Financial Rehabilitation and Insolvency Act (FRIA)

FRIA is aka

RA. 10142

At least (2) purposes of FRIA:

a. To encourage debtors and creditors to collectively and realistically resolve and adjust competing claims and

property rights through rehabilitation

b. If not feasible, to facilitate speedy and orderly liquidation of debtor's assets and the settlement of their

obligations.

Nature of Proceedings: (3)

a. In rem (proceeding will affect the ENTIRE world)

b. Jurisdiction over all persons affected shall be acquired upon publication of the notice of commencement in a

newspaper of general circulation in the Philippines.

c. Proceedings shall be summary and non-adversarial.

DEBTORS under FRIA: (4)

Note: The ff debtors must be INSOLVENT

a. Sole proprietorship registered with DTI

b. Partnership registered with the SEC

c. Corporations organized and existing under the laws of the Philippines

d. Individual debtors which are natural persons who are residents and citizens of the Philippines

Group of Debtors (meaning pwede ni sila magfile of petition for rehab na iusa na lng masking technically separate sila): (3)

a. Financially related corporations (parent, subsidiary, affiliates)

b. Partnerships - MORE than 50% of which is owned by the SAME person

c. Single proprietorships - owned by the SAME individual

EXCLUDED Debtors: (4)

a. Banks

b. Pre-need companies

c. Insurance companies

d. Government agencies or units

*governed by their respective special laws

Insolvent under [FRIA] shall refer to the financial condition of a debtor that is GENERALLY: (2)

a. Unable to pay its or his liabilities as they fall due; or

b. Has liabilities greater than its or his assets

Creditors: include natural or juridical persons which has a ___ against the debtor that arose ___. which can either be: (2)

claim, on or before commencement date,

Unsecured creditors or secured creditors

Shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated, etc. including but NOT limited to the ff:

a. All claims of the government...

b. Claims against directors and officers of the debtor...

This inclusion does NOT however, prohibit creditors or third parties from filing cases against the ___.

Claim; directors and officers acting in their personal capacities

Proceedings covered by the FRIA: (4)

1. Rehabilitation - voluntary or involuntary

2. Pre-negotiated rehabilitation

3. Liquidation - voluntary or involuntary

4. Suspension of payments

*No. 4 is applicable only to INDIVIDUAL debtors but 1-3 is applicable to corporations

This involves calling the creditors to a meeting to propose and agree on a schedule of payments and to prevent the debtor from making any payment OUTSIDE the necessary or legitimate expenses of the business, and the issuance of a suspension order to prevent pending executions against the debtor.

Suspension of Payments

Coverage of Suspension of Payments (covers only):

only INDIVIDUAL debtors (No partnerships/corporations)

(4) Features of Suspension of Payments:

a. The debtor has sufficient properties to cover all of his debts but he foresees the impossibility of meeting his debts when they respectively fall due.

b. The purpose is to suspend or delay the payment of debts.

c. The amount of indebtedness is NOT affected (NOT reduced or discharged)

d. The number of creditors is IMMATERIAL.

Distinction between Suspension of Payments and Rehabilitation:

a. Applies only to

b. Debtor has/is

c. Secured debtors are

d. Filed by the

e. Requirements

a. individual debtors only vs. business organizations also

b. sufficient assets to cover his liabilities vs. debtor is insolvent

c. NOT affected vs. affected by stay order

d. by the debtor vs MAYBE filed by creditors

e. NO minimum requirement for the amount of claims vs. When creditors file, the claims must be:

1. At least 1M or

2. At least 25% of the subscribed capital stock or partners' contribution, whichever is HIGHER

Upon motion filed by the individual debtor, the court may issue an order suspending any pending execution against the individual debtor. This is called ___.

Suspension Order

[Suspension Order] As a rule, NO creditor shall sue or institute 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 the proceedings remain pending. Exceptions:

1. Those creditors having claims for: (3)

If incurred in the ___ days immediately PRIOR to the ___.

2.

1. a. Personal Labor

b. Maintenance

c. Expense of last illness and funeral of the wife or children of the debtor

60 days, prior to the filing of the petition

2. Secured creditors

[Suspension Order]

The suspension order shall lapse when ___ shall have passed without the proposed agreement being accepted by the creditors or as soon as such agreement is denied.

3 months

[Suspension Order]

Prohibited Acts of the DEBTOR:

1. Sell, transfer, encumber or dispose in any manner his property EXCEPT those used in the ___ in which the petitioning individual is engaged.

2. Making any payment ___ of the necessary or legitimate expenses of his business or industry.

1. ordinary operations of commerce or industry

2. outside

[Suspension Order]

Creditor's Meeting: the debtor shall attach to his petition a proposed agreement with creditors, which shall be approved in a creditor's meeting.

1. Quorum: presence of creditors holding at least ___

2. Approval: ___

a.

b.Claims of the majority vote amount to at least ___

A creditor whose claim is incurred within ___ prior to the filing of the petition for suspension is NOT ___.

1. 3/5 of the liabilities of the debtor

2. double majority is required

a. 2/3 of the creditors voting and

b. at least 3/5 of the total liabilities

90 days, NOT entitled to vote

is the restoration of the debtor to a condition of successful operation and solvency

rehabilitation

(2) types of rehabilitation:

a. Initiated by who

b. Who will file

RFBT notes/Handout (p. 4 of 13)

Commencement/Stay Order which shall (4):

This shall be issued within ___ days from the ___.

RFBT notes/Handout (p. 4 of 13)

5 days, from the filing of the petition

___: the date when the court issues the Commencement Order ___ to the date of

filing of the petition for voluntary or involuntary proceedings.

Commencement date, retroactive

Effect of Stay Order on Secured Credits: the preference of creditors is ___, but the ___ of such preference is SUSPENDED.

retained, enforcement

EXCEPTIONS to the Stay Order: (7)

RFBT notes/Handout (p. 5 of 13)

Court Action: Upon filing of the petition for rehabilitation, the court may:

a. Give due course to the petition if: (2)

b. Deny the petition if ANY of the ff are present: (4)

c. Covert the ___ - there is ___

RFBT notes/Handout (p. 5 of 13)

WHO WILL MANAGE THE BUSINESS OF THE DEBTOR: (2)

RFBT notes/Handout (p. 5 of 13)

GROUNDS: (appointment of rehab receiver/mngt committee)

1.

2.

3.

RFBT notes/Handout (p. 5 of 13)

REHABILITATION RECEIVER: -appointed by the court w/ the principal duty of: (4)

RFBT notes/Handout (p. 5 of 13)

REHABILITATION RECEIVER Qualifications: (4)

1 Citizen of the Philippines

2 Resident of the Philippines in the 6 months immediately preceding the nomination

3 Has the requisite knowledge of insolvency and commercial laws

4 No conflict of interest

when appointed by the court, shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities

management committee

shall assist the rehab receiver in communicating w/ the Cr. and shall be the primary liason between the rehab receiver & Crs

Creditor's Committee

Creditor's Committee composed of (4):

Secured creditors;

Unsecured;

Trade creditors and suppliers; and

Employees of the debtor.

They cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor.

Creditor's Committee

ACTSOFDEBTORS/OWNERS/PARTNERS/DIRECTORS OR OFFICERS which may subject him/them to liability:

1. authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the

debtor and/or creditors;

2. conceal or authorize or approve concealment, from the creditors, or embezzles or misappropriates, any

property of the debtor.

Acts of Debtors/Owners/Partners/Directors or Officers which were subjected to liability (extend of liab): whichever is ___ between

1 Double the value of the property sold, embezzled or disposed; or

2 Double the value of the transaction involved

*whichever is HIGHER

a plan by which the financial well-being and viability of an insolvent debtor can be restored using various means including BUT not limited to the ff: (8)

Rehabilitation Plan, RFBT notes

[Rehabilitation Plan] Approval required:

1. Creditor representing ___ and the confirmation of the court; &

2. The court even without approval of the creditors or even over the objections of the creditors, in the following cases: (4)

more than 50% of total claims, RFBT notes

Submission of the Rehab Plan: [Process]

___ from receipt, the

court shall notify the creditors

the rehab plan submission for

confirmation.

W/n 5 days, RFBT notes

OBJECTION OF CREDITORS regarding the Rehab Plan: (3 grounds) and this shall be filed within ___ days from ___

RFBT notes, within 20 days from the receipt of notice from the court

CONFIRMATION OF THE REHABILITATION PLAN: the court shall issue an order confirming the Rehabilitation Plan if: (4)

This shall be WITHIN ___ from the date of ___.

1 year, from the date of filing the petition, RFBT notes

If no plan is confirmed within the said period

[1 year], the proceedings may upon motion, or

motu propio, be converted into one for the ___.

liquidation of the debtor

CRAM DOWN EFFECT: -the rehabilitation plan approved by the court shall be binding upon the:

1.

2.

a.

b.

c.

RFBT notes

Pre-negotiated Rehabilitation plan: may be approved by the court if it is approved or endorsed by: ___ holding at least ___, including:

1) Secured creditors holding at least ___; and

2) ___ creditors holding at least 50% of the total ___ claims.

creditors, 2/3 of the total liabilities

1) 50% of the total secured claims

2) Unsecured, unsecured

[Pre-negotiation Plan] Who may file: (2)

The debtor by him/itself; or

The debtor with any its/his creditors

[Pre-negotiation Plan] Issuance of Order: Within ___ days, and after determination that the petition is sufficient in form and substance, the court shall issue an Order which shall; (9)

five (5) working, RFBT notes

Grounds for objection [Issuance of Order of Pre-negotiation Plan]: W/n ___ days from the date of ___, any creditor or other interested party may submit to the court a verified objection to the petition of the Rehab Plan. The objections shall be limited to the following: (4)

8, second publication, RFBT notes

Hearing on Objections of the Pre-negotiation Plan: the date of the hearing shall be ___ from the ___. The court actions are the ff: (3)

NO earlier than 20 days and NO later than 30 days, date of the second publication of the Order, RFBT notes

PERIOD FOR APPROVAL OF REHABILITATION PLAN: maximum period of ___ DAYS from the date of the ___. If the court fails to act within the said period, the Rehabilitation Plan shall be ___.

120, filing of petition to approve the Rehab plan, deemed approved

[OUT-OF-COURT REHABILITATION]

Minimum Requirements:

1)

2) Approved by ___:

a. Representing at least ___ of the secured obligations;

b. Representing at least ___ of the unsecured obligations; and

c. Holding at least

RFBT notes

[ Period]

agreed upon by the parties pending negotiation and finalization of the out-of-court or informal

restructuring/workout agreement or Rehabilitation Plan and it shall be effective and enforceable not only

against the contracting parties but also against the other creditors, if:

1) Such agreement is approved by creditors representing ___;

Standstill Period; more than fifty percent (50%) of the total

liabilities of the debtor

Standstill Period: continuation

2) Notice thereof is publishing in a newspaper of general circulation in the Philippines ___; and

3) The standstill period does not exceed ___

once a week for two

(2) consecutive weeks, one hundred twenty (120) days from the date of effectivity

Cram Down Effect[Pre-negotiation Plan]:

Publication requirement:

Effectivity:

once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the

Philippines, shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the notice

thereof

___ is the proceeding where:

1. Claims are filed

2. Assets are disposed

3. Proceeds are divided among the creditors

Liquidation

Liquidation vs Suspension of Payments

RFBT notes

SIMILARITIES BETWEEN VOLUNTARY AND INVOLUNTARY LIQUIDATION: (2)

RFBT notes

DIFFERENCE BETWEEN VOLUNTARY AND INVOLUNTARY LIQUIDATION

RFBT notes

Acts of Insolvency

Handout (page 10 of 13)

CONVERSION BY THE COURT INTO LIQUIDATION PROCEEDINGS

RFBT notes

LIQUIDATION ORDER:

RFBT notes

RIGHTS OF SECURED CREDITORS:

RFBT notes

Election of Liquidator

Handout (page 11 of 13)

Court-appointed Liqudator: The court may appoint the liquidator if (4)

RFBT notes

*Qualifications for Liquidator is same as enumerated for ___

rehabilitation receiver, RFBT notes

Liquidator may be removed at any time by the court for cause, either motu propio or upon motion of any

creditor entitled to vote for the election of the liquidator. True or False.

True

Registry of Claims: the liquidator shall prepare a preliminary registry of claims of secured and unsecured Creditors W/n ___.

20 days from his assumption into office

The Liquidation Plan: W/n ___, the Liquidator shall submit Liq. Plan to the court: (3)

3 months from his assumption to office, (1) all the assets of the debtor

(2) a schedule of liquidation of the assets and

(3) payment of the claims

Sale of Assets in Liquidation:

General Rule: sale shall be made at ___.

Exceptions: (2)

public auction, (1) goods are perishable in nature/high maintenance, (2) private sale is for the best interest of both debtor and his creditors

Upon determining that the liquidation has been completed, the court shall issue an Order approving the report and ordering the SEC to ___

remove the debtor from the registry of legal entities

Upon receipt of 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 proceedings