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Notes on Financial Rehabilitation and Insolvency Act

GENERAL PROVISIONS

Sec. 3. Nature of proceedings


– in rem; summary; non-adversarial
– jurisdiction: publication in any newspaper of general circulation per rules

[Rules 1

Sec. 4. publication of notice of commence and commencement order, 1 newspaper of


general circulation for 2 consecutive weeks

- pleadings not allowed:


 motion to dismiss
 motion for bill of particulars
 petition for relief
 motion for extension
 motion for postponement and similar motions (may be allowed for
compelling reasons, verified and under oath)
 reply
 rejoinder
 intervention
 pleadings similar to the foregoing
- any pleading, motion or submission should be verified
- contain supporting annexes (certified true copies)
- unverified submission shall be considered not filed; improperly verified may
be considered not filed
- upon motion, original annexes may be produced for examination/comparison
- pleadings or motions in 3 printed and 2 digital copies, annexes printed
- court may decide on basis of affidavits, counter-affidavits other documents,
clarificatory hearing if necessary
- any order immediately executory

Sec. 6. Venue
- RTC with jurisdiction over principal office of the debtor; if group, head office
of any of the debtors

Sec. 7. Individual notices to foreign creditors with no known Philippine address]

Sec. 7. Substantive and Procedural Consolidation


- each juridical entity separate
- may be commingled if:
 same owner
 commingled in fact
 common creditors
 voluntarily accedes
 beneficial to all; promotes rehab objectives
- court may join other affiliates of debtor as parties pursuant to rules

Sec. 10. Debtor, owner, partner, or directors and officers shall be liable for double
the value of property or amount of transaction, whichever is higher
– if property disposed or concealed after having notice of rehab
proceedings/reason to believe commencement
– or in contemplation of proceedings dispose of property not in usual course of
business or authorize transaction in fraud or grossly disadvantageous to
creditors, or conceal, embezzles or misappropriates any property of debtor

Sec. 11. Any bank may hold an equity interest or investment in debtor when
conveyed to it in satisfaction of a debt under the Rehabilitation or Liquidation Plan,
subject to ownership limits and to be disposed of within five (5) years

COURT-SUPERVISED REHABILITATION

(A) Initiation Proceedings


(1) Voluntary Proceedings

Sec. 12. Petition to Initiate Voluntary Proceedings by Debtor

- approved by the owner/majority of partners/2/3 vote of directors or


members
- verified petition to establish insolvency and viability of its rehabilitation
and include:
 identification of debtor, principal activities and addresses
 statement of fact and cause of insolvency
 specific relief sought
 grounds
 other information required for relief
 debts and liabilities, creditors, addresses, amounts of claims,
collaterals, securities
 inventory of assets, receivables and claims against third parties
 Rehabilitation Plan (RP)
 names of nominees to be RR
 other documents required by rules
- Group of debtors may file petition for rehab when financial distress
would likely adversely affect financial condition and/or operations of
other members; or if participation is essential under the terms and
conditions of the RP

(2) Involuntary Proceedings

Sec. 13. Circumstances to Initiate Involuntary Proceedings.


- Any creditor or group of creditor whose aggregate claim is at least
P1,000,000 or at least 25% of the subscribed capital stock, whichever
is higher, may initiate involuntary proceedings if:
 No genuine issue of fact or law on their claims
 Due and demandable payments not made for at least 60 days or
failed in general to meet liabilities as due
 Foreclosure proceeding by other creditor which will prevent
payment of debts as due or render insolvent

Sec. 14. Petition to Initiate Involuntary Proceedings


- Verified petition to establish substantial likelihood that debtor may be
rehabilitated, to include:
 Identification of debtor, principal activities and address
 Circumstances to initiate involuntary proceedings under Sec. 13
 Specific relief sought
 RP
 Nominees for Rehabilitation Receiver (RR)
 Other information required for relief
 Other documents required by the rules

[Rule 2:
Sec. 2 Contents of Petition (in addition to FRIA)
- history of debtor
- fact and cause of insolvency
- grounds
- pending actions against debtor
- threats/demands to enforce claims against debtor
- manner by which debtor may be rehabilitated and how it will benefit
creditors, employees and stockholders
- exact address of debtor’s documents

Petition shall be accompanied by:


- ITR for past 2 years
- AFS last fiscal year
- Interim FS not earlier than 30 days before filing of petition
- Schedule of Debts and Liabilities to include creditors, claim, principal,
interest, penalties, due 30 days before filing, nature of claim, any
security
- Inventory of Assets whether in possession of debtor or third party,
nature, location, condition, book value, market value; certified copy of
certificate of title attached, encumbrances or liens
 To include Schedule of Accounts Receivable, date of maturity,
degree of collectability; Schedule of Existing Claims Against Third
Party
- RP
- Schedule of Payments and Disposition of Assets within 1 year before
filing of petition
- Schedule of Cash Flow for 3 months immediately preceding and
succeeding
- Schedule of Possible Claims
- Affidavit of General Financial Condition (see Annex “A” of Rules)

Sec. 3. Text of Verification]

(B) Action on Petition and Commencement of Proceedings

Sec. 15. Action on Petition


- If petition sufficient in form and substance, issue Commencement
Order within five (5) days
- If deficient, may be given time to amend/supplement

[Rule 2
Sec. 7. If petition deficient in form and substance, court may give 5 days to amend or
supplement petition; period to issue Commencement Order shall be from new filing;
dismiss if not amended/supplemented]

Sec. 16. Rehabilitation proceedings shall commence upon issuance of


Commencement Order which shall:
- identify debtor, principal activities and principal place of business
- summarize the ground/s
- state relief and any procedure particular to relief
- state legal effects of Commencement Order, including Sec. 17
- declare that debtor is under rehabilitation
- direct publication (2x, 2 consecutive weeks, first publication within 7
days after issuance)
- direct personal service of the petition to debtor/creditors (as
applicable) within 5 days [Rule 2, Sec. 8 – served on creditor holding at
least 10% of liabilities, BIR, relevant regulatory agencies
- direct service to foreign creditors with no known Philippine addresses
ensuring receipt at least 15 days before initial hearing]
- appoint a RR; may or may not be from list
- requirements/deadlines for creditors to establish claim; direct filing of
claims 5 days before initial hearing [Rule 2, Sec. 8 – required verified
notices of claim with warning on effect of failure to file]
- direct BIR to comment [Rule 2, Sec. 8 – direct also regulatory
agency/iesand interested parties to comment with supporting
affidavits and documents not later than 15 days before initial hearing]
- prohibit withholding supply of goods and services in ordinary course
of business as long as paid for
- authorize payment of administrative expenses
- set initial hearing forty (40) days from filing of petition; to determine
substantial likelihood of rehabilitation
- make available copies of petition and RP to any interested party
- indicate location of documents regarding debtor and proceedings
- state that debtor/creditor who is not petitioner may nominate any
other qualified person to be RR, 5 days before hearing
- [Rule 2, Sec. 8 – state that all contracts not confirmed in writing
within 90 days from issuance automatically terminated]
- include a Stay or Suspension Order which shall:
 suspend all actions for enforcement of claims against debtor
 suspend all actions to enforce any
judgment/attachment/provisional remedy
 prohibit debtor from selling, encumbering, transferring or
disposing any of its properties except ordinary course of business
 prohibit payment of liabilities as of Commencement Date (CD)

[Rule 2, Sec. 8 – issuance of stay order does not affect right to commence action ad
cautelam to preserve claim; filing fee P100,000 or 1/10 of prescribed fee, whichever
lower; balance of fee to be paid upon reinstatement/reviva]

Sec. 17. Effects of Commencement Order


Unless prohibited in the FRIA, issuance of Commencement Order shall have these
effects (in addition to Suspension Order):
- vest powers and functions of RR, including right to review all records
to which management and directors have access
- prohibit/serve as basis to nullify extrajudicial process to enforce claim
after CD
- serve as basis to nullify any setoff after CD
- serve as basis to nullify perfection of any lien after CD
- consolidate resolution of all legal proceedings by and against debtor,
unless allowed otherwise
Attempts to seek recourse against debtor outside these proceedings is indirect
contempt.

[Rule 2, Sec. 9. Effects of Commencement Order shall retroact to date of filing of


petition]

Sec. 18. Exceptions to Suspension or Stay Order


- cases already pending appeal in SC as of CD; any final and executory
judgment on such appeal to be referred to court for action
- at court’s discretion, cases pending in specialized or quasi-judicial
agency which is capable or resolving claim more quickly, fairly,
efficiently; final and executory judgment to be referred to court as
undisputed claim
- enforcement of claims against sureties, other persons solidarily liable
with debtor, accommodation mortgagors, issuers of letter of credit;
unless property subject of same is necessary for rehabilitation
- action by customers of securities market participant to recover or
claim moneys and securities entrusted to such participant in the
ordinary course of business
- actions of a licensed broker or dealer to sell pledged securities of
debtor pursuant to a securities pledge or margin agreement for
settlement of securities transactions pursuant to SRC
- clearing/settlement of financial transactions through clearing agency
or similar entity recognized by BSP and SEC
- criminal action against debtor, owner, partner, director or officer

Sec. 19. Waiver of national and local taxes from issuance of commencement order
until approval of RP or dismissal of petition

Sec. 20. Effects of Commencement Order, Stay or Suspension Order applies to


government financial institutions, regardless of contrary statutory provisions

Sec. 21. Commencement Order in effect for as long as there is substantial likelihood
that debtor will be successfully rehabilitated. In determining likelihood, minimum
requirements:

- proposed RP complies with minimum contents prescribed by FRIA


- sufficient monitoring of business by RR
- debtor met with creditors to extent reasonably possible to reach
consensus on proposed RP
- report of RR stating that underlying assumptions, financial goals in RP
as realistic, feasible and reasonable, or in any case, there is
substantial likelihood of rehabilitation because:
 sufficient assets to rehabilitate
 sufficient cash flow for operation
 good faith and due diligence or owners, partners, stockholders,
directors and officers
 not a sham filing
 debtor likely able to pursue a viable RP
- no materially false or misleading statement in petition, RP and
attachments
- met with creditors representing ¾ of total obligation, or with debtor
(as applicable) as good faith effort to reach consensus on proposed
RP
- Debtor has not committed misrepresentation/fraud of its creditor/s

[Rule 2, Sec. 11 – Commencement Order will be effective for duration of


rehabilitation unless (a) earlier lifted, (b) RP seasonably confirmed or approved; (c)
proceedings ordered terminated under Rule 2, Sec. 73

Sec. 12. Notice of Claim – creditor or interested party not listed in Schedule of Debts
and Liabilities shall filed verified notice not later than five (5) days before initial
hearing.]

Sec. 22. Action in Initial Hearing


- determine creditors with timely and proper filing of claims
- hearing on qualifications/appointment of RR; appoint new one if
necessary
- direct creditors to comment on petition and RP within twenty (20)
days
- direct RR to submit report in Sec. 24 within forty (40) days from
initial hearing

[Rule 2, Sec. 14
- direct creditors to discuss their comments on the petition
- determine reasonableness of RR’s fees; presumed reasonable
unless creditors object]

Sec. 23. Creditor who files claim belatedly shall not be entitled to participate in
rehabilitation proceedings but entitled to receive distributions

Sec. 24. Report of RR within forty (40) days from initial hearing, with or without
comments from any of creditors, with preliminary findings and recommendations on
whether:
- debtor is insolvent and causes; any unlawful or irregular acts of
owner, partners, directors or officers in contemplation of
insolvency which may have contributed to the insolvency
- underlying assumptions, financial goals and procedures in RP are
realistic, feasible and reasonable
- there is substantial likelihood of successful rehabilitation
- petition should be dismissed
- debtor should be dissolved/liquidated

Sec. 25. Within ten (10) days from report of RR in Sec. 24, court may:
- give due course to the petition upon finding that:
 debtor is insolvent
 substantial likelihood of successful rehabilitation
- dismiss the petition upon finding that:
 debtor is not insolvent
 petition is sham filing to delay
 petition, RP and attachments contain materially false or
misleading statements
 debtor committed acts of misrepresentation/fraud of creditors
- convert proceedings to liquidation upon finding that:
 debtor is insolvent
 no substantial likelihood of successful rehabilitation

Sec. 26. – If petition is given due course, court shall direct RR to review, revise and or
recommend action on RP and submit new one to court within ninety (90) days

Any dispute regarding RP or proceedings may be submitted to arbitration or


alternative modes of dispute resolution.
Sec. 27. – If petition is dismissed, court may order debtor to pay damages.

(C) The RR, Management Committee and Creditors’ Committee (CC)

Sec. 28. RR may be natural or juridical person (to designate a qualified natural
person)

[Rule 2, Sec. 21. Qualifications of RR]

Sec. 30. RR.


- Court shall initially appoint, may or may not be from list
- At initial hearing, creditor/debtor not the petitioner may
nominate and court may appoint a new one
- If nominated by more than 50% of secured creditors, court shall
appoint

Sec. 31. Powers, Duties and Responsibilities of RR:


- Verify factual allegations in petition, annexes
- Verify and correct, debts, liabilities and valuation [[Rule 2, Sec. 26 -
also accept and incorporate amendments to Schedule of Debts and
Liabilities]
- Evaluate validity, genuineness and amount of claims [Rule 2, Sec. 26 –
submit to court revised Schedule of Debts and Liabilities]
- [Rule 2, Sec. 26 – investigate acts, conduct, properties, liabilities and
financial condition of debtor, operation of business and desirability of
continuance, other matters relevant to RP]
- Take possession, custody, control and preserve value of property
- Sue and recover, with court approval, amounts/properties owed to
debtor
- Have access to all information on operations and business of debtor
and for its rehabilitation
- [Rule 2, Sec. 26 – examine under oath directors and officers of debtor
and any other witnesses]
- Sue and recover, with court approval, amounts/properties disposed in
fraud of debtor or creditor or with undue preference of creditor/s
- Monitor business and operations so that no conveyance of property
other than in ordinary course of business
- To engage persons to assist in his function, with court approval
- Determine manner by which debtor may best be rehabilitated,
review, revise, recommend on RP
- Implement approved RP, if so provided
- Assume powers of management of debtor if directed by Court
pursuant to Sec. 36
- Other powers conferred by court from time to time
- Submit a status report on rehabilitation proceedings
- May recommend appointment of management committee under Sec.
36

[Rule 2, Sec. 26. (in addition)


- Report any fact ascertained as to causes of debtor’s problems, fraud,
preferences, dispositions, misconduct, irregularities
- Monitor and report to court any changes in debtor’s business
- Prohibit and report any encumbrance, transfer or disposition of assets,
payments outside of ordinary course of business
- Unlimited access to employees, books, records, financial documents of
debtor during business hours
- Inspect, copy, any document as to debtor’s business including those
with third parties
- Gain entry into property of debtor for inspection
- Take possession, control and custody to preserve value of assets
- notify counterparties as to contracts debtor decided to confirm
- be notified and attend all board and stockholders meetings of debtor
- submit report to management committee on status and condition of
debtor on actions taken by RR
- recommend termination of proceedings and dissolution of debtor if he
determines that continuance of business no longer feasible
- apply to court for any order or directive he may deem necessary to aid
in exercise of power
- make quarterly reports on status and progress or rehabilitation

Sec. 32. Removal of RR by court motu proprio or by motion of creditor/s holding


more than 50% of total obligations, on grounds under rules of procedure including:
- Incompetence, gross negligence, failure to perform
- Lack of particular specialized competency required
- Illegal acts in performance of duty
- Lack of qualification/presence of disqualification
- Conflict of interest after appointment
- Manifest lack of independence detrimental to stakeholders

[Rule 2, Sec. 27. Removal of RR (in addition)


- Failure without just cause to perform any of his functions]

Sec. 36. Upon motion of any interested party, court may direct RR to assume powers
of management of debtor or appoint a management committee, upon evidence of
any of the following:
- actual or imminent danger or dissipation of properties
- paralyzation of business operations; or
- gross mismanagement of debtor or fraud or other wrongful conduct
or gross violation of FRIA by existing management, owner, partner,
director, officer or representative

[Rule 2, Sec. 33. Role of Management Committee


- investigate acts , conduct, properties, liabilities and financial condition
of debtor
- examine under oath directors and officers, other witnesses
- report to court problems, fraud, misconduct, mismanagement,
irregularities
- employ persons necessary to perform its function
- report to court any material adverse change in the business
- evaluate existing equity, capital, assets and liabilities, earnings and
operations
- determine and recommend to court best way to salvage interest of
creditors, stockholders and public
- prohibit and report to court conveyance, etc. of debtor’s property
outside of ordinary course of business
- prohibit and report to court payments outside of ordinary course of
business
- unlimited access to employees, premises, documents during office
hours
- inspect, copy, etc. documents pertaining to business of debtor
- enter property owned by debtor for inspection
- inform court of any material change affecting entity’s ability to meet
obligations
- take steps to modify, nullify transactions detrimental or prejudicial to
interest of debtor
- recommend termination of proceedings and dissolution of
continuance will no longer work to the bets interest of stakeholders
- apply to the court for any order or directive to aid in performance of
functions
- other powers conferred by court
-
- Sec. 34. Composition of Management Committee
- First member nominated by debtor
- Second member by creditor/s holding more than 50% of total
obligations
- Third member by first and second member within ten 10 days from
appointment
- If each fail to appoint, to be appointed by court
- In case decision to appoint management committee is due to gross
mismanagement of debtor/existing management, court shall appoint
first member]

Sec. 40. Cannot be appointed RR, member of management committee, or employed


by RR or management committee if he has conflict of interest. Shall include:
- creditor, owner, partner or stockholder of debtor
- competitor of debtor
- within five (5) years from petition, director, officer, owner, partner or
employee of debtor or creditor, or auditor or accountant of debtor
- within two (2) years, underwriter of outstanding securities of debtor
- related by consanguinity or affinity to fourth degree to any creditor,
owner, partner, stockholder, director, officer, employee or
underwriter
- has direct or indirect material interest in debtor or any creditor
Disclose conflict of interest to court; party adversely affected may waive or court
may disregard conflict taking into account general interest of stakeholders

[Rule 2, Sec. 23. Disclose conflict of interest by nominees for RR before name
submitted for appointment, by RR within 15 days from appointment or within 10
days from learning of conflict
-same rule for persons who assists RR or management committee as professionals,
experts or employees; to file within 10 days from date contracted]

Sec. 41. Immunity from suit of RR, management committee and those persons
employed by them or any or omission done in good faith or approved by court

Sec. 42. After the creditors’ meeting under Sec. 63, creditors belonging to a class
may formally organize a CC; may agree to form committee with representatives
from: (a) secured creditors; (b) unsecured creditors; (c) trade creditors and suppliers;
(d) employees of debtor. RR shall attend and assist in election of representatives.

[Rule 2, Sec. 39. Organization of CC


- After petition is given due course, court shall order RR to call meeting
the debtor and all classes of creditors at least 2 weeks but not more
than 4 weeks from date of order, to consider organization of CC; order
to designate day, hour and lace, published as often as court prescribes
but no less than 2 consecutive weeks
- CC may be organized if the creditors, representing at least majority of
all claims in registry vote for it

Sec. 40 Election of Representatives to CC


- Each class shall be entitled to elect representatives to CC
- - Each creditor shall vote based on proportion of his claim to the total
claims of class as determined by RR based on registry (determination
binding only for voting)
- Voting by proxy, mail, email allowed

Sec. 41. Election of Chairman of CC


- Representatives of class 1 vote each, resolve tie by lots
- Chairman responsible for convening committee whenever necessary]

Sec. 43. CC shall be primary liaison between RR and creditors. It cannot exercise or
waive any right of any creditor unless specifically authorized in writing by such
creditor.
- If already constituted, shall be notified of actions in rehabilitation
proceedings, otherwise individual creditors to be informed
- members of CC entitled to reasonable compensation which is
administrative expense

[Rule 2, Sec. 43
- RR shall determine class to which each creditor belongs; challenge class first to RR
within 5 days then court within 5 days; decision of court final and executory but only
as to classification, not on nature of claim]

(D) Determination of Claims

Sec. 44. Preliminary registry of claims to be established RR within twenty (20) days
from assumption into office; available for public inspection. All claims should be
supported by evidence.

[Rule 2, Sec. 44 – RR to publish place/s and date/s of inspection in newspaper of


general circulation once every week for 2 consecutive weeks; period of inspection
shall not exceed 15 days from last publication]

Sec. 45. Within thirty (30) days from expiration of twenty (20) day period above,
interested parties may submit a challenge to claim/s, serving copy on RR and on
creditor claiming. After the thirty (30) day period, RR shall submit the registry of
claims which shall include undisputed claims not subject to challenge.

[Rule 2, Sec. 45 – After period to challenge, registry of claims shall include: (1) claims
not challenged, (2) claims resolved by RR after challenge, (3) disputed but unresolved
claims]

Sec. 46. Any decision of RR re claims may be appealed to the court.

[Rule 2, Sec. 46 – Review of decision of RR on claim by filing motion within 5 days


from RR’s decision]

(E) Governance

Sec. 47. Unless otherwise provided herein, management of juridical debtor shall
remain with existing management, subject to the applicable law on election of
directors, managers or managing partner. However, all disbursements, disposals,
and other acts affecting title or interest to property shall be subject to approval of
the RR and/or court.

(F) Use, Preservation and Disposal of Assets and Treatment of Assets and
Claims after CD

Sec. 48. Unless otherwise provided, no disposal of funds or property except in


ordinary course of business or to finance administrative expenses.
Sec. 49. Sale of Assets - Court may authorize sale of unencumbered assets
outside of ordinary course of business if perishable, costly to maintain,
susceptible to devaluation or otherwise in jeopardy.

[Rule 48, Sec. 48 – Application by motion of RR served on debtor and creditors or


CC ensuring receipt at least 3 days before hearing unless court sets shorter notice.
- If court grants, order to specify cause for necessity; sale either by
public auction or private sale
- Itemized statement of property sold, name of purchaser and price to
be filed with court on completion of sale
- RR shall execute instrument to transfer property to purchaser]

Sec. 50. Sale of Encumbered Property of Debtor and Assets of Third Parties Held
by Debtor - Court may authorize disposal of debtor’s property or property of
third person held by debtor, where there is a security interest of a third person
under a financial, credit or similar transaction, if:

(a) the disposal if necessary for continued operation of debtor’s business; and
(b) debtor has made arrangements for a substitute lien with equal level of
security

Under same conditions, debtor may sell property which it is authorized to sell as
trust receipt or consignment arrangements.

No criminal liability for disposals under this section.

[Rule 2, Sec. 49
- in sale of encumbered property or property of third persons held by debtor with
security interest of third person, affected owner or secured creditor’s consent
should be given
- not necessary for property under trust receipt or consignment since already
have authority to sell
- application by motion served to debtor and owner/s creditors or CC to be
received at least 3 days before unless shorter notice set by court
- comment on motion by non-extendible period of 3 days from receipt of motion
court to resolve motion within 5 days from hearing
- court to specify if public auction or private sale
- itemized statement of property sold upon completion
- RR to execute instrument to transfer property]

Sec. 51. Assets of Debtor Held By Third Parties – In case of possessory pledges,
mechanic’s liens or similar claims, third parties who possess debtor’s assets need
RR approval for disposal. RR may also:
- demand surrender of property to RR, subject to payment of claims
secured by the lien
- allow third party to retain possession to preserve or increase value of
property or total value of debtor’s assets
- after notice, hearing and approval, dispose as may be beneficial for
rehabilitation

Sec. 52. Court may rescind sale of property not in ordinary course of business;
but unencumbered property may be disposed of upon order of court, after
notice and hearing if:
- in the interest of administering debtor and
preparation/implementation of RP
- to substitute a lien, mortgage or pledge of property under FRIA
- to meet administrative expenses
- payment of victims of quasi-delict, if covered by debtor’s insurance
- for payment to repurchase property of debtor auctioned off under
FRIA
- for payment to reclaim property of debtor pursuant to possessory lien

[Rule 2, Sec. 51 – sale/disposition not in ordinary course of business made for the
above purposes may not be nullified under this section]

Sec. 53. Reasonable steps should be taken by RR to prevent depreciation of


property held by debtor that is subject to potentially rapid obsolescence,
depreciation or diminution in value. If depreciation cannot be avoided, and is
jeopardizing the security or property interest of secured creditor or owner, the
court shall:
-allow unencumbered property to be foreclosed by secured creditor; proceeds of
sale distributed under rules of concurrence and preference of credits
- order conveyance of a lien or ownership interest in substitute property of
debtor to the secured creditor
- order conveyance to secured creditor of a lien on residual funds from sale of
encumbered property
- or allow sale or disposition of property

Sec. 54. Rate of interest on secured and unsecured claims after commencement
shall be provided for in RP

Sec. 55. With court approval, recommended by RR, the debtor may enter into
credit arrangements, secured or not, incur obligations essential for
rehabilitation. Payment of these obligations is administrative expense.

[Rule 2, Sec. 54. New credit arrangements exclude restructuring of obligations]

Sec. 56. Compensation for employees to carry on business – administrative


expense; separation pay for work prior to commencement – pre-commencement
claim; claims for salary and separation pay for work after CD – administrative
expense

Sec. 57. Unless cancelled by final judgment, all contracts of debtor shall continue
in effect; 90 days after commencement, debtor shall notify each counterparty if
it is confirming the contract; contract obligations during 90 days, and after for
confirmed contracts, are administrative expense; contracts not confirmed
deemed terminated; claims for actual damages due to termination are pre-
commencement claims

(G) Avoidance Proceedings

Sec. 58. Transactions before commencement date may be rescinded or declared null
and void on ground that executed with intent to defraud creditor/s or under
preference of creditors; disputable presumption of such if:
- unreasonably inadequate consideration to debtor and within ninety (90) days
before commencement date
- accelerated payment to creditor within same period
- provides security/additional security within same period
- creditor obtained more than pro rata share in assets of debtor already insolvent
- effect to put assets beyond reach of creditors or prejudice their interest
Civil Code on rescission shall apply.

Sec. 59. Action for Rescission or Nullity


- RR may initiate and prosecute action in Sec. 58. If RR does not consent:
- If leave is granted, RR can transfer right in action to creditor
- Any benefit derived from proceeding, shall be creditor’s to extent of claim;
remainder to the estate
- If RR signifies readiness to institute for the benefit of creditors, order shall fix
the time for doing so; benefit derived shall be estate’s

(H) Treatment of Secured Creditors

Sec. 60. The issuance of Commencement Order, Stay or Suspension Order shall
not diminish or impair security or lien of secured creditor, except right to enforce
may be suspended during term of Stay Order.

Court may, on RR recommendation, allow secured creditor to foreclose on


property securing, if property is not necessary for rehabilitation. Creditor to be
admitted in proceedings only for balance of claim.

Sec. 61. Lack of Adequate Protection. Court may terminate, modify or set
conditions for continuance of suspension of payment; or relieve a claim from its
coverage; upon showing that: (a) creditor does not have adequate protection
over property securing its claim; (b) value of a claim exceeds fair market value of
property (not necessary for rehabilitation).

Lack of adequate protection means:


(a) debtor fails to honor pre-existing agreement to keep property insured
(b) debtor fails to take commercially reasonable steps to maintain property
(c) property depreciated to extent that creditor is under secured
If lack of protection, court shall order debtor or RR to provide insurance or
maintenance, make payments or provide additional/replacement security.
If not feasible, court may modify Stay Order to allow adequate protection to
enforce claim. Remedies under this paragraph may be denied if property is
required for rehabilitation.

(I) Administration Proceedings

Sec. 62. Contents of RP


- underlying assumptions, financial goals, procedure to attain
- compare amount to be received by creditors under RP and liquidation
within one hundred twenty (120) days
- information for classes of creditors to determine if in their financial
interest to support RP, e.g., reduction of principal interest and
penalties
- establish classes of voting creditors, subclass of voting creditors if
prior approval granted
- how debtor will be rehabilitated, e.g., debt forgiveness, debt
rescheduling, reorganization or quasi-reorganization, dacion en pago,
dent-equity conversion, sale of business as going concern, setting up
of new business
- specify treatment of each class, subclass
- provide for equal treatment of all claims in same class or subclass,
unless particular creditor agrees to less favorable treatment
- ensure compliance with concurrence and preference of credits in Civil
Code, other laws
- maintain security interest of secured creditors and preserve
liquidation value of the security unless waived
- disclose all payments for pre-commencement debts during
proceedings, justification
- describe disputed claim and provisioning of payment if found valid
- identify debtor’s role in implementation
- state rehabilitation covenants of debtor; breach will be material
breach of RP
- identify management of debtor and implementation of RP, affiliation
and remuneration
- address treatment of claims after confirmation of RP
- require debtor and counterparties to adhere to confirmed contracts
- arrange for payment of all administrative expenses as condition to
RP’s approval, unless waived in writing by creditors concerned
- arrange for payment of all taxes and assessments or
adjust/compromise amount with BIR
- [Rule 2, Sec 60. Include certified copy of certificate of tax clearance or
evidence of compromise settlement]
- include resolution to increase shares where RP contemplates issuance
of additional shares
- state compensation and status of RR after approval of RP
- provisions for conciliation/mediation in case of disagreement on
interpretation and implementation of RP

[Rule 2, Sec. 61 – include relevant foreign ownership limits or information


- include material financial undertakings to support RP
- provisions for monitoring implementation of RP including reports
manner of implementation
- other relevant information to enable reasonable investor to make informed
decision on feasibility of RP]

Sec. 63. If due course given to petition, RR to confer with debtor and all classes of
creditors and may consider their views in review, revision and preparation of RP.

Sec. 64. RR to notify creditors once RP ready for examination, then convene creditors
within twenty (20) days.
- RP deemed rejected unless approved by all creditor classes adversely
affected.
- Approved by class if creditor holding more than 50% of total claims
for the class vote in favor

[Rule 2, Sec 62 – voting may be by proxy, mail or email received before meeting
- RR to inform court of approval or rejection of RP within 5 days from voting]

Notwithstanding rejection by creditors, court may confirm RP if:

- RP complies with requirements under FRIA;


- RR recommends confirmation of RP;
- Shareholders, owners or partners of debtor lose at least controlling
interest due to RP;
- Objecting creditors to have compensation with net present value
greater than in liquidation

[Rule 2, Sec. 62 - Confirmation in spite of rejection may be motu proprio or by motion


within 10 days from notice of rejection]

Sec. 65. If RP approved, RR shall submit it to court or confirmation; Within five (5)
days, court shall inform creditor that RP submitted for confirmation and any creditor
may file an objection

Sec. 66. Filing of Objections to RP within twenty (20) days from court notice; limited
to the following:

- creditors support induced by fraud


- documents/data relied upon in RP are materially false/misleading
- RP is in fact not supported by voting creditors
[Rule 2, Sec. 65 – Hearing on objections within 10 days from expiration of period to
file objections]

Sec. 67. If objections submitted, set hearing/s. If court finds merit, order RP or other
party to cue defect. If debtor in bad faith or not possible to cure defect, convert to
liquidation.

Sec. 68. Court shall confirm RP if:


- no objections within period
- objections lack merit
- basis of objection cured
- debtor complied with order to cure objection
May confirm RP notwithstanding unresolved disputes over claims, if there is
adequate provision for payment.

Court may approve or implement RP in spite of objection from owners, partners,


stockholders of insolvent debtor if terms are necessary to restore financial well-
being of debtor.

Sec. 69. Effect of Confirmation of RP


- RP shall be binding on all, whether or not participated or claims scheduled
- Debtor to comply with provisions of RP
- Payments to creditors in accordance with RP
- Contract and other arrangements shall continue to apply insofar as do not
conflict with RP
- Compromise on amounts, rescheduling of timing of payments are binding,
whether or not RP successfully implemented
- Claims after approval of RP not treated in RP are not subject to Suspension
Order

Order confirming shall comply with Rule 36 of Rules of Court (Judgments, Final
Order, Entry).

Court may retain jurisdiction to resolve contested claims and allegations of breach of
RP by debtor.

Sec. 70. Liability for general partners for unpaid balances remain, in spite of approval
of RP.

Sec. 71. Amounts reduced or forgiven not subject to tax.

Sec. 72. Maximum period to confirm RP is one (1) year from filing of petition. If not
confirmed, may convert to liquidation.

Sec. 73. Upon confirmation of RP, RR shall provide final report and accounting to
court. Unless RR has role in RP after approval, RR shall be discharged.
(J) Termination of Proceedings

Sec. 74. Terminated by order of court declaring either successful implementation of


RP or failure of rehabilitation. [Rule 2, Sec. 73, By motion of RR or any interested
party]

Failure of rehabilitation in the following:


- dismissal of petition
- debtor fails to submit RP
- Under RP, no substantial likelihood of rehabilitation
- Approved RP but fail to realize objectives, targets, goals, including timelines and
conditions for settlement of obligation
- Fraud in securing approval of RP
- Analogous circumstances

[Rule 2, Sec. 73
- RP not confirmed by court
- Determination that RP may no longer be implemented
- In connection with Sec. 65, Failure to cure defect, or debtor acted in
bad faith, or not feasible to cure defect
- Failure of debtor to comply with these Rules, Rules of Court or any
order of the court]

Upon breach or failure of RP, court may


- Issue order to cure breach with specific period, failing which convert to
liquidation
- Allow debtor or RR to submit amended RP which will be governed by same
requirements for approval
- Issue any other order to remedy breach
- Enforce applicable provisions of RP through writ of execution

Sec. 75. Effects of Termination


- discharge of RR, subject to final accounting
- lifting of Stay Order and any other court order holding enforcement of claims in
abeyance

If termination is due to failure of rehabilitation or dismissal of petition, proceedings


shall be immediately converted to liquidation.