Financial Rehabilitation and Insolvency Act of 2010 (FRIA)
the debtor/creditor
- To encourage debtors (both juridical and natural
persons), and their creditors to collectively and
- Acknowledges cross-border insolvency
realistically resolve and adjust competing claims
and property rights.
- Ensure a timely, fair, transparent, effective and
efficient rehabilitation or liquidation of debtors.
- To ensure or maintain certainty and predictability in
commercial affairs.
- To preserve and maximize the value of the assets of
the debtors.
- Contains an express provision allowing a Creditors
- To recognize creditors rights and respect priority of
claims, and ensure equitable treatment of creditors
who are similarly situated.
The overriding policy of the FRIA is to encourage
debtors and their creditors to collectively and
realistically resolve and adjust competing claims and
property rights.
In a nutshell, FRIA wants to give debtors who are unable
to meet their credit obligations, in the absence of bad
faith/negligence, a breathing spell by way of suspension
of payments and adoption of remedial measures that
can help them put their house in order again.
A successful rehabilitation will be mutually beneficial to
debtors and creditors. In case the effort fails, the
government will step in to see to it that the debtors
remaining assets are properly liquidated and equitably
distributed to the creditors.
SALIENT POINTS OF THE FRIA LAW
The proceedings in a summary and non-adversarial
manner with view towards efficient rehabilitation or
liquidation of debtors.
- Affords tax exemptions on indebtedness reduced or
forgiven pursuant to rehabilitation or liquidation
proceedings.
- Rehabilitation proceedings may be initiated by the
debtor/creditor, which may take the form of
o Court-supervised,
o Pre-negotiated, or
o Out-of-court/informal proceedings.
- Upon determination that the debtor may no longer
be rehabilitated pending rehab proceedings may be
converted into liquidation proceedings or motion of
proceedings.
o Upon petition, the court may issue
necessary relief arising from insolvency or
rehabilitation proceedings in a foreign
jurisdiction involving a foreign entity with
assets in the Phils.
Committee.
o Serve as the primary liaison between the
rehab receiver and creditors in order to
assist the rehab receiver in communicating
with the creditors of the debtor.
o Can a rehabilitation court empower a
Creditors Committee to interfere with the
judgment of the BOD of the company
under rehabilitation?
HELD: The SC noted the expansive powers
well beyond those of the rehabilitation
receiversgranted to the Creditors
Committee. The SC clarified that while
corporate powers of all corporations may be
exercised, PD 902-A provides an exception by
empowering the rehabilitation court to Create
and appoint a management committee to
undertake the management of corporations.
The exception applies when there is imminent
danger of dissipation, loss, wastage or
destruction of assets or other properties or
paralyzation of business operations of such
corporations which may be prejudicial to the
interest of minority stockholders, parties-
litigants, or the general public.
In such a case, the management
committee may overrule or revoke the
actions of the previous management and
BOD of the entity/entities under
management notwithstanding any
provision of law, articles of incorporation,
or bylaws to the contrary.
However, since BNY neither petitioned for
the appointment of a management
committee nor presented evidence
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 showing that any of the conditions to
warrant its creation exist, the expansive
powers granted to the monitoring
committee are not sanctioned under the
law.
o Under the FRIA, the Creditors Committee
is not authorized to modify or supplant the
decisions of the BOD of a debtor, as the
FRIA maintained the legal difference
between a Creditors Committee and a
Management Committee.
- The Stay or Suspension Order under FRIA.
o Arguably the very heart of the FRIA itself.
o Effective for the duration of the rehab
proceedings for as long as there is a
substantial likelihood that the debtor can
be successfully rehabilitated.
o Summary in nature and immediately
executory.
o Mandatory and may be availed of by the
interested party as a matter of right, w/n
the order an appeal was perfected.
o May be availed of by writ of execution
(R39). An interested debtor/creditor may
enforce the Stay or Suspension Order by
securing a Writ of Execution from the
rehab or insolvency court which issued the
same Satay or Suspension Order.
o The Stay or Suspension Order is
automatically included in the issuance of
the Commencement Order. It has 4
important effects on the insolvent debtor
(effects of a Commencement order):
1. Suspends all actions/proceedings, in
court or otherwise, for the
enforcement of claims against the
debtor;
2. Suspends all actions to enforce any
judgment, attachment, or other
provisional remedies against the
debtor;
3. Prohibits the debtor from selling,
encumbering, transferring, or
disposing in any manner any of its
properties, EXCEPT in the ordinary
course of business;
4. Prohibits the debtor from making any
payment of its liabilities outstanding
as of the commencement date,
EXCEPT as may be provided herein
(utilities like water, electricity)
- The first 2 are for the benefit of the debtors,
to prevent multiplicity of suits and protect the
debtor from having to defend himself in
litigation against multiple lawsuits.
- The last 2 are for the benefit of the creditors
and for the preservation of the value of the
debtors properties, also prevent sham
transactions by the debtor wherein their
property is transferred to a 3rd person in order
to defraud creditors.
- Waiver by both the National and LGUs of taxes and
fees under the FRIA.
o Simultaneous with the issuance of the
Commencement Order (and with the Stay
or Suspension Order) but entirely distinct
and separate therefrom.
o Only effective until the Rehabilitation Plan
has been either approved/dismissed.
o Creates a real and enforceable right in
favor of the debtor under rehabilitation.
- A debtor may enter into sham transactions in order
to hide his assets from the court or sell his
properties despite the prohibition of the Stay or
Suspension Order.
- REMEDIES of Creditor for Non-compliance with the
Suspension Order and of this Act.
o Fine of not more than 1million and
imprisonment for not less than 3 months
nor more than 5 years for each offense
- REMEDIES of Debtor:
o Under the Rules of Crout, Writ of
Prohibitiononce issued, shall command
the respondent court/tribunal to desist fro
hearing or proceeding when he is acting
with grave abuse of discretion amounting
to lack or excess of jurisdiction.
o Under Article 27 of the Civil Code, the
debtor who suffers material or moral loss
due to the neglect or the unjustified
refusal of a public officer to uphold his
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 legal duty to obey the Stay or Suspension
Order and secion 19 of the FRIA may sue
the latter for damages and/or
administrative charges against the said
officer.
o Under Article 2176 of the Civil Code on
quasi-delict/tort.
o Administrative remedy: the aggrieved
debtor may rely on the ground of refusal
to perform official duty, neglect of
duty, or inefficiency and incompetence in
the performance of official duties.
o Criminal remedy: criminal complaint under
RA 3019 or the Anti-graft and Corrupt
Practices Act.
- Nature of Rehabilitation Proceeding
o In rem, summary, non-adversarial manner
- How is jurisdiction over the parties acquired?
o Upon the publication of the notice of the
commencement of the proceedings in any
newspaper of general circulation in the
Phils in the manner prescribed by the
Rules of Court.
1. Regularly published;
2. Does not cater to a particular group;
3. Bona fide clientele.
- The term debtor excludes the following:
o Bank;
o Insurance company;
o Pre-need company;
Provided that government financial institutions
other than banks and GOCCs shall be covered by
the FRIA.
- Court-supervised rehabilitation proceedings:
o Voluntary proceeding; and
o Involuntary proceeding.
- How an insolvent debtor initiate a voluntary
proceeding?
o File petition for rehabilitation
- A creditor may initiate involuntary proceeding. Any
creditor or group of creditors with a claim of, or the
aggregate of whose claims is, at least 1million pesos
or at least 25% of the subscribed capital stock may
initiate involuntary proceeding.
o No genuine issue of fact or law on he
claims of petitioner/s, and that the due
and demandable payments thereon have
not been made or at least 6o days or that
the debtor has failed generally to meet its
liabilities as they fall due; or
o A creditor other than the petitioner/s has
initiated foreclosure proceedings against
the debtor that will prevent the debtor
from paying its debts as they become due
or will render it insolvent;
- Rehabilitation proceedings shall commence upon
the issuance of the Commencement Order
(automatically includes the Stay or Suspension
Order).
- Court shall issue the Commencement Order within
5 working days from filing if it finds the petition for
rehab to be sufficient in form and substance.
- How long shall the CO be effective?
o For as long as there are indicators that
there will be potential likelihood of
rehabilitation, unless lifted by the court.
o If none, court shall issue another order to
convert rehab to insolvency.
- EFFECT OF COMMENCEMENT ORDER:
o Suspends all actions/proceedings, in court
or otherwise, for the enforcement of
claims against the debtor;
o Suspends all actions to enforce any
judgment, attachment, or other
provisional remedies against the debtor;
o Prohibits the debtor from selling,
encumbering, transferring, or disposing in
any manner any of its properties, EXCEPT
in the ordinary course of business;
o Prohibits the debtor from making any
payment of its liabilities outstanding as of
the commencement date, EXCEPT as may
be provided herein (utilities like water,
electricity)
o Rehabilitating entity shall have the ff
powers:
1. obtain records to which debtors
management and directors have
access, including bank accounts;
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 2. Prohibit or render null and void the
results of any extrajudicial activity;
3. To seize property. A Any perfection of
lien against the debtors property
after commencement date is
rendered null and void.
4. Consolidate all legal proceedings
against the debtor to the court.
PROVIDED that the court may allow
the continuation of cases on other
courts where the debtor had initiated
the suit.
- Stay or Suspension Order shall apply to
government financial institutions. HOWEVER, it
shall not apply to the following:
1. Cases already pending appeal in the SC as
of the commencement date. Provided that
any final and executory judgment arising
from such appeal shall be referred to the
court for appropriate action;
2. Cases pending/filed at a specialized
court/quasi-judicial agency which, upon
determination by the court, is capable of
resolving the claim more quickly, fairly,
and efficiently than the court;
3. Enforcement of claims against sureties and
other persons solidarily with the debtor
and third party or accommodation
mortgagors as well as issuers of letters of
credit (revenue generating);
4. To any form of action of customers or
clients of a securities market participant to
recover or otherwise claim moneys and
securities entrusted to the latter in the
ordinary course of the latters business, as
well as any action of such securities
market participant or the appropriate
regulatory agency or self-regulatory org to
pay or settle such claims/liabilities;
5. Any criminal action against individual
debtor/owner, partner, director, or officer
of a debtor shall not be affected by any
proceeding commenced under FRIA.
(Doctrine of Corporate Entity)
- What are actions which the court shall undertake at
the initial hearing?
1. Determine the creditors who made timely
and proper filing of their notice of claims;
2. Hear and determine any objection to the
qualifications of the appointment of the
rehabilitation receiver and, if necessary,
appoint a new one in accordance with
FRIA;
3. Direct creditors to comment on the
petition and the Rehabilitation Plan, and to
submit the same to the court and to the
rehabilitation receiver within a period not
more than 20days; and
4. Direct the rehabilitation receiver to
evaluate the financial condition of the
debtor and to prepare and submit to the
court within 40days from initial hearing
the report.
- What is the effect of failure to file notice of claim?
1. A creditor whose claim is not listed in the
schedule of debts and liabilities and who
fails to file a notice of claim in accordance
with the Commencement Order but
subsequently files a belated claim shall not
be entitled to participate in the rehab
proceedings, but shall be entitled to
receive distributions arising therefrom.
- When may the court give due course to the
petition?
1. Within 10days from receipt of the report
of the rehab receiver, the court may give
due course to the petition upon a finding
that:
1. The debtor is insolvent, and
2. There is a substantial likelihood for
the debtor to be successfully
rehabilitated.
- What will be the action of the court if the petition is
given due course?
1. The court shall direct the rehab receiver
to:
1. Review,
2. Revise, and/or
3. Recommend action on the rehab plan,
and
4. Submit the same or a new one to the
court w/in 90days.
2. The court may refer any dispute relating to
the Rehabilitation Plan or the rehab
proceedings pending before it to
arbitration or other modes of dispute
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 resolution as provided (ADR) should it
determine that such mode will resolve the
dispute more quickly, fairly, and efficiently
than the court.
- When may the court dismiss the petition?
1. Withing 10days from receipt of the report
of the rehab receiver, the court may
dismiss the petition upon a finding that:
1. Debtor is not insolvent;
2. Petition is sham intended only to
delay the enforcement of rights of
creditors;
3. The petition, rehab plan, and
attachments thereto contain any
materially false or misleading
statements; or
4. Debtor has committed acts of
misrepresentation or in fraud of
creditors.
- What is the consequence if petition is dismissed?
1. Court may, in its discretion, order
petitioner to pay damages to any
creditor/debtor who may have been
injured by the filing of the petition.
- When may the court convert the proceedings into
one of liquidation?
1. W/in 10days from receipt of the report of
the rehab receiver upon a finding that:
1. Debtor is insolvent; and
2. There is no substantial likelihood for
the debtor to be successfully
rehabilitated.
- When may the court terminate the proceedings?
1. Upon motion by any stakeholder or the
rehab receiver by order of the court
declaring a successful implementation of
the rehabilitation plan or a failure of
rehabilitation.
- Where is there a failure of rehabilitation:
1. Dismissal of the petition by the court;
2. Debtor fails to submit a Rehabilitation
Plan;
3. Under the Rehab Plan submitted by the
debtor, there is no substantial likelihood
that the debtor can be rehabilitated within
a reasonable period (e.g., lotto, more
borrowings; but what are deemed viable
are downsizing, cut down on number of
branches, companywide point-of-sale
system, go paperless, lease an office to
raise revenue);
4. In the implementation of the rehab plan,
debtor fails to perform its obligations;
5. The commission of fraud in securing the
approval of the Rehabilitation Plan or its
amendment; and
6. Other analogues circumstances.
- What is the remedy in case there is no rehab or
failure of rehab?
1. Upon motion by affected party, court may:
1. Issue an order directing that the
breach be cured within a specified
period, failing which the proceedings
may be converted to liquidation;
2. Issue an order converting the
proceedings to a liquidation;
3. Allow debtor/rehab receiver to submit
amendments to the rehab plan;
4. Issue any other order to remedy the
breach consistent with the present
regulation, other applicable law, and
best interests of the creditors.
- What are the effects of termination?
1. The discharge of the rehab receiver
subject to his submission of a final
accounting; and
2. The lifting of the Stay Order and any other
court order holding in abeyance any action
for the enforcement of a claim against the
debtor.
- When may an individual debtor apply for a
suspension of payment?
1. 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 resided for 6 months prior to the
filing of his petition.
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- When may the court issue Suspension Order for
individual debtor?
1. Upon motion filed by the individual
debtor, provided that the properties held
as security by secured creditors shall not
be the subject of such SO.
- When shall the suspension order lapse?
1. The SO shall lapse when 3months shall
have passed w/o the proposed agreement
being accepted by the creditors or as soon
as such agreement is denied.
- May a creditor institute an action to collect his
claim pending the proceeding?
1. NO, for as long as the proceedings remain
pending.
Exceptions:
1. Creditors having claims for personal
labor, maintenance, expense of last
illness and funeral of the wife/children
of debtor incurred within 60days
immediately prior to the filing of the
petition; and
2. Secured creditors.
- Who may be a rehabilitation receiver?
1. Any qualified natural or juridical person,
provided if a juridical entity, it must
designate a natural person/s who possess
all the qualifications and none of the
disqualifications.
- What are the qualifications of a rehabilitation
receiver?
1. Citizen of the Phils or a resident thereof in
the 6months immediately preceding his
nomination;
2. Of good moral character and with
acknowledged integrity, impartiality, and
independence;
3. Has the requisite knowledge of insolvency
and other relevant commercial laws, rules
and procedures, relevant training and
experience necessary to properly
discharge the duties and obligations of a
rehab receiver;
4. Has no conflict of interest, PROVIDED such
conflict of interest may be waived by a
party who may be prejudiced.
- Powers of rehabilitation receiver?
1. To verify the accuracy of the factual
allegations in the petition and annexes;
2. To verify and correct, if necessary, the
inventory of all assets of the debtor and
their valuation;
3. To verify and correct, if necessary, the
schedule of debts and liabilities of the
debtor;
4. To evaluate the validity, genuineness, and
true amount of all the claims against the
debtor;
5. To take possession, custody and control,
and preserve the value of all the
properties of the debtor; and
6. To sue and recover, with approval of the
court, all amounts owed to, and all
properties pertaining to the debtor;
7. To have access to all information
necessary, proper, and relevant to the
operations and business of the debtor and
for its rehabilitation;
8. To sue and recover, with the approval of
the court, all property or money of the
debtor paid, transferred, or disbursed in
fraud of the debtor or its creditors or
which constitute undue preference of
creditors;
9. With the courts approval, employ persons
or entities to assist him in the discharge of
his functions;
10. To determine the manner by which the
debtor may be best rehabilitation, review
and/or recommend action on the rehab
plan and submit the same or a new one to
the court for approval;
11. To implement the rehab plan approved by
the court.
12. Submit a status report on the rehab
proceedings every quarter as ma be
requird by the court motu proprio or upon
motion f any creditor, or as may be
provided in the rehab plan.
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