FRIA REVIEWER

State

shall ensure a timely, fair, transparent, effective, and efficient rehabilitation or liquidation of debtors

Financial Rehabilitation and Insolvency Act(FRIA for short) of 2010

which lapsed into law on July 18, 2010, expressly repealed the Insolvency Law.

FRIA (Financial Rehabilitation and Insolvency Act)

expresses 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.

rehabilitation or liquidation

shall be made with the following factors in mind:

(1) to ensure or maintain certainty and predictability in commercial affairs;

(2) preserve and maximize the value of the assets of these debtors;

(3) recognize creditor rights;

(4) respect the priority of claims; and

(5) ensure equitable treatment of creditors who are similarly situated.

liquidation of the debtors' assets and the settlement of their obligations

When rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and orderly _____

Debtor

shall refer to a sole proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership duly registered with Securities and Exchange Commission (SEC), a corporation duly organized and existing under the Philippine laws, or an individual debtor who has become insolvent.

individual debtor

shall refer to a natural person who is a resident and citizen of the Philippines that has become insolvent.

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.

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.

Liabilities

shall refer to monetary claims against the debtor, including stockholder's advances that have been recorded in the debtor's financial statements as advances for future subscriptions.

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

refers to the 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.

General unsecured creditor

shall refer to a creditor whose claim or a portion thereof its neither secured, preferred nor subordinated under the FRIA.

Secured creditor

shall refer to a creditor with a secured claim.

Secured claim

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

Lien

shall refer to a statutory or contractual claim or judicial charge on real or personal property that legally entitles a creditor to resort to said property for payment of the claim or debt secured by such lien.

Owner/ Proprietor

Who will Approve or File Petition to a sole proprietorship-voluntary rehabilitation?

Majority of Partners

Who will Approve or File Petition to a partnership-voluntary rehabilitation?

(1)Majority of the Director or Trustees; and

(2) Stockholders representing 2/3 of Outstanding Capital or 2/3 of Members of Non-stock corporation(Sec. 12, FRIA)

Who will Approve or File Petition to a corporation-voluntary rehabilitation?

Creditor or group of creditors with a claim of, or the aggregate of whose claim is, at least P1,000,000 or at least 25% of the subscribed capital stock or partners' contributions. whichever is higher (Sec 13, FRIA)

Who will approve of File Petition to sole proprietorship, Partnership, and Corporation - Involuntary rehabilitation

Insolvent debtor

Who will approve of File Petition to sole proprietorship, Partnership, and Corporation - Voluntary rehabilitation

The insolvent debtor and the Rehabilitation Plan is endorsed or approved by creditors by holding at least 2/3 of the total liabilities of the debtor including secured creditors holding more than 50% of the total secured claim and unsecured creditors holding more than 50% of unsecured claims (Sec. 76, FRIA).

Who will approve of File Petition to sole proprietorship, Partnership, and Corporation - Pre-negotiated Rehabilitation (Petition for Approval of Pre-Negotiated Rehabilitation Plan)

a) Three or more creditors, and

b) the aggregate of whose claim is, at least P1,000,000 or at least 25% of the subscribed capital stock or partners' contributions. whichever is higher (Sec 13, FRIA)

Who will approve of File Petition to sole proprietorship, Partnership, and Corporation - Involuntary LIQUIDATION

Individual Debtor

Who will approve or File Petition to individual debtor - Suspension of Payment?

Individual Debtor WITH AT LEAST P500,000 debts who does have sufficient assets to cover his liabilities

Who will approve or File Petition to individual debtor - Voluntary Liquidation?

Any creditor or group of creditors with a claim of, or with claims aggregating at least P500,000.00

Who will approve or File Petition to individual debtor - Involuntary Liquidation (Petition for Acts of Insolvency)

(1) banks

(2) pre-need companies

(3) insurance companies, and

(4) national and local government agencies or units.

Excluded from the operation of the FRIA are debtors which are:

Rehabilitation

shall refer to the restoration of the debtor to a condition of successful operation and solvency, if its 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.

(1) the insolvency of the debtor;

(2) the viability of its rehabilitation

The grounds for rehabilitation of any of the three business organizations are:

a) VOLUNTARY REHABILITATION. The following must be alleged (in the verified Petition) and established:

1) There is no genuine issue of fact or law on the claim/s of the petitioners/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

2) 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 insomvent.

The grounds for rehabilitation of any of the three business organizations are:

b) INVOLUNTARY REHABILITATION. A creditor or group of creditors may initiate involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if:

Rehabilitation Plan

shall refer to 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, debt forgiveness, debt rescheduling, reorganization or quasi reorganization, dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern or setting up of new business entity, or other similar arrangements as may be approved by the court or creditors.

Petition for Rehabilitation

A Rehabilitation Plan is attached to the

creditors (50% of the total claims)

The Rehabilitation Plan: (1) may be approved by the _____

(2) confirmed by the court after approval of the creditors or even without such approval or even over the objection of the creditors.

Cram Down Rule

The Rehabilitation Plan (including pre-negotiated plans) confirmed by the Court shall be binding upon the debtor and all persons who may be affected by it, including creditors whether or not such persons have participated in the proceedings, opposed the Plan or whether or not their claims have been scheduled.

1) Suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;

2) Suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;

3) Prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and

4) Prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may provided herein.

STAY ORDER

The court having jurisdiction over the rehabilitation over the rehabilitation case shall issue a Commencement Order which shall include a Stay Order. The Stay or Suspension Order shall:

entire duration of the rehabilitation proceedings

The commencement order and consequently the Stay Order shall be effective for the

Claim

shall refer to all claims or demands whatever nature or character against the debtor or its property, whether for money 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.

The existing Board and/or Management of the debtor shall continue.

WHO WILL MANAGE

1) Actual or eminent danger of dissipation, loss, wastage, or destruction of the debtor's assets or properties;

2) Paralyzation of the business operations of the debtor; or

3) Gross mismanagement of the debtor, owner, partner, director, officer, or representative/s in the management of the debtor

Management can be replaced. Upon motion, the court may appoint either the Rehabilitation Receiver or a Management Committee to undertake the management of the debtor in the following cases

1) The debtor is insolvent; and

2) There is a substantial likelihood for the debtor to be successfully rehabilitated

The Required Court Findings when the Court action - Give DUE COURSE to the petition.

1) The debtor is NOT insolvent;

2) The petition is sham filing and only to delay the enforcement of the creditor/s or of any group of creditors;

3) The petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading statements; or

4) The debtor has committed acts of misrepresentation or in fraud of creditors or a group of creditors.

The Required Court Findings when the Court action - DISMISS the Petition.

1) The debtor is insolvent; and

2) There is no substantial likelihood for the debtor to be successfully rehabilitated

The Required Court Findings when the Court action - CONVERT the proceedings into Liquidation Proceedings

1) The debtor must agree to the out-of-court or informal restructuring workout agreement or rehabilitation plan;

2) It must be approved by creditors representing at least sixty-seven percent (67%) of the secured obligations of the debtor;

3) It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and

4) It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured or unsecured, of the debtor.

Rehabilitation is not necessarily court supervised. An out-of-court or informal restructuring agreement or rehabilitation plan that meets the minimum requirements is recognized under the FRIA.

a) Minimum Requirements of Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans:

1) Agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor;

2) Notice thereof is published in a newspaper of general circulation in the Philippines once a week for two(2) consecutive weeks; and

3) The standstill period does not exceed one hundred (120 days) from the date of effectivity.

Standstill Period. An agreement on standstill period may be binding if the following requisites are present:

Cram Down Rule

applies upon publication of the notice of the out-of-court approved rehabilitation plan.

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

b) This 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.

SUSPENSION OF PAYMENTS

Only an INDIVIDUAL DEBTOR may file a petition for suspension of payment:

a) Properties held as security by secured creditors shall not be the subject of such suspension order

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

c) No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition of the petition for suspension of payments and for as long as proceedings remain pending.

SUSPENSION ORDER

Upon motion filed by the individual debtor, the court may issue an order suspending any execution against the individual debtor:

1) 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

2) Secured creditors.

Exceptions.

The following creditors are not affected by the Stay Order.

a) 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 debt or is engaged, so long as the proceeding relative to the suspension of payments are pending.

b) 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.

PROHIBITED ACTS

The Individual Debtor is prohibited (in the Order to be issued by the court after the filing of the Petition for Suspension for payments) from:

at least 3/5

CREDITORS' MEETING

The Individual Debtor shall attach to the Petition for Suspension of Payment a proposed agreement with the creditors.

a) The proposed agreement shall be approved or rejected in the Creditors' Meeting. The presence of creditors holding claims amounting to _____ of the liabilities of the debtor is necessary for the meeting.

1) Two thirds (2/3) of the creditors voting unite upon the same proposition; and

2) 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.

Double majority is necessary for the approval proposed agreement with the creditors, to wit:

LIQUIDATION PROCEEDING

This is the proceeding where claims are filed the assets of the insolvent debtor are disposed and the proceeds are divided among the creditors. These rules apply to individual debtors, sole proprietorships, partnerships and corporations, partnerships, and corporation. The rules below apply to original liquidation proceedings and proceedings that are originally rehabilitation proceedings but converted into liquidation.

(1) declaring that the debtor is insolvent

(2) ordering the liquidation of the debtor;

(3) in case of juridical person, declaring it as dissolved;

prohibiting payments and/or transfer of property by the debtor; and

(5) directing all claims to be filed with the liquidator

LIQUIDATION ORDER

The Court that has jurisdiction over the liquidation proceedings shall, in proper cases, issue a Liquidation Order which includes, among others:

a.) Court-supervised Rehabilitation

b.) Pre-Negotiated Rehabilitation

c.) Out- of -Court/Formal Restructuring Agreement

Kinds of Rehabilitation

1) Voluntary

2) Involuntary

Types of Rehabilitation

1) Sole Proprietorship (reg w/ DTI) - Owner/Proprietor

2) Partnership (Reg with SEC) - Majority of Partners

3) Corporation (duly incorporated under the Revised Corporation Code of the Philippines - Majority of the directors or trustees; AND Stockholders representing 2/3 of outstanding capital/members of non-stock corporation

4) Group of debtors filing jointly - One or more debtors foresee the impossibility of debtor settling debt when they fall due

Who May file for voluntary Rehabilitation?

Voluntary

initiated by the debtor, upon showing that: a. The debtor is insolvent; and b. The viability of rehabilitation

Involuntary

initiated by the creditor or group of creditors.

Any creditor or group of creditors with a claim of or the aggregate of claims is : ● At least P1,000,000; or

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

Who may file for Involuntary Rehabilitation?

Stay Order /Effect

is a legal directive by the Court to halt or suspend all actions of creditors related to rehabilitation process, including: 1. Suspend all actions all proceedings, in court or otherwise for the enforcement of claims against the debtor; 2. Suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; 3. Prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; 4. Prohibit the debtor from making any payment of its liabilities outstanding as of commencement date except as may be provided for by law

a.) Declaration that debtor is under rehabilitation

b.) Appointment of a rehabilitation receiver

c.) Directive for all creditors to file verified notices of claim

d.) Order staying claims against debtors.

The court shall issue a Commencement Order - Once petition is sufficient in form and substance. Content:

Commencement Date (Effectivity of Stay Order)

The date when the court issues the commencement Order retroacts to the date of filing of the petition for voluntary or involuntary proceedings.

within 5 days

The Commencement Date is issued _____ from the filing of the petition.

1.) Vests rehabilitation receiver power, including the power to obtain records, bank accounts

2.) Prohibit or serve as legal basis to render null and void any extrajudicial activity to possess, seize, sell encumbered property, attempt to collect, enforce a claim AFTER the commencement date

3.) Serve as legal basis to render null and void any perfection of any lien against debtor's property AFTER the commencement date

4.) Serve as legal basis to render null and void perfection of any lien against debtor's property AFTER the commencement date

5.) Consolidate the resolution of all legal proceedings BY AND AGAINST THE DEBTOR to the Insolvency court

EFFECTS OF COMMENCEMENT ORDER

From the issuance of commencement order until approval of plan or dismissal of petition

Extent: Includes national or local taxes, including penalties, interests and charges.

WAIVER ON IMPOSITION OF TAXES

Claims

All claims or demands of whatever nature or character against the debtor or its property, whether:

• Monetary or non-monetary

• Liquidated or unliquidated

• Fixed or contingent

• Matured or unmatured

• Disputed or undisputed but not limited to:

(1) claims of the government; 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.

❖ Preference of creditors is RETAINED

❖ Enforcement of such preference is SUSPENDED

Effect of Stay Order on Secured Credits

1. Actual or eminent danger of dissipation, loss, wastage or destruction of the debtor's assets or properties;

2. Paralyzation of the business operations of the debtor; or

3. a.) Gross mismanagement of the debtor or b.) fraud or c.) other wrongful conduct on the part of, or gross or willful violation of the FRIA by existing management of the debtor, owner, partner, director, officer of representative/s in the management of the debtor.

Rehabilitation Receiver and Management Committee

Grounds for Appointment of a rehabilitation receiver/Management Committee:

Creditors' Committee

to assist the rehabilitation receiver in communicating with the creditors and shall be the primary liaison between the rehabilitation receiver and the creditors

Test of economic feasibility

being emphasized by FRIA to provide better present value recovery for its creditors-taking into account the interest that the amount of money which the creditor would recover from debt if paid on time. It requires Liquidation Analysis as an Integral Part of Rehabilitation Plan.

Within 5 days

Submission of the Rehabilitation Plan (Sec. 65) -

If the rehabilitation plan is approved, the rehabilitation receiver shall submit the same to the court for confirmation.

- _____from receipt of the rehabilitation plan:

- Court shall notify the creditors that the rehabilitation plan has been submitted for confirmation.

- Any creditor man obtain copies of the rehabilitation plan.

- Any creditor may file an objection.

20 days

Objection of creditors (Sec. 66) - May be filed within _____ from the receipt of notice from the court that the rehabilitation plan has been submitted for confirmation. - Grounds for objection of creditors: a. Creditors' support was induced by fraud b. Documents or data relied upon in the plan are materially false or misleading c. The plan is in fact not supported by the voting creditors

1 year

Period of confirmation (Sec. 72)

- Must be within _____ from the date of the filing petition

- If no plan is confirmed within the said period, the proceedings may upon motion, be converted into one for the liquidation of the debtor.

An insolvent debtor, given that the plan must be endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including: a. secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor; and b. unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor.

Who can file a petition for approval of a pre-negotiated Rehabilitation Plan?

1. Schedule of debts and liabilities

2. Inventory of assets

3. Pre-negotiated Rehabilitation Plan

4. Nominees for rehabilitation receiver

Minimum Contents of the Petition

five (5) working days

Handling disputed claims and provision of funds - Within _____, and after determination that the petition is sufficient in form and substance, the court shall issue an Order

ten (10) days

Within _____ from the date of the second publication of the Order, the court shall approve the Rehabilitation Plan unless a creditor or other interested party submits an objection to it in accordance with the next succeeding section.

twenty (20) days; thirty (30) days

The court schedules a hearing for objections, determining the merit of each objection no earlier than _____ and no later than _____ from the date of the second publication of the Order mentioned in Section 77.

120 days

The court has a maximum of _____ from the filing of the petition to approve the Rehabilitation Plan. Failure to act within this period results in automatic approval. The approval of the pre-negotiated plan has the same legal effect as the confirmation of a plan under Chapter II.

Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans

allows as debtors to undergo a restructuring or rehabilitation process outside the formal court proceedings and is recognized as valid and effective.

Standstill Period

refers to a temporary period during which certain financial activities or legal actions are paused or "stand still." This period is often agreed upon by the debtor (the entity facing financial distress) and its creditors as part of an out-of-court or informal restructuring agreement or rehabilitation plan.

Cram Down Effect

allows a court to impose a restructuring or rehabilitation plan on creditors, even if not all of them have agreed to it which shall have the same legal effect as confirmation of a Plan.

once a week for at least three (3) consecutive weeks

Publication: The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published _____ in a newspaper of general circulation in the Philippines.

fifteen (15) days

Effectivity: The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of _____ from the date of the last publication of the notice