Financial Rehabilitation & Insolvency Act (RA No. 10142) Flashcards
Nature of Proceedings
(3)
- In rem–binds the whole world.
- Jurisdiction over all persons affected.
- Proceedings shall be summary and non-adversarial.
Purpose
- To encourage debtors and creditors to collectively and realistically resolve and adjust competing claims and property rights through rehabilitation.
- If not feasible, to facilitate speedy and orderly liquidation of debtor’s assets and the settlement of their obligations.
Debtors
Insolvent
- Sole proprietorship registered with the DTI;
- Partnership registered with the SEC
- Corporations organized and existing under the laws of the Philippines; (SEC)
- Individual debtors which are natural persons who are residents and citizens of the Philippines
Group of Debtors
- Financially related Corporations
- Partnerships - more than 50% of which is owned by the same person
- Single Proprietorships - owned by the same individual
Excluded Debtors: Banks, pre-need companies, insurance companies, and go
Pre-negotiated Rehabilitation
*2/3 of total creditors
*1/2 of secured creditors
*1/2 of unsecured creditors
Period: 120 days from filing, deemed approved if not acted upon
Insolvent
Shall refer to the financial condition of a debtor that is generally
- Unable to pay its or his liabilities as they fall due (technical insolvency)
- has liabilities greater than its or his assets (actual insolvency)
Creditors
include natural of juridical persons which has a claim against the debtor that arose on or before commencement date, which can either be secured or unsecured
- Unsecured creditors are those whose claim or a portion thereof is neither secured, preferred nor subordinated.
- Secured creditors are those whose claims are secured by a lien (either by law, agreement, or by judicial judgment) which legally entitles a creditor to resort the property subject of a lien for payment of his claim.
What is Claim?
It shall refer to all claims or demands of whatever nature or character against the debotr 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.
This inclusion does not, however, prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities.
What are the Proceedings Covered by the PRIA?
- Rehabilitation - voluntary or involuntary
- Pre-negotiated rehabilitation
- Liquidation - voluntary or involuntary
- Suspension of payments
- Out-of-court Rehabilitation
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.
covers only INDIVIDUAL DEBTORS
SUSPENSION OF PAYMENTS
Features of Suspension of Payments
(4)
- the debtor has sufficient properties to cover all his debts but he foresees the impossibility of meeting his debts when they respectively fall due. (technical insolvency)
- The purpose is to suspend or delay the payments of debts.
- The amount of indebtedness is not affected (not reduced or discharged)
- The number of creditors is immaterial.
Exceptions in collection of claims during Suspension of payments:
- Those creditors having claims for:
a. Personal labor
b. Maintenance
c. Expense of last illness and funeral of the spouse or children of the debtor
If incurred in the 60 days immediately prior to the filing of the petition - Secured creditors
The suspension order shall lapse when 3 months shall have passed without the proposed agreement being accepted by the creditors or as soon as such agreement is denied.
PROHIBITED ACTS OF THE DEBTOR:
Suspension of Payments
After filing and during pendency, the debtor cannot:
- Sell, transfer, encumber or dispose in any manner his property, except those used in the ordinary operations of commerce or industry in which the petitioning individual is engaged
- Making any payment outside of the necessary or legitimate expenses of his business or industry
CREDITORS’ MEETING:
Suspension of Payments
The debtor shall attach to his petition a proposed agreement with creditors, which shall be approved in a creditors’ meeting.
- Quorum: presence of creditors holding at least 3/5 of the liabilities of the debtor.
- Approval: double majority is required:a. 2/3 of the creditors voting; andb. Claims of the majority vote amount to at least 3/5 of the total liabilitiesA creditor whose claim is incurred within 90 days prior to the filing of the petition for suspension is not entitled to vote.Creditors not affected by the suspension order may refrain from attending the meeting and voting therein and he shall not be bound by any agreement determined in the meeting. However, if they should join in the voting they shall be bound in the same manner as are other creditors.
- Disapproval – the proceedings shall be terminated and the creditors shall be at liberty to enforce their rights.
It is the restoration of the debtor to a condition of successful operation and solvency. If it 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.
Rehabilitation
It is initiated by the debtor, upon showing that:
- The debtor is insolvent; and
- The viability of rehabilitation
Who will file?
Sole proprietorship - Owner/Proprietor
Partnership - Majority of partners
Corporation - Majority of the directors or trustees; AND Stockholders representing 2/3 of outstanding capital/members of non-stock corporation
Voluntary Rehabilitation
It is initiated by the creditor or group of creditors, if there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that
- No payments on the due and demandable debts have been made for at least 60 days; or
- That the debtor has failed generally to meet its liabilities as they fall due; or
- A creditor, other than 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.
Who will file?
Creditors with claims or aggregate of whose claim is at least P1M or 25% of the subscribed capital stock or partners’ contributions, whichever is higher.
Involuntary Rehabilitation
WHO WILL MANAGE THE BUSINESS OF THE DEBTOR:
Rehabilitation
During the rehabilitation proceeding, the management shall be done by the:
- Existing Board and/or management; or
- Upon motion, the court may appoint:
a. Rehabilitation Receiver; or
b. Management Committee
Qualifications of a Rehabilitation Receiver
(4)
- Citizen of the Philippines
- Resident of the Philippines in the 6 months immediately preceding the nomination
- Has the requisite knowledge of insolvency and commercial laws
- No conflict of interest
Rehabilitation Plan
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:
1. Debt forgiveness;
2. Debt rescheduling;
3. Reorganization or quasi-reorganization;
4. Dacion en pago;
5. Debt-equity conversion; and
6. Sale of the business (or parts of it) as a going concern; or
7. Setting up of new business entity; or
8. Other similar arrangements,
As may be approved by the court or creditors.
Approval required for the Rehabilitation Plan
- Creditors representing more than 50% of total claims and the confirmation of the court; or
- The court even without approval of the creditors or even over the objections of the creditors, in the following cases:
a. The Rehabilitation Plan complies with the requirements of the FRIA;
b. The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
c. The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the Rehabilitation Plan; and
d. The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a net present value greater than that which they would have received if the debtor were under liquidation.
Period of Confirmation
Rehabilitation Plan
Must be within 1 year from the date of filing the petition.
If no plan is confirmed within the said period
It will be converted into one for the liquidation of the debtor.
What are the acts of insolvency?
(a) That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors;
(b) That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent;
(c) That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
(d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
(e) That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying the liquidation or of defrauding any creditors or claimant;
(g) That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
(h) That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;
(i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;
(k) That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days;
(l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary; and
(m)That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment
CONVERSION BY THE COURT INTO LIQUIDATION PROCEEDINGS
During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation proceedings, in the following cases:
- When a petition for rehabilitation is filed and it is established that the debtor is indeed insolvent but there is no substantial likelihood for the debtor to be successfully rehabilitated.
- If no rehabilitation plan is confirmed within a period of 1 year from the filing of the petition for rehabilitation.
- Failure of rehabilitation or dismissal of the petition for rehabilitation on technical grounds; or
- Upon filing of the verified motion of the debtor during the pendency of the court-supervised or pre-negotiated rehabilitation proceedings.
LIQUIDATION ORDER: includes, among others:
- (a)declare the debtor insolvent;
- (b)order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
- (c)order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution;
- (d)order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks;
- (e)direct payments of any claims and conveyance of any property due the debtor to the liquidator;
- (f)prohibit payments by the debtor and the transfer of any property by the debtor;
- (g)direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;
- (h)authorize the payment of administrative expenses as they become due;
- (i)state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and
- (j)set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication
Election of Liquidator:
Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, will be allowed to vote in the election of the liquidator.
A secured creditor will not be allowed to vote, unless:
- he waives his security or lien; or
- has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim.
The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of amount of claims, and who is qualified shall be appointed as the liquidator.
A rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, may also be appointed as a liquidator.
TRUE
THE LIQUIDATION PLAN
Within three (3) months from his assumption into office, the Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a minimum enumerate:
- All the assets of the debtor
- A schedule of liquidation of the assets and
- Payment of the claims.
The liquidator may sell the unencumbered assets of the debtor and convert the same into money.
Exemptions to public auction rule
A private sale may be allowed with the approval of the court if;
- the goods to be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or maintain; or
- the private sale is for the best interest of the debtor and his creditors.
With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his claim or part thereof.
