather than promote substantial
justice. Otherwise stated, strict application of technical rules of procedure should be
shunned when they hinder rather than promote substantial justice.

In this case, instead of filing its opposition to the petition for rehabilitation at least ten
days before the date of the initial hearing as required by the Rules, petitioner filed a
Motion for Leave of Court to Admit Opposition to Rehabilitation Petition with the
attached Opposition to Petition for Rehabilitation on the date of the initial hearing.
Because the pleading was not filed on time, the RTC denied the motion. While the court
has the discretion whether or not to admit the opposition belatedly filed by petitioner, it is
our considered opinion that the RTC gravely abused its discretion when it refused to grant
the motion, even as the factual circumstances of the case require that the Rules be
liberally construed in the interest of justice.

Time and again, we have held that cases should, as much as possible, be resolved on the
merits, not on mere technicalities. In cases where we dispense with the technicalities, we
do not mean to undermine the force and effectivity of the periods set by law. In those rare
cases where we did not stringently apply the procedural rules, there always existed a clear
need to prevent the commission of a grave injustice, as in the present case.

Additional:
Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes.
On the one hand, they attempt to provide for the efficient and equitable distribution of an
insolvent debtor’s remaining assets to its creditors; and on the other, to provide debtors
with a "fresh start" by relieving them of the weight of their outstanding debts and
permitting them to reorganize their affairs.The purpose of rehabilitation proceedings is to
enable the company to gain a new Lease on life and thereby allow creditors to be paid
their claims from its earnings.

The determination of the true and correct amount due petitioner is important in assessing
whether FADI may be successfully rehabilitated. It is thus necessary that petitioner be
given the opportunity to be heard by the rehabilitation court. The court should admit
petitioner’s comment on or opposition to FADI’s petition for rehabilitation and allow
petitioner to participate in the rehabilitation proceedings to determine if indeed FADI
could maintain its corporate existence.

E. Venue of Proceedings 

Sec 6, AM No. 12-12-11-SC. Venue.- All petitions pursuant to these Rules shall be filed
in the Regional Trial Court which has jurisdiction over the principal office of the debtor
alleged to be insolvent as specified in its articles of incorporation or partnership or in its
registration papers with the Department of Trade and Industry (DTI) in cases of sole
proprietorship, as the case may be. Where the principal office of the corporation,
partnership or association as registered in the Securities and Exchange Commission
(SEC) is in Metro Manila, the action must be filed in the Regional Trial Court of the city
or municipality where the head office is located.

A petition for voluntary or involuntary rehabilitation involving a group of debtors

shall be filed in the Regional Trial Court which has jurisdiction over the principal office
of any of the debtors alleged to be insolvent, as specified in its articles of incorporation or
partnership, to registration papers with the DTI in cases of sole proprietorship, as the case
may be.

F. Purposes

PBCom vs Basic Polyprinters and Packaging Corporation

GR No. 187581

Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a
position 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 more if the corporation continues as a going
concern that if it is immediately liquidated.”It contemplates a continuance of corporate
life and activities in an effort to restore and reinstate the corporation to its former position
of successful operation and solvency.22

In Asiatrust Development Bank v. First Aikka Development, Inc.,we said that

rehabilitation proceedings have a two-pronged purpose, namely: (a) to efficiently and
equitably distribute the assets of the insolvent debtor to its creditors; and (b) to provide
the debtor with a fresh start, viz:chanRoblesvirtualLawlibrary

Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes.

On the one hand, they attempt to provide for the efficient and equitable distribution of an
insolvent debtor's remaining assets to its creditors; and on the other, to provide debtors
with a "fresh start" by relieving them of the weight of their outstanding debts and
permitting them to reorganize their affairs. The purpose of rehabilitation proceedings is to
enable the company to gain a new lease on life and thereby allow creditors to be paid
their claims from its earnings.

Consequently, the basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation. The
determination of such issues was to be carried out by the court-appointed rehabilitation
receiver,25lawred who was Cacho in this case.

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA)
of 2010), a law that is applicable hereto, has defined a corporate debtor as a corporation
duly organized and existing under Philippine laws that has become insolvent. The term
insolvent is defined in Republic Act No. 10142 as “the financial condition of a debtor
that is generally unable to pay its or his liabilities as they fall due in the ordinary course
of business or has liabilities that are greater than its or his assets.” As such, the
contention that rehabilitation becomes inappropriate because of the perceived insolvency
of Basic Polyprinters was incorrect.

G. Concept of Insolvency

Section 4 (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 course of business or has
liabilities that are greater than its or his assets.

Metrobank vs N.F. Naguiat Enterprises, Inc.,

GR No. 178407

The objective in insolvency proceedings is "to effect an equitable distribution of the

bankrupt's properties among his creditors and to benefit the debtor by discharging 54 him
from his liabilities and enabling him to start afresh with the property set apart for him as
exempt."
Republic Act No. 10142 provides a broad definition of the term, "insolvent":

SEC. 4. Definition of Terms. - As used in this Act, the term:

....

(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 course of business or has liabilities
that are greater than its or his assets.

Republic Act No. 10142 also expressly categorizes different forms of debt relief available
to a corporate debtor in financial distress. These are out-of-court restructuring
agreements; pre-negotiated rehabilitation;court-supervised rehabilitation;and liquidation
(voluntary and involuntary). An insolvent individual debtor can avail of suspension of
payments,87 or liquidation.

During liquidation proceedings, a secured creditor may waive its security or lien, prove
its claim, and share in the distribution of the assets of the debtor, in which case it will be
admitted as an unsecured creditor; or maintain its rights under the security or lien, 89 in
which case:

1 [T]he value of the property may be fixed in a manner agreed upon by

the creditor and the liquidator. When the value of the property is less than the
claim . . . the [creditor] will be admitted ... as a creditor for the balance. If its value
exceeds the claim . . . the liquidator may convey the property to the creditor and
waive the debtor's right of redemption upon receiving the excess from the creditor;
2
3 [T]he liquidator may sell the property and satisfy the secured
creditor's entire claim from the proceeds of the sale; or
4
5 [T]he secured creditor may enforce the lien or foreclose on the
property pursuant to applicable laws.

A secured creditor, however, is subject to the temporary stay of foreclosure proceedings

for a period of 180 days, upon the issuance by the court of the Liquidation Order.

Republic Act No. 10142 was to govern all petitions filed after it had taken effect, and all
further proceedings in pending insolvency, suspension of payments, and rehabilitation
cases, except when its application "would not be feasible or would work injustice, in
which event the procedures set forth in prior laws and regulations shall apply."

i. Actual v Technical

PNB vs CA
 GR No. 165571

A reading of Sec. 4-1 shows that there are two kinds of insolvency contemplated in
it: (1) actual insolvency, i.e., the corporation’s assets are not enough to cover its
liabilities; and (2) technical insolvency defined under Sec. 3-12, i.e., the corporation
has enough assets but it foresees its inability to pay its obligations for more than one
year.

In the case at bar, the ASB Group filed with the SEC a petition for rehabilitation
with prayer for suspension of actions and proceedings pending rehabilitation.
Contrary to petitioners’ arguments, the mere fact that the ASB Group averred that it
has sufficient assets to cover its obligations does not make it "solvent" enough to
prevent it from filing a petition for rehabilitation. A corporation may have
considerable assets but if it foresees the impossibility of meeting its obligations for
more than one year, it is considered as technically insolvent. Thus, at the first
instance, a corporation may file a petition for rehabilitation—a remedy provided
under Sec. 4-1.

When Sec. 4-1 mentioned technical insolvency under Sec. 3-12, it was referring to
the definition of technical insolvency in the said section; it was not requiring a
previous filing of a petition for suspension of payments which petitioners would
have us believe.

Petitioners harp on the SEC’s failure to examine whether the ASB Group is
technically insolvent. They contend that the SEC should wait for a year after the
filing of the petition for suspension of payments when technical insolvency may or
may not arise. This is erroneous. The period mentioned under Sec. 3-12, "longer
than one year from the filing of the petition," does not refer to a year-long waiting
period when the SEC can finally say that the ailing corporation is technically
insolvent to qualify for rehabilitation. The period referred to the corporation’s
inability to pay its obligations; when such inability extends beyond one year, the
corporation is considered technically insolvent. Said inability may be established
from the start by way of a petition for rehabilitation, or it may be proved during the
proceedings for suspension of payments, if the latter was the first remedy chosen by
the ailing corporation. If the corporation opts for a direct petition for rehabilitation
on the ground of technical insolvency, it should show in its petition and later prove
during the proceedings that it will not be able to meet its obligations for longer than
one year from the filing of the petition.

H. Concept of Debtor

Section 4 (k)- Debtor shall refer to, unless specifically excluded by a provision of this
Act, a sole proprietorship duly registered with the Department of Trade and Industry
(DTI), a partnership duly registered with the Securities and Exchange Commission
(SEC), a corporation duly organized and existing under Philippine laws, or an individual
debtor who has become insolvent as defined herein.

Section 5. Exclusions. - The term debtor does not include banks, insurance companies,
pre-need companies, and national and local government agencies or units.

For purposes of this section:

(a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially or actually
subject to conservatorship, receivership or liquidation proceedings under the New Central
Bank Act (Republic Act No. 7653) or successor legislation;
(b) Insurance company shall refer to those companies that are potentially or actually
subject to insolvency proceedings under the Insurance Code (Presidential Decree No.
1460) or successor legislation; and
(c) Pre-need company shall refer to any corporation authorized/licensed to sell or offer to
sell pre-need plans.
Provided, That government financial institutions other than banks and government-owned
or controlled corporations shall be covered by this Act, unless their specific charter
provides otherwise.

II. Rehabilitation

A. Definition and Concept

Section 4- Definition of terms

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected
in the plan, more if the debtor continues as a going concern than if it is immediately
liquidated.

BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc.
GR No. 205469

Wonder Book Corp. vs. PBCom

GR No. 187316

Viva Shipping Lines, Inc. vs. Keppel Philippines Marine, Inc.

GR No. 177382

B. Concept of Material Financial Commitment

PBCom vs Basic Polyprinters and Packaging Corporation

GR No. 187581

A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing the
proposed rehabilitation plan. This commitment may include the voluntary undertakings of
the stockholders or the would-be investors of the debtor-corporation indicating their
readiness, willingness and ability to contribute funds or property to guarantee the
continued successful operation of the debtor corporation during the period of
rehabilitation.

Basic Polyprinters presented financial commitments, as follows:

(a) Additional P10 million working capital to be sourced from the insurance claim;

(b) Conversion of the directors’ and shareholders’ deposit for future subscription to
common stock;

(c) Conversion of substituted liabilities, if any, to additional paid-in capital to increase the
company’s equity; and

(d) All liabilities (cash advances made by the stockholders) of the company from the
officers and stockholders shall be treated as trade payables.

However, these financial commitments were insufficient for the purpose. We explain.

The commitment to add P10,000,000.00 working capital appeared to be doubtful

considering that the insurance claim from which said working capital would be sourced
had already been written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation.
A claim that has been written-off is considered a bad debt or a worthless asset, and cannot
be deemed a material financial commitment for purposes of rehabilitation. At any rate,
the proposed additional P10,000,000.00 working capital was insufficient to cover at least
half of the shareholders’ deficit that amounted to P23,316,044.00 as of June 30, 2006.

We also declared in Wonder Book Corporation v. Philippine Bank of Communications

(Wonder Book) that the conversion of all deposits for future subscriptions to common
stock and the treatment of all payables to officers and stockholders as trade payables was
hardly constituting material financial commitments. Such “conversion” of cash advances
to trade payables was, in fact, a mere re-classification of the liability entry and had no
effect on the shareholders’ deficit. On the other hand, we cannot determine the effect of
the “conversion” of the directors’ and shareholders’ deposits for future subscription to
common stock and substituted liabilities on the shareholders’ deficit because their
amounts were not reflected in the financial statements contained in the rollo.