PRIORITY CLAIMS

• CONCURRENCE AND PREFERENCE OF CREDITS

• (ARTICLES 2236-2251)
CONCURRENCE OF CREDITS
• Implies the possession by two or more creditors of equal
rights or privileges over the same property or all the property of
a debtor
PREFERENCE OF CREDIT
Right held by a creditor to be preferred in the payment of his claim above
others out of the debtor’s assets

NATURE AND EFFECT OF PREFERENCE

1. A preference is an exception to the general rule. For this reason,
the law as to preferences is strictly construed.
2. Preference doesn’t create an interest in property. it creates simply a
right of one creditor to be paid first the proceeds of the sale of property as
against another creditor.
3. The law doesn’t give the creditor who has a preference a right to take the
property or sell it as against another creditor. It is not a question who takes
or sells, it is one of the application of the proceeds after the sale—of
payment of the debt
4. The right of preference is one which can be made only by being
asserted and maintained. If the right claimed is not asserted or
maintained, it is lost.
5. Where a creditor released his levy, leaving the property in possession
of the debtor, thereby indicating that he didn’t intend to press his claim
further as to that specific property, after that act, his claim to preference,
if one had been asserted y him, could not exist because he had ceased to
contest.
WHEN RULE OF PREFERENCE APPLICABLE
1. Apply only where two or more creditors have separate and distinct claims
against the same debtor who has an insufficient property
2. Is applicable when the debtor is insolvent—having more liabilities than
his assets
3. It is a matter of necessity and log that the question of preference
should arise only when the debtor’s assets are insufficient to pay his debts in
full
GENERAL PROVISIONS
Art. 2236. The debtor is liable with all his property, present and future,
for the fulfillment of his obligations, subject to the exemptions
provided by law. (1911a)

• AS A RULE, A DEBTOR IS LIABLE WITH ALL HIS PROPERTY, PRESENT

AND FUTURE, FOR THE FULFILLMENT OF HIS OBLIGATIONS
• EXEMPT PROPERTY
1. Present property-Articles 152, 153, 154, 155, 205(Family
Code); Section 13 Rule 39 of the Rules of Court; Section 118 of CA
141
Art. 152. The family home, constituted jointly by the husband
and the wife or by an unmarried head of a family, is the
dwelling house where they and their family reside, and the
land on which it is situated.

• Art. 153. The family home is deemed constituted on a house and

lot from the time it is occupied as a family residence. From
the time of its constitution and so long as any of its
beneficiaries actually resides therein, the family home
continues to be such and is exempt from execution, forced sale or
attachment except as hereinafter provided and to the extent
of the value allowed by law.
• Art. 154. The beneficiaries of a family home are:

• (1) The husband and wife, or an unmarried person who is the head
of a family;
(2) Their parents, ascendants, descendants, brothers and
sisters, whether the relationship be legitimate or illegitimate,
who are living in the family home and who depend upon the
head of the family for legal support. (226a)

• Art. 155. The family home shall be exempt from execution,

forced sale or attachment except:
(1) For nonpayment of taxes;
(2) For debts incurred prior to the constitution of the family
home;
(3) For debts secured by mortgages on the premises before or after
such constitution; and
(4) For debts due to laborers, mechanics, architects, builders,
materialmen and others who have rendered service or
furnished material for the construction of the building. (243a)
• Art. 205. The right to receive support under this Title as well
as any money or property obtained as such support shall not be
levied upon on attachment or execution. (302a)

• Sec. 13. Property exempt from execution.

Except as otherwise expressly provided by law, the following
property, and no other, shall be exempt from execution:

• (a) The judgment obligor's family home as provided by law, or the

homestead in which he resides, and land necessarily used in
connection therewith;
(b) Ordinary tools and implements personally used by him in
his trade, employment, or livelihood;
(c) Three horses, or three cows, or three carabaos, or other
beasts of burden such as the judgment obligor may select
necessarily used by him in his ordinary occupation;
(d) His necessary clothing and articles for ordinary personal
use, excluding jewelry;
• (e) Household furniture and utensils necessary for
housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment obligor may
select, of a value not exceeding one hundred thousand pesos;
• (f) Provisions for individual or family use sufficient for four
months;
(g) The professional libraries and equipment of judges,
lawyers, physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers, and other professionals, not
exceeding three hundred thousand pesos in value;
(h) One fishing boat and accessories not exceeding the total
value of one hundred thousand pesos owned by a fisherman
and by the lawful use of which he earns his livelihood;
(i) So much of the salaries, wages, or earnings of the
judgment obligor of his personal services within the four
months preceding the levy as are necessary for the support of
his family;
• (j) Lettered gravestones;
• (k) Monies benefits, privileges, or annuities accruing or in any
manner growing out of any life insurance;
• (l) The right to receive legal support, or money or property
obtained as such support, or any pension or gratuity from the
Government;
• (m) Properties specially exempt by law.
• But no article or species of property mentioned in his section shall
be exempt from execution issued upon a judgment recovered for
its price or upon a judgment of foreclosure of a mortgage thereon.

• 2. Future property—those related to the insolvency of a debtor

• 3. Property in custodia legis and of public dominion

• Art. 2237. Insolvency shall be governed by special laws insofar as

they are not inconsistent with this Code.
INSOLVENCY LAW WILL COME INTO PLAY AFTER THE RULES OF
PREFERENCE AND CONCURRENCE OF CREDITS.
•
DEBTOR MUST BE THE ABSOLUTE OWNER
Art. 2238. So long as the conjugal partnership or absolute
community subsists, its property shall not be among the
assets to be taken possession of by the assignee for the
payment of the insolvent debtor's obligations, except
insofar as the latter have redounded to the benefit of the
family. If it is the husband who is insolvent, the
administration of the conjugal partnership of absolute community may,
by order of the court, be transferred to the wife or to a third person other than
the assignee. (n)
Art. 2239. If there is property, other than that mentioned in
the preceding article, owned by two or more persons, one
of whom is the insolvent debtor, his undivided share or
interest therein shall be among the assets to be taken
possession of by the assignee for the payment of the insolvent debtor's
obligations. (n)
• RULES INVOLVING UNDIVIDED SHARE OR INTEREST OF A CO-
OWNER
If there is a co-ownership and of the co-owners is the
insolvent debtor, his undivided share or interest in the property shall be
possessed by the assignee in insolvency proceedings because it is part of his
assets
The shares of the other co-owners of course cannot be taken
possession of by the assignee
Art. 2240. Property held by the insolvent debtor as a
trustee of an express or implied trust, shall be excluded from the
insolvency proceedings. (n)

RULE INVOLVING PROPERTY HELD IN TRUST

The trustee is not strictly speaking the owner of the trust property although
he has legal title thereto
Hence, property held in trust by the insolvent debtor should be
excluded from the insolvency proceedings
CLASSIFICATION OF CREDITS
Art. 2241. With reference to specific movable property of the debtor, the
following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision
thereof;

(2) Claims arising from misappropriation, breach of trust, or malfeasance by

public officials committed in the performance of their duties, on the movables,
money or securities obtained by them;

(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 if the
movable has been resold by the debtor and the price is still unpaid, 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 form, substance and identity; neither is the
right lost by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;
 (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;

(5) Credits for the making, repair, safekeeping or preservation of

personal property, on the movable thus made, repaired, kept or possessed;

(6) Claims for laborers' wages, on the goods manufactured or

the work done;

(7) For expenses of salvage, upon the goods salvaged;

(8) Credits between the landlord and the tenant, arising from the contract
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
contract and incidental expenses, until their delivery and for thirty days
thereafter;
(10) Credits for lodging and supplies usually furnished to travelers by
hotelkeepers, on the movables belonging to the guest as long as such movables
are in the hotel, but not for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest advanced to
the debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal property of the
lessee existing on the immovable leased and on the fruits of the same, but not
on money or instruments of credit;
(13) Claims in favor of the depositor if the depositary has wrongfully
sold the thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or preference
attaches have been wrongfully taken, the creditor may demand them
from any possessor, within thirty days from the unlawful seizure.
GENERAL CATEGORIES OF CREDIT
1. Special preferred credits listed in Articles 2241 and 2242
2. Ordinary preferred credits listed in Article 2244
3. Common credits under Article 2245
• PREFERRED CREDITS WITH RESPECT TO SPECIFIC MOVABLE PROPERTY
• 1. Duties, taxes and fees due thereon to the State or any subdivision
thereof
• 2. Claims arising from misappropriation, breach of trust, or malfeasance
by public officials committed in the performance of their duties, on
the movables, money or securities obtained by them

• 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 if the movable has been resold by the debtor and the price is still
unpaid, 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 form,
substance and identity; neither is the right lost by the sale of the thing together
with other property for a lump sum, when the price thereof can be
determined proportionally
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
a. Should be registered
b. Binding against third parties
5. Credits for the making, repair, safekeeping or preservation of personal
property, on the movable thus made, repaired, kept or possessed
6. Claims for laborers' wages, on the goods manufactured or the work
done
7. For expenses of salvage, upon the goods salvaged
8. Credits between the landlord and the tenant, arising from the contract 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
contract and incidental expenses, until their delivery and for thirty days
thereafter
10. Credits for lodging and supplies usually furnished to travelers by 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
11. Credits for seeds and expenses for cultivation and harvest advanced to the
debtor, upon the fruits harvested
12. Credits for rent for one year, upon the personal property of the lessee
existing on the immovable leased and on the fruits of the same, but not
on money or instruments of credit
13. Claims in favor of the depositor if the depositary has wrongfully sold
the thing deposited, upon the price of the sale.
PREFERRED CREDITS WITH RESPECT TO SPECIFIC MOVABLE
PROPERTY
Articles 2241 and 2242 don’t give the order of preference or priority of
payment
They merely enumerate the credits which enjoy preference with
respect to specific movables or immovables
With respect to the same specific movable or immovable, creditors
with the exception of the State, merely concur
REMEMBER that preference is only given to #1 and the rest shall
be treated equally
• WRONGFUL TAKING OF MOVABLES TO WHICH LIEN ATTACHES
• Last paragraph applies only when the right of ownership in such
property continues in the debtor, and therefore, is not applicable
to cases where the debtor has parted his ownership therein, as
where he has sold the property
Art. 2242. With reference to specific immovable property and real
rights of the debtor, the following claims, mortgages and liens shall
be preferred, and shall constitute an encumbrance on the immovable or
real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as
well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works, upon said
buildings, canals or other works;
 (5) Mortgage credits recorded in the Registry of Property, upon
the real estate mortgaged;
(6) Expenses for the preservation or improvement of real property
when the law authorizes reimbursement, upon the immovable preserved
or improved;
(7) Credits annotated in the Registry of Property, in virtue of a
judicial order, by attachments or executions, upon the property affected,
and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an immovable
among them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or other
conditions imposed upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance
premium for two years. (1923a
PREFERRED LIEN ON SPECIFIC IMMOVABLE PROPERTY
1. Taxes due upon the land or building
2. For the unpaid price of real property sold, upon the immovable sold
3. Claims of laborers, masons, mechanics and other workmen, as
well as of architects, engineers and ontractors, engaged in the
construction, reconstruction or repair of buildings, canals or other works,
upon said buildings, canals or other works
4. Claims of furnishers of materials used in the construction, reconstruction,
or repair of buildings, canals or other works, upon said buildings, canals or
other works
5. Mortgage credits recorded in the Registry of Property, upon the real
estate mortgaged
6. Expenses for the preservation or improvement of real property when
the law authorizes reimbursement, upon the immovable preserved or
improved
7. Credits annotated in the Registry of Property, in virtue of a judicial
order, by attachments or executions, upon the property affected,
and only as to later credits
8. Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus divided
9. Claims of donors or real property for pecuniary charges or other
conditions imposed upon the donee, upon the immovable donated
10. Credits of insurers, upon the property insured, for the
insurance premium for two years.

Art. 2243. The claims or credits enumerated in the two preceding

articles shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1, Article 2241, and
No. 1, Article 2242, shall first be satisfied
NATURE OF CLAIMS OR CREDITS IN ARTICLES 2241 AND 2242
Articles 2241 and 2242 apply only when there is a concurrence
of credits when the same specific property of the debtor is subjected
to the claims of several creditors and the value of such property is
insufficient to pay in full all the creditors
In such situation, the question of preference will arise, there
will be a need to determine which of the creditors will be paid
ahead of the others
Art. 2244. With reference to other property, real and personal, of the
debtor, the following claims or credits shall be preferred in the order
named:
(1) Proper funeral expenses for the debtor, or children under his or her
parental authority who have no property of their own, when approved by
the court;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they have no
property of their own;
(4) Compensation due the laborers or their dependents under laws
providing for indemnity for damages in cases of labor accident, or illness
resulting from the nature of the employment;
(5) Credits and advancements made to the debtor for support of himself or herself, and family,
during the last year preceding the insolvency;

(6) Support during the insolvency proceedings, and for three months thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

(8) Legal expenses, and expenses incurred in the administration of the insolvent's estate for
the common interest of the creditors, when properly authorized and approved by the court;

(9) Taxes and assessments due the national government, other than those mentioned in
Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those referred to in Articles 2241, No. 1,
and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than those indicated in
Articles 2241, No. 1, and 2242, No. 1;
(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity or

beneficence;

(14) Credits which, without special privilege, appear in(a) a public

instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in the
order of priority of the dates of the instruments and of the
judgments, respectively. (1924a)
• SPECIAL PREFERRED CREDITS
• 1. Proper funeral expenses for the debtor, or children under his or her
parental authority who have no property of their own, when approved by the
court
• 2. Credits for services rendered the insolvent by employees, laborers, or
household helpers for one year preceding the commencement of the
proceedings in insolvency
• 3. Expenses during the last illness of the debtor or of his or her spouse
and children under his or her parental authority, if they have no
property of their own
• 4. Compensation due the laborers or their dependents under laws providing
for indemnity for damages in cases of labor accident, or illness resulting from
the nature of the employment
• 5. Credits and advancements made to the debtor for support of himself or
herself, and family, during the last year preceding the insolvency
• 6. Support during the insolvency proceedings, and for three months
thereafter
• 7. Fines and civil indemnification arising from a criminal offense
• 8. Legal expenses, and expenses incurred in the administration of
the insolvent's estate for the common interest of the creditors, when
properly authorized and approved by the court
• 9. Taxes and assessments due the national government,
• other than those mentioned in Articles 2241, No. 1, and 2242, No. 1
(10) Taxes and assessments due any province, other than those referred
to in Articles 2241, No. 1, and 2242, No. 1
• 10. Taxes and assessments due any city or municipality, other than those
indicated in Articles 2241, No. 1, and 2242, No. 1
• 11. Damages for death or personal injuries caused by a quasi-delict
• 12. Gifts due to public and private institutions of charity or beneficence
• 13. Credits which, without special privilege, appear in a. public instrument; or
b. in a final judgment, if they have been the subject of litigation.

• These credits shall have preference among themselves in the order of priority
of the dates of the instruments and of the judgments, respectively.
ORDER OF PRIORITY ONLY WITH RESPECT TO INSOLVENT’S FREE PROPERTY
1. Specially preferred credits—credits which are specially preferred because
they constitute liens take precedence over ordinary preferred credits so far
as concerns the property to which the liens are attached
a. Specific property involved of greater value
b. Specific property involved of lesser value—will be treated as ordinary
preferred credits and to be paid
in the order of preference therein provided
2. Ordinary preferred credits—only in respect of the insolvent’s free
property, is an order of priority established. In this sequence, certain
taxes and assessments also figure but, as already pointed out, these don’t have
the same kind of overriding preference

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. (1925)
NON-PREFERRED OR COMMON CREDITS
Credits other than those mentioned in 2241, 2242, and 2244 shall enjoy
no preference and such common credits shall be paid pro rata regardless of
dates
ORDER OF PREFERENCE OF CREDITS

Art. 2246. Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal
property to which the preference refers.

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 payment of
duties, taxes and fees due the State or any subdivision thereof. (1926a)
Art. 2248. Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of the
immovable or real right to which the preference refers.

Art. 2249. If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment of
the taxes and assessments upon the immovable property or real right.
(1927a)

Art. 2250. The excess, if any, after the payment of the credits which enjoy
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 the
other credits. (1928a)
TWO-TIER ORDER OF PREFERENCE
First tier includes only taxes, duties and fees due on a specific movable
or immovable property
All other special preferred credits stand on the second tier to be satisfied pari
passu and pro rata, out of the residual value of the specific property to which
such other credits relate
The pro-rata rule however doesn’t apply to credits annotated in the
RD in virtue of a judicial order, by attachments and executions, which are
preferred to later credits. In satisfying several credits annotated by
attachments and executions, the rule is still preference according to the
priority of credits in the order of time.

PROCEEDING FOR PAYMENT PRO RATA OF PREFERRED CREDITORS

• Proceeding required for adjudication of claims of preferred creditors
• Pro rata rule contemplates more than one creditor
Art. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not
paid, shall be satisfied according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro rata regardless
of dates. (1929a)

SUMMARY AS TO ORDER OF PREFERENCE

1. Preferred lien on specific immovables
2. Preferred lien on specific movables
3. Special preferred credits
4. Distribute pro-rata to creditors without preference
Insolvency is the state of insolvent,
defined 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. Insolvency proceedings may
cover:
(a) an individual debtor, referring to a natural person who is a resident and
citizen of the Philippines that has become insolvent as defined
under Republic Act No. 10142; or
(b) a debtor, referring to, unless specifically excluded by a provision
of Republic Act No. 10142, 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,
(c) or an individual debtor who has become insolvent as defined in Republic
Act No. 10142.
INSOLVENCY OF INDIVIDUAL DEBTOR
Insolvency of Individual Debtors
Insolvent individual debtors have the following
options:
(a)Suspension of payments;
(b)Voluntary liquidation; and
(c)Involuntary liquidation.
 Suspension of Payments
Petition
An individual debtor who, possessing sufficient property to cover all his
debts but foreseeing the impossibility of meeting them when they
respectively fall due, may file a verified petition that he be declared in the
state of suspension of payments by the court of the province or city in
which he has resides for six (6) months prior to the filing of his petition.
He shall attach to his petition, as a minimum:
(a) a schedule of debts and liabilities;
(b) an inventory of assets; and
(c) a proposed agreement with his creditors
Action on the Petition
If the court finds the petition sufficient in form and substance, it shall,
within five (5) working days from the filing of the petition, issue an Order:
(a) calling a meeting of all the creditors named in the schedule of debts
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 date, time
and place of the meeting;
(b) directing such creditors to prepare and present written evidence of
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.
Actions suspended; Suspension Order
• Upon motion filed by the individual debtor, the court may issue an order
suspending any pending execution against the individual debtor.
Properties held as security by secured creditors shall not be the subject
of such suspension order. The suspension order shall lapse when three
(3) months shall have passed without the proposed agreement being
accepted by the creditors or as soon as such agreement is denied.
• No creditor shall sue or institute proceedings to collect his claim from
the debtor from the time of the filing of the petition for suspension of
payments and for as long as proceedings remain pending except:
(a) those creditors having claims for personal labor, maintenance, expense
of last illness and funeral of the wife or children of the debtor incurred
in the sixty (60) days immediately prior to the filing of the petition; and
(b) (b) secured creditors
Creditors’ Meeting
• The presence of creditors holding claims amounting to at least three-
fifths (3/5) of the liabilities shall be necessary for holding a meeting. The
commissioner appointed by the court shall preside over the meeting and
the clerk of court shall act as the secretary thereof, subject to the
following rules:
(a) The clerk shall record the creditors present and amount of their
respective claims;
(b) The commissioner shall examine the written evidence of the claims. If
the creditors present hold at least three-fifths (3/5) of the liabilities of the
individual debtor, the commissioner shall declare the meeting open for
business;
(c) The creditors and individual debtor shall discuss the propositions in the
proposed agreement and put them to a vote;
(d) To form a majority, it is necessary: (1) that two-thirds (2/3) of the
creditors voting unite upon the same proposition; and (2) that the claims
represented by said majority vote amount to at least three-fifths (3/5) of
the total liabilities of the debtor mentioned in the petition; and
(e) After the result of the voting has been announced, all protests made
against the majority vote shall be drawn up, and the commissioner and
the individual debtor together with all creditors taking part in the voting
shall sign the affirmed propositions.
No creditor who incurred his credit within ninety (90) days prior to the
filing of the petition shall be entitled to vote.
Persons who may refrain from voting
• Creditors who are unaffected by the Suspension Order may refrain from
attending the meeting and from voting therein. Such persons shall not
be bound by any agreement determined upon at such meeting, but if
they should join in the voting they shall be bound in the same manner as
are the other creditors.
Rejection of the proposed agreement
• The proposed agreement shall be deemed rejected if the number of
creditors required for holding a meeting do not attend thereat, or if the
two (2) majorities mentioned in Section 97 hereof are not in favor
thereof. In such instances, the proceeding shall be terminated without
recourse and the parties concerned shall be at liberty to enforce the
rights which may correspond to them.
Objections
• If the proposal of the individual debtor, or any amendment thereof made
during the creditors’ meeting, is approved by the majority of creditors in
accordance with Section 97 hereof, any creditor who attended the meeting
and who dissented from and protested against the vote of the majority may
file an objection with the court within 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 the meeting shall be: (a) defects in the call for the meeting,
in the holding thereof and in the deliberations had thereat which prejudice
the rights of the creditors; (b) fraudulent connivance between one or more
creditors and the individual debtor to vote in favor of the proposed
agreement; or (c) fraudulent conveyance of claims for the purpose of
obtaining a majority. The court shall hear and pass upon such objection as
soon as possible and in a summary manner.
• In case the decision of the majority of creditors to approve
the individual debtor’s proposal or any amendment thereof
made during the creditors’ meeting is annulled by the
court, the court shall declare the proceedings terminated
and the creditors shall be at liberty to exercise the rights
which may correspond to them.
Effects of approval of proposed agreement
• If the decision of the majority of the creditors to approve the proposed
agreement or any amendment thereof made during the creditors’ meeting
is uphold by the court, or when no opposition or objection to said decision
has been presented, the court shall order that the agreement be carried out
and all parties bound thereby to comply with its terms.
• The court may also issue all orders which may be necessary or proper to
enforce the agreement on motion of any affected party. The Order
confirming the approval of the proposed agreement or any amendment
thereof made during the creditors’ meeting shall be binding upon all
creditors whose claims are included in the schedule of debts and liabilities
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.
Failure of individual debtor to perform agreement
• If the individual debtor fails, wholly or in part, to perform the
agreement decided upon at the meeting of the creditors, all the rights
which the creditors had against the individual debtor before the
agreement shall revest in them. In such case the individual debtor may
be made subject to the insolvency proceedings in the manner
established by this Act
 Voluntary Liquidation
Application
• An individual debtor whose properties are not sufficient to cover his
liabilities, and owing debts exceeding Five hundred thousand pesos
(Php500,000.00), may apply to be discharged from his debts and
liabilities by filing a verified petition with the court of the province or
city in which he has resided for six (6) months prior to the filing of such
petition. He shall attach to his petition a schedule of debts and
liabilities and an inventory of assets. The filing of such petition shall be
an act of insolvency.
Liquidation Order
• If the court finds the petition sufficient in form and substance it shall,
within five (5) working days issue the Liquidation Order.
• Involuntary Liquidation
The Petition
• Any creditor or group of creditors with a claim of, or with claims
aggregating at least Five hundred thousand pesos (Php500, 000.00) may
file a verified petition for liquidation with the court of the province or city
in which the individual debtor resides.

Acts of Insolvency
• The following shall be considered acts of insolvency, and the petition for
liquidation shall set forth or allege at least one of such acts:
• (a) That such person is about to depart or has departed from the Republic
of the Philippines, with intent to defraud his creditors;
• (b) That being absent from the Republic of the Philippines, with intent to
defraud his creditors, he remains absent;
• (c) That he conceals himself to avoid the service of legal process for the
purpose of hindering or delaying the liquidation or of defrauding his
creditors;
(d) That he conceals, or is removing, any of his property to avoid its
being attached or taken on legal process;
(e) That he has suffered his property to remain under attachment or
legal process for three (3) days for the purpose of hindering or delaying
the liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any
creditor or claimant for the purpose of hindering or delaying the
liquidation or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by
default for the purpose of hindering or delaying the liquidation or of
defrauding his creditors;
(h) That he has suffered or procured his property to be taken on legal
process with intent to give a preference to one or more of his creditors
and thereby hinder or delay the liquidation or defraud any one of his
creditors;
• The petitioning creditor/s shall post a bond in such as the court shall
direct, conditioned that if the petition for liquidation is dismissed by the
court, or withdrawn by the petitioner, or if the debtor shall not be
declared an insolvent the petitioners will pay to the debtor all costs,
expenses, damages occasioned by the proceedings and attorney’s fees.

Order to Individual Debtor to Show Cause

• Upon the filing of such creditors’ petition, the court shall issue an Order
requiring the individual debtor to show cause, at a time and place to be
fixed by the said court, why he should not be adjudged an insolvent.
Upon good cause shown, the court may issue an Order forbidding the
individual debtor from making payments of any of his debts, and
transferring any property belonging to him. However, nothing contained
herein shall affect or impair the rights of a secured creditor to enforce his
lien in accordance with its terms.
 Default
• If the individual debtor shall default or if, after trial, the issues are found in favor of the
petitioning creditors the court shall issue the Liquidation Order.
Absent individual debtor
• In all cases where the individual debtor resides out of the Republic of the Philippines; or
has 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 preliminary process or
orders in the matter, then the petitioning creditors, upon submitting the affidavits
requisite to procedure an Order of 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 Order of the court directing the sheriff of the province or city in which
the 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 and the costs of
the proceedings. Upon receiving such Order of the court 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 individual debtor, not exempt from execution, to an
extent sufficient to cover the amount provided for and to prepare within three (3) days
from the time of taking such possession, a complete inventory of all the property so
taken, and to return it to the court as soon as completed. The time for taking the
inventory and making return thereof may be extended for good cause shown to the
court. The sheriff shall also prepare a schedule of the names and residences of the
creditors, and the amount due each, from the books of the debtor, or from such other
papers or data of the individual debtor available as may come to his possession, and
shall file such schedule or list of creditors and inventory with the clerk of court.
• The bonds to procure the order for custody of the property and
effects of the individual debtor shall be conditioned that if, upon final
hearing of the petition in insolvency, the court shall find in favor of
the petitioners, such bonds and all of them shall be void; if the
decision be in favor of the individual debtor, the proceedings shall be
dismissed, and the individual debtor, his heirs, administrators,
executors or assigns shall be entitled to recover such sum of money
as 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 allowed by the court.
All property held for all creditors; Appeal bonds; Exemptions to sureties
In all cases where property is taken into custody by the sheriff, if it does not
embrace all the property and effects of the debtor not exempt from
execution, any other creditor or creditors of the individual debtor, upon
giving bond to be approved by the court in double the amount of their
claims, singly or jointly, shall be entitled to similar orders and to like action,
by the sheriff; until all claims 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 be held by him for the benefit of all creditors
of the individual debtor whose claims shall be duly proved.
 The bonds to procure the order for custody of the property and effects of
the individual debtor shall be conditioned that if, upon final hearing of the
petition in insolvency, the court shall find in favor of the petitioners, such
bonds and all of them shall be void; if the decision be in favor of the
individual debtor, the proceedings shall be dismissed, and the individual
debtor, his heirs, administrators, executors or assigns shall be entitled to
recover such sum of money as 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 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 double the amount of the value of the property in
controversy, and for the costs of the proceedings.
All property held for all creditors; Appeal bonds; Exemptions to sureties

In all cases where property is taken into custody by the sheriff, if it does not
embrace all the property and effects of the debtor not exempt from execution,
any other creditor or creditors of the individual debtor, upon giving bond to be
approved by the court in double the amount of their claims, singly or jointly,
shall be entitled to similar orders and to like action, by the sheriff; until all
claims 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
be held by him for the benefit of all creditors of the individual debtor whose
claims shall be duly proved.
• The bonds to procure the order for custody of the property and effects of the
individual debtor shall be conditioned that if, upon final hearing of the
petition in insolvency, the court shall find in favor of the petitioners, such
bonds and all of them shall be void; if the decision be in favor of the
individual debtor, the proceedings shall be dismissed, and the individual
debtor, his heirs, administrators, executors or assigns shall be entitled to
recover such sum of money as 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 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 double the amount of the value of the property in controversy,
and for the costs of the proceedings.
 Sale under execution
• If, in any case, proper affidavits and bonds are presented to the court or
a judge thereof, asking for and obtaining an order of publication and an
order for the custody of the property of the individual debtor and
thereafter the petitioners shall make it appear satisfactorily to the court
or a judge thereof that the interest of the parties to the proceedings will
be subserved by a sale thereof, the court may order such property to be
sold in the same manner as property is sold under execution, the
proceeds to deposited in the court to abide by the result of the
proceedings.
Common provisions
• In addition to the provisions on the Liquidation Order,
Liquidation Plan and Liquidator, the following provisions
shall apply to liquidation in insolvency proceedings of
both individual debtors and juridical debtors.
 Determination of Claims
Registry of Claims
• Within twenty (20) days from his assumption into office the liquidator shall
prepare a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their security or lien, or have
fixed the value of the 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 unsecured creditors.
• The liquidator shall make the registry available for public inspection and
provide publication notice to creditors, individual debtors owner/s of the
sole proprietorship-debtor, the partners of the partnership-debtor and
shareholders or members of the corporation-debtor, on where and when
they may inspect it. All claims must be duly proven before being paid
 Right of Set-off
• If the debtor and creditor are mutually debtor and creditor of each other one
debt shall be set off against the other, and only the balance, if any shall be
allowed in the liquidation proceedings.
Opposition or Challenge to Claims
• Within thirty (30 ) days from the expiration of the period for filing of applications
for recognition of claims, creditors, individual debtors, owner/s of the sole
proprietorship-debtor, partners of the partnership-debtor and shareholders or
members of the corporation -debtor and other interested 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 claim. Upon the expiration of
the (30) day period, the rehabilitation receiver shall submit to the court the
registry of claims containing the undisputed claims that have not been subject to
challenge. Such claims shall become final upon the filling of the register and may
be subsequently set aside only on grounds or fraud, accident, mistake or
inexcusable neglect.
Submission of Disputed to the Court
•The liquidator shall resolve disputed claims
and submit his findings thereon to the court
for final approval. The liquidator may disallow
claims.
 Avoidance Proceedings
Any transaction occurring prior to the issuance of the Liquidation Order or,
in case of the conversion of the rehabilitation proceedings prior to the
commencement date, entered into by the debtor or involving its 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 undue preference of creditors. A disputable presumption of
such intent shall arise if the transactio
(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.
• The liquidator or, with his conformity, a creditor may initiate and prosecute
any action to rescind, or declare null and void any transaction described in
the immediately preceding paragraph. If the liquidator does not consent to
the filling or prosecution of such action, any creditor may seek leave of the
court to commence said action.
• If leave of court is granted, the liquidator shall assign and transfer to the
creditor all rights, title and interest in the chose in action or subject matter
of the proceeding, including any document in support thereof.
• Any benefit derived from the proceeding, 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.
• Where, before an order is made, the liquidator signifies to the court his
readiness to the institute the proceeding for the benefit of the creditors,
the order shall fix the time 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.
VOLUNTATY INSOLVENCY UNDER THE CIVIL CODE
Art. 1255. The debtor may cede or assign his property
to his creditors in payment of his debts. This cession,
unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net
proceeds of the thing assigned. The agreements
which, on the effect of the cession, are made between
the debtor and his creditors shall be governed by
special laws.
Cession / Assignment
CESSION/ASSIGNMENT IN FAVOR OF CREDITORS – the
process by which debtor transfer all the properties not
subject to execution in favor of creditors is that the
latter may sell them and thus, apply the proceeds to
their credits
• extinguish up to amount of net proceeds (unless with
a contrary stipulation)
 Assignment
Kinds of Assignment:
• Legal – governed by the insolvency law (previously under Act
1956 now under FRIA)
• Voluntary – agreement of creditors
Requisites of Voluntary Assignment:
• More than one debt
• More than one creditor
• Complete or partial insolvency of debtor
• Abandonment of all debtor’s property not exempt from
execution
• Acceptance or consent on the part of the creditors
Effects of Assignment
• Creditors do not become the owner; they are merely
assignees with authority to sell
• Debtor is released up to the amount of the net
proceeds of the sale, unless there is a stipulation to
the contrary
• Creditors will collect credits in the order of preference
agreed upon, or in default of agreement, in the order
ordinarily established by law
 Dation in Payment Cession in Payment
One creditor Plurality of creditors
Not necessarily in state of financial Debtor must be partially or
difficulty relatively insolvent
Thing delivered is considered as Universality of property of debtor
equivalent of performance. is what is ceded. No ownership is
transferred to creditor, only
authority to sell
Payment extinguishes obligation to Merely releases debtor for net
the extent of the value of the thing proceeds of things ceded of,
delivered as agreed upon, proved assigned, unless there is a contrary
or implied from the conduct of the intention
creditor