FRIA Law

REPUBLIC ACT No. 10142 AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF FINANCIALLY DISTRESSED ENTERPRISES AND INDIVIDUALS The "Financial Rehabilitation and Insolvency Act (FRIA) of 2010" AND THE FINANCIAL REHABILITATION RULES OF PROCEDURE (AM NO. 12-12-11-SC) ***©LP IGNACIO*** SALIENT FEATURES & CASES Corporate rehabilitation in general Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency ( New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, GR No. 165001, 31 January 2007; Metrobank v. ASB Holdings, Inc., GR No. 166197, 27 Feb. 2007). A rehabilitation case is commercial in nature that should be resolved expeditiously for the benefit of all parties concerned and the economy in general (ibid.) “Rehabilitation” contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency (Ruby Industrial Corp. V. CA, 284 SCRA 445 [1998]); also PNB v. CA, 576 SCRA 537, 20 January 2009) Declaration of Policy under the FRIA The State encourages debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. (Sec. 2, FRIA) Construction of the FRIA Rules (F-Rules) (AM No. 12-12-11-SC) The F-Rules shall be liberally construed to promote a timely, fair, transparent, effective, and efficient rehabilitation of debtors, in accordance with the declared policy of the FRIA (Sec. 3, Rule 1, F-Rules). Nature of Proceedings The proceedings under FRIA shall be in rem in nature and shall be conducted in a summary and nonadversarial matter. It covers all persons affected upon publication in a newspaper of general circulation (Sec. 3, FRIA). Jurisdiction over all persons affected by the proceedings is acquired upon publication of the notice of the commencement of the proceedings and the commencement order or any similar order of the proceedings in one (1) newspaper of general circulation in the Philippines for two (2) consecutive weeks. The proceedings shall be summary and non-adversarial in nature (Sec. 4, Rule 1, F-Rules). “In rem” – A technical term used to designate proceedings or actions instituted against the thing, in contradistinction to personal actions, which are said to be in personam (Black’s Law Dictionary, 6th ed). Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate adjudication of claims that must be threshed out in ordinary court proceedings (Advent Capital and Finance Corp. v. Alcantara, 665 SCRA 224, 25 January 2012). A rehabilitation case is commercial in nature that should be resolved expeditiously for the benefit of all parties concerned and the economy in general (New Frontier Sugar Corp. v. RTC, Branch 39, Iloilo City, GR No. 165001, 31 January 2007; Metrobank v. ASB Holdings, Inc., GR No. 166197, 27 Feb. 2007). Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the United States, have equitable and rehabilitative purposes. On the one hand, they attempt to provide for the efficient and equitable distribution of an insolvent debtor’s remaining assets to its creditors; and on the other, to provide debtors with a “fresh start” by relieving of the weight of their outstanding debts and permitting them to reorganize their affairs (BPI v. SEC, et al., GR No. 164641, 20 December 2007 citing US cases). Court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor (Pacific Wide Realty and Dev’t. Corp. v. Puerto Azul Land Inc., 605 SCRA 503, 25 November 2009). Notification to foreign creditors (Sec. 7, Rule 1, F-Rules)

FRIA – LPIgnacio 2 Whenever notice is to be given to creditors in the Philippines, such notice shall also be given to the known foreign creditors with no addresses in the Philippines. The court may order that appropriate steps be taken with a view to notifying any foreign creditor whose address is not yet known.

Prohibited pleadings (Sec. 4, Rule 1, F-Rules) The following pleadings are prohibited: (A) motion to dismiss; (B) motion for a bill of particulars; (C) petition for relief; (D) motion for extension; (E) motion for postponement and other motions of similar intent; (F) reply; (G) rejoinder; (H) intervention; and (I) any pleading or motion that is similar to or of like effect as any of the foregoing. (Sec. 4, Rule 1, F-Rules) When motion for extension/postponement is allowed For stated and fully supported compelling reasons, the court may allow the filing of motions for extension or postponement, provided, the same shall be verified and under oath. (Sec. 4, Rule 1, FRules) Any motion/pleading shall be verified Any pleading, motion, or other submission submitted by any interested party shall be supported by verified statements that the affiant has read the submission and its factual allegations are true and correct of his personal knowledge or based on authentic records, and shall contain supporting annexes, which the submitting party shall attest as faithful reproductions of the originals. An unverified submission shall be considered as not filed. An improperly verified submission may be considered as not filed, at the discretion of the judge. Upon motion, the originals of the annexes to a submission may be produced in court for examination or comparison by a party to the proceedings. All pleadings or motions shall be filed in three (3) printed and two (2) digital copies in CD format. Annexes to the pleadings and other submissions shall be in printed form. The court may decide matters on the basis of affidavits, counter-affidavits, and other documentary evidence, conducting clarificatory hearings when necessary. (Sec. 4, Rule 1, F-Rules) Any order is immediately executory Any order issued by the court under the F-Rules is immediately executory. Review of any order of the court shall be in accordance with Rule 6 of the Rules. Provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of the proceedings in a just, equitable, and speedy manner. (Sec. 4, Rule 1, F-Rules) In a case, it was ruled that a motion for new trial or reconsideration is a prohibited pleading (BPI Family Savings Bank, Inc. v. Pryce Gases, Inc., 653 SCRA 42, 29 June 2011). However, Sec. 1, Rule 6, F-Rules provides that a party may file a motion for reconsideration of any order issued by the court prior to the approval of the Rehabilitation Plan. No relief can be extended to the party aggrieved by the court's order on the motion through a special civil action for certiorari under Rule 65 of the Rules of Court. An order issued after the approval of the Rehabilitation Plan can be reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court. Further, an order approving or disapproving a rehabilitation plan can only be reviewed through a petition for certiorari to the Court of Appeals under Rule 65 of the Rules of Court within fifteen (15) days from notice of the decision or order (Sec. 2, Rule 6, F-Rules). Powers of officer/directors of a corporation during rehabilitation There is nothing in the corporate rehabilitation that would ipso facto deprive the Board of Directors and corporate officers of a debtor corporation of control such that it can no longer enforce its right to recover its property from an errant lessee (Umale v. ASB Realty Corp., 652 SCRA 215, 15 June 2011). In Sec. 9, Rule 1, F-Rules, creditors are allowed to decide in accordance with the relevant provisions of the Corporation Code in the case of stock or non-stock corporations or the Civil Code in the case of partnerships.

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Venue (Sec. 6, F-Rules) 1) For a debtor that is a corporation, partnership or sole proprietorship: in the Regional Trial Court which has jurisdiction over the principal office as specified in its articles of incorporation or partnership or in its registration papers with the Department of Trade and Industry (DTI) in cases of sole proprietorship. If located in Metro Manila, in the Regional Trial Court of the city or municipality where the head office is located. 2) For group of debtors: in the Regional Trial Court which has jurisdiction over the principal office of any of the debtors alleged to be insolvent, as specified in its articles of incorporation or partnership, or registration papers with the DTI in cases of sole proprietorship. Coverage, Exclusion and Applicability Coverage The FRIA covers insolvent individual debtor and juridical entities duly organized and existing under Philippine laws, and their affiliates and subsidiaries, sole proprietorship duly registered with the DTI, a partnership duly registered with the SEC (Sec. 4k, FRIA); government financial institutions other than banks and government owned or controlled corporations, unless their specific charter provides otherwise (Sec. 5, FRIA). Exclusion The FRIA does not include within its coverage banks, insurance companies, pre-need companies, and national and local government agencies or units (Sec. 5, FRIA). The FRIA is unavailable to non-resident citizens and aliens/foreigners as it covers only an “individual debtor,” a natural person who is a resident and citizen of the Philippines who becomes insolvent (Sec. 4o, FRIA). Sureties or solidary debtors are excluded. It was ruled that a creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation (Banco de Oro-EPCI, Inc. v. JAPRL Dev’t. Corp., 551 SCRA 342 [2008]). In Section 10c, Rule 1, F-Rules, the suspension or stay order shall not apply to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver. Applicability The FRIA shall apply to pending insolvency, suspension of payments and rehabilitation cases except if not feasible or would work injustice in the opinion of the court (Sec. 146, FRIA; Sec. 2, F-Rules). The FRIA shall apply to all contracts of the debtor regardless of the date of perfection (Sec. 147, FRIA). What is insolvency? It refers 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 (Sec. 4p, FRIA; Sec. 5k, Rule 1, F-Rules). The first insolvency contemplated above is otherwise known as technical insolvency and the second is referred to as actual insolvency (Philippine National Bank v. CA, 576 SCRA 537, 20 January 2009). Remedies under the FRIA There are three remedies under the FRIA: court-supervised rehabilitation (CSR), pre-negotiated rehabilitation (PNR), and out-of-court or informal restructuring agreements or rehabilitation plans (OCRA). A debtor may also choose to directly undergo, or convert any of the aforementioned relief into, liquidation. Court Supervised Rehabilitation (CSR) Initiation of Proceedings Court supervised rehabilitation (CSR) may be initiated by either the insolvent debtor or creditor/s. An insolvent debtor may file a verified petition for CSR with the court. The petition shall establish the insolvency of the debtor and include the schedule of debts, inventory of assets, rehabilitation plan and names of the nominees for rehabilitation receiver (Sec. 12, FRIA).

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A creditor or group of creditors with claims of at least P1.0 million or 25% of the subscribed capital stock or partners’ contributions of the debtor may file a verified petition for CSR. The petition shall include the rehabilitation plan and names of the nominees for rehabilitation receiver (Sec. 13, FRIA). Creditors may initiate a rehabilitation proceedings based on the following grounds: (A) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days; or (B) the debtor has failed generally to meet its liabilities as they fall due; or (C) at least one 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. (Sec. 5, Rule 2, F-Rules) A debtor-initiated rehabilitation is a “voluntary rehabilitation.” A creditor-initiated rehabilitation is an “involuntary rehabilitation.” Administration of the Proceedings Action on the petition If the court finds the petition sufficient in form and substance, it will issue a commencement order within five (5) working days from the filing of the petition. If deficient in form or substance, the court may, in its discretion, a) allow the amendment or supplement of the petition, or b) to submit the necessary documents (Sec. 15, FRIA). The court shall dismiss the petition if the deficiency is not complied within the extended 5-day period (Sec. 7, Rule 2, F-Rules). The issuance of the commencement order signals the start of the rehabilitation proceedings. The commencement order shall, among others (a) appoint a rehabilitation receiver, (b) prohibit the debtor’s suppliers from withholding supply of goods and services, (c) direct all creditors to file their claims, and (d) set the case for initial hearing (Sec. 15, FRIA). The creditors shall file their verified notices of claims with the court at least five (5) days before the initial hearing date, their failure to do so on time will bar them from participating in the rehabilitation proceedings but will not prejudice their right to receive distributions if recommended by the rehabilitation receiver and approved by the Court (Sec. 8M, Rule 1, F-Rules). Effects of the commencement order The effects of the court's issuance of a Commencement Order shall retroact to the date of the filing of the petition (Sec. 9, Rule 1, F-Rules). Issuance of suspension or stay order/effects The commencement order (Sec. 16, FRIA) shall also include a suspension or stay order suspending all actions or proceedings for the enforcement of claims or judgments against the debtor and prohibiting debtor from selling, encumbering or disposing of any of its properties and from making any payment of its liabilities (Sec. 16q). In Section 8V, Rule 1, F-Rules, the Stay or Suspension Order shall: (i) suspend all actions or proceedings in court or otherwise, for the enforcement of all claims against the debtor; (ii) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor; (iii) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and (iv) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein. The suspension order, however shall not apply (Sec. 18, FRIA) to cases on appeal in the Supreme Court at the time of the issuance of the commencement order (Sec. 18a, FRIA); the enforcement of claims against sureties and other persons solidarily liable with the debtor and third party/accommodation mortgagors (Sec. 18c, FRIA); the sale by licensed brokers or dealers of pledged securities pursuant to a securities pledge or margin agreement (Sec. 18e, FRIA); any criminal action against the individual debtor or owner, partner, director or officer of a debtor (Sec. 18g, FRIA). Obligation of issuing bank under a letter of credit is primary and solidary. It is not enjoined by the stay order (MWSS v. Daway, 432 SCRA 559 [2004]). The issuance of stay order cannot suspend foreclosure of accommodation mortgages (Situs Dev. Corp. v. Asiatrust Bank, 688 SCRA 621, 16 January 2013).

FRIA – LPIgnacio 5 The issuance of a stay order does not affect the right to commence actions or proceedings in order to preserve ad cautelam a claim against the debtor and to toll the running of the prescriptive period to file the claim (Sec. 8, last par., Rule 2, F-Rules). During rehabilitation, the only payments sanctioned by the Interim Rules are those made to creditors in accordance with the provisions of the plan (Express Investments III v. Bayantel, 687 SCRA 50, 05 December 2012). The Commencement Order and the Stay or Suspension Order on the suspension of rights to foreclose or otherwise pursue legal remedies shall apply to government financial institutions, notwithstanding provisions in their charters or other laws to the contrary (Sec. 20, FRIA). Parri Passu Principle - During rehabilitation, the assets of the distressed corporation are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another. All creditors should stand on equal footing. - Both secured and unsecured creditors shall suffer a write-off of penalties and default interest and the escalating interest rates shall equally be imposed on them. - The commitment embodied in the parri passu principle only goes so far as to ensure that the assets of the distressed corporation are held in trust for the equal benefit of all creditors. (Express Investments III Private Ltd. and Export Dev't. Canada v. Bayantel, Inc., 687 SCRA 50, 05 December 2012) Treatment of contracts All contracts not confirmed in writing by the debtor within ninety (90) days following the issuance of the commencement order shall be considered automatically terminated (Sections 8U & 56, Rule 1, F-Rules). Rulings on what is a claim that maybe included in the stay order A claim shall include all claims or demand of whatever nature or character against a debtor or its property, whether of money or otherwise (Philippine Airlines, Inc. v. CA, 576 SCRA, 20 January 2009). The definition is all-encompassing as it refers to all actions whether for money or otherwise. There are no distinctions or exemptions (Sps. Sobrejuanite v. ASB Development Corp., 471 SCRA 763, 30 September 2005; PAL v. Zamora, GR No. 166996, 06 February 2007). All actions for claims against a corporation pending before any court, tribunal or board shall ipso facto be suspended in whatever stage such actions may be found (Pacific Wide Realty and Dev’t. Corp. v. Puerto Azul Land Inc., 605 SCRA 503, 25 November 2009). What are automatically stayed or suspended are the proceedings of an action or suit and not just the payment of claims—the actions that are suspended cover all claims against a distressed corporation whether for damages founded on a breach of contract of carriage, labor cases, collection suits or any other claims or a pecuniary nature (Malayan Insurance Company, Inc. v. Victorias Milling Co., Inc., 585 SCRA 45, 17 April 2009). The date when the claim arose, or when the action is filed, is of no moment—as long as the corporation is under a management committee or a rehabilitation receiver, all actions for claims against it must yield to the greater imperative or corporate rehabilitation, excepting only claims for payment of obligations incurred by the corporation in the ordinary course of business (Malayan Insurance Company, Inc. v. Victorias Milling Co., Inc., 585 SCRA 45, 17 April 2009). Enforcement of writs of execution issued by judicial or quasi-judicial tribunals, since such writs emanate from “actions for claims,” likewise, be suspended (Malayan Insurance Company, Inc. v. Victorias Milling Co., Inc., 585 SCRA 45, 17 April 2009). The automatic suspension of an action for claims against a corporation under a rehabilitation receiver or management committee embraces all phases of the suit, that is, the entire proceedings of an action or suit and not just the payment of claims during the execution stage after the case had become final and executory (Castillo v. Uniwide, 619 SCRA 641, 30 April 2010 Garcia, et al. vs. Philippine Airlines, Inc., G.R. No. 164856, August 29, 2007). Even if the relationship is one of trust, there is no provisions in the Interim Rules that a claim arising from a trust relationship is excluded from the Stay Order—the stay order is effective on all creditors of the corporation without distinction, ether secured or unsecured (Abrera v. Barza, 599 SCRA 534, 11 September 2009). Even ejectment proceedings are suspended (Tyson v. CA, 461 SCRA 469). "Claims" that are not suspended

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The suspension of “all claims” as an incident to corporate rehabilitation does NOT contemplate the suspension of criminal charges filed against the corporate officers of the distressed corporation (Jose Marcel Panlilio, et al., vs. RTC Branch 51, Manila, GR No. 173846, 02 February 2011; Rosario v. Co., GR No. 133608, 563 SCRA 239, 26 August 2008). Criminal actions against the individual officer of a corporation are not subject to the Stay or Suspension Order in rehabilitation proceedings (Sec. 18, FRIA). BP 22 case is not a "claim." The filing of a case for BP 22 is not a "claim" that can be enjoined within the purview of PD 902-A on stay order. True, although conviction of the accused for the alleged crime could result in the restitution, reparation or indemnification of the private offended party for the damage or injury he sustained by reason of the felonious act of the accused, nevertheless, prosecution for violation of BP 22 is a criminal action, the purpose of which is to punish the mere issuance of a bad check, rather than for its non-payment (Rosario v. Co., 563 SCRA 239 [2008]). Suspension of all actions for claims against corporations pertains to those who stand in the category of debtors and creditors. Unit buyers in a condominium are not in the same category. Section 24 of the interim rules limits the coverage of the Rules on rehabilitation and consequently the rule of suspension of action to those who stand in the category or debtors and creditors; the relationship between the petitioner banks, as mortgagor of the ASB property, on one hand, and respondents SLGT and Dylanco, as unit buyers, on the other, cannot be that of a debtor-creditor as to bring the case within the purview of the rules on corporate recovery, let alone the Sobrejuanite case; then, too, the vinculum that binds SLGT/Dylanco, as unit buyers and as suitors before the HLURB, and ASB is far from being akin to that of debtor-creditor; as it were, SLGT/Dylanco sued ASB for having constituted, in breach of PD 957, a mortgage on the condominium project without prior HLURB approval and so much as notifying them of the loan release for which reason they prayed for the delivery of their units free from all liens and encumbrances; with the view we take of the case, the complaint of individual respondents is not in the nature of “claims” that should be covered by the suspensive effect of a rehabilitation proceeding (Metrobank vs. SLGT Holdings, Inc., et al., G.R. Nos. 175181-82, Sept 14, 2007). The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud (Banco de Oro-EPCI, Inc. v. JAPRL Dev’t. Corp., 551 SCRA 342 [2008]). There is nothing in the corporate rehabilitation that would ipso facto deprive the Board of Directors and corporate officers of a debtor corporation of control such that it can no longer enforce its right to recover its property from an errant lessee (Umale v. ASB Realty Corp., 652 SCRA 215, 15 June 2011). Effectivity and duration of suspension/stay order Unless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated (Sec. 21, FRIA) unless (a) earlier lifted by the court, (b) the rehabilitation plan is seasonably confirmed or approved, or (c) the rehabilitation proceedings are ordered terminated by the court pursuant to Section 73 of the F-Rules (Sec. 11, Rule 2, F-Rules). The issuance of the commencement order or stay/suspension order shall not diminish or impair the security of the secured creditors, except that the stay order may suspend their rights to enforce their security (Sec. 60, FRIA). The court, however, may allow the secured creditor to enforce his security or foreclose on the property of the debtor constituting the security if said security or property is not necessary for rehabilitation (Sec. 60, FRIA). The stay order simply suspends all actions for claims against a corporation undergoing rehabilitation -- it does not work to oust a court of its jurisdiction over a case properly filed before it (de Castro v. Liberty Broadcasting network, Inc., GR No. 165153, 25 August 2010, 629 SCRA 77). Notice of claim (Sec. 12, Rule 1, F-Rules) Every creditor of the debtor or any interested party whose claim is not yet listed in the schedule of debts and liabilities shall file his verified notice of claim not later than five (5) days before the first initial hearing date fixed in the Commencement Order. If a creditor files a belated claim, he shall not be entitled to participate in the proceedings but shall be entitled to receive distributions arising therefrom if recommended and approved by the rehabilitation receiver, and approved by the court.

Modification of suspension of payments

FRIA – LPIgnacio 7 The court, on motion or motu proprio, may modify or terminate, or set conditions, for the continuance of suspension of payment, or relieve a claim from coverage, if it is proven that a creditor does not have adequate protection over the property securing its claim (Sec. 61a, FRIA) or that the value of the claim secured by the debtor’s property (which is not necessary for rehabilitation) exceeds the fair market value of the said property (Sec. 61b, FRIA). Initial hearing The initial hearing shall be set at a date no later than forty (40) days from the date of the filing of the petition (Sec. 8Q, Rule 1, F-Rules). At the initial hearing, the court shall determine compliance with the jurisdictional requirements; i.e. filing of a publisher's affidavit showing that the publication requirements and a petitioner's affidavit showing that the service requirement for local creditors and notification requirement for foreign creditors had been complied with, as required in the commencement order (Sec. 13, Rule 2, F-Rules) Thereafter, the court shall determine which creditors timely filed their claims and hear any objection to the appointed rehabilitation receiver or to the rehabilitation plan (Sec. 22, FRIA). A creditor who failed to file its claim shall not be entitled to participate in the rehabilitation proceedings, but shall be entitled to receive distributions therefrom (Sec. 23,FRIA). Additional hearings The court may hold additional hearings as may be necessary to continue the initial hearing process but these hearings must be concluded not later than ninety (90) days from the first hearing date fixed in the Commencement Order (Sec. 15, Rule 1, F-Rules). Action of the rehabilitation receiver After the initial hearing, the rehabilitation receiver shall submit to the court his report on whether or not to give due course to the petition. The rehabilitation receiver may likewise recommend the liquidation of the debtor (Sec. 24, FRIA). The report shall be submitted within forty (40) days from the termination of the initial hearing, with or without the comments from the creditors (Sec. 16, Rule 2, F-Rules). The rehabilitation receiver shall establish a preliminary registry of claims (Sec. 44, FRIA) within twenty (20) days from assumption (Sec. 44, Rule 2, F-Rules). Interested parties may challenge or oppose any claim therein (Sec. 45, FRIA). The confirmation of the rehabilitation plan shall bind the debtor and persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the Rehabilitation Plan or whether or not their claims have been scheduled (Sec. 69a, FRIA). Determination of claims The rehabilitation receiver shall make the registry available for public inspection providing the place/s and date/s of inspection and publish the same in a newspaper of general circulation in the Philippines once every week for two (2) consecutive weeks. The period of inspection shall not exceed fifteen (5) days from the last publication (Sec. 44, Rule 2, F-Rules). Challenge to the claim/s must be made and submitted to the court within thirty (30) days from the expiration of the period to inspect. Upon the expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to the court the registry of claims. The registry of claims shall include the following lists of (1) claims that have not been subject to challenge; (2) claims resolved by the rehabilitation receiver after these have been challenged; and (3) disputed but unresolved claims. (Sec. 45, Rule 2, FRules) The aggrieved party may seek the review of the decision of the rehabilitation receiver on a claim by filing a motion with the rehabilitation court within five (5) days from receipt of the rehabilitation receiver's assailed decision, which shall be decided by the court at the soonest possible time. (Sec. 46, Rule 2, FRules) Action of the court upon receipt of the rehabilitation report Within ten (10) days from receipt of the report the court may give due course to the petition, dismiss the petition or convert the proceedings into one for the liquidation of the debtor (Sec. 17, Rule 2, F-Rules). If the petition is given due course, the rehabilitation plan must be submitted within a period of not more than ninety (90) days from the date of the order giving due course to the petition (Sec. 18, Rule 2, FRules). The Rehabilitation Receiver A rehabilitation receiver must be a resident citizen, knowledgeable of insolvency, possess good moral character and have no conflict of interest (Sec. 29, FRIA). His role is to preserve the value of the assets of

FRIA – LPIgnacio 8 the debtor and implement the rehabilitation plan (Sec. 31, FRIA). He may be removed for cause by the court, motu proprio or upon motion of creditors holding 50% of the total liabilities of the debtor (Sec. 32, FRIA). Management of the debtor or appointment of a Management Committee Upon motion of interested party, the receiver may manage the debtor or appoint a management committee (MC) (Sec. 36, FRIA; Sec. 31, Rule 2, F-Rules). Organization of a Creditors’ Committee (Secs. 39-42, Rule 2, F-Rules). After the petition is given due course, a Creditors’ Committee may be organized to be represented by each class of creditors such as secured creditors, unsecured creditors, trade creditors and suppliers, and employees of the debtor. It shall the primary liaison between the rehabilitation receiver and the creditors. The creditors' committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor. The creditors' committee may be authorized by the court or by the rehabilitation receiver to perform such other tasks and functions to facilitate the rehabilitation process. Immunity from suit The rehabilitation receiver and all persons employed by him shall not be subject to any action, claim or demand in connection with any act done or omitted to be done by them in good faith in connection with the exercise of their powers and functions or other actions duly approved by the court (Sec. 41, FRIA). Post-Commencement Date Actions The court may, upon the recommendation of the rehabilitation receiver, authorize the sale of the debtor’s assets if the assets are perishable, susceptible to devaluation or are otherwise in jeopardy (Sec. 49, FRIA). The rate and term of interest, if any, on secured and unsecured claims shall be determined and provided for in the rehabilitation plan (Sec. 54, FRIA; Sec. 53, Rule 1, F-Rules). The court may rescind or declare null and void (a) any sale or disposal of debtor’s property which is not made in the ordinary course of business or (b) any transaction of the debtor occurring prior to the issuance of the commencement order which was executed with intent to defraud creditor/s or gives undue preference to any creditor (Sec. 58, FRIA). There shall be no diminution of security or lien; they are merely suspended during the stay order (Sec. 60, FRIA). The court, on motion or motu proprio, may terminate, modify or set conditions for the continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that: (a) a creditor does not have adequate protection over the property securing its claim; or (b) the value of a claim secured by a lien on property which is not necessary for rehabilitation of the debtor exceeds the fair market value of the property. (Sec. 60, Rule 2, F-Rules) By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver merely suspend the actions for claims against respondent corporations. Petitioner bank’s preferred status over the unsecured creditors relative to the mortgage liens is retained, but the enforcement of such preference is suspended. The loan agreements between the parties have not been set aside and petitioner bank may still enforce its preference when the assets of ASB Group of Companies will be liquidated. Considering that the provisions of the loan agreements are merely suspended, there is no impairment of contracts, specifically its lien in the mortgaged properties (Metrobank v. ASB Holdings, Inc., GR No. 166197, 27 February 2007). Liability of Directors and Officers Directors and officers of the debtor shall be liable up to double the value of the property sold, embezzled or otherwise disposed of if they knowingly dispose of debtor’s property other than in the ordinary course of business, approve fraudulent or grossly disadvantageous transactions, or conceal, embezzle or misappropriate debtor’s property (Sec. 10,FRIA).

Rehabilitation Plan The FRIA provides for the minimum contents of a rehabilitation plan (Sec. 62, FRIA). As a rule, the rehabilitation plan is submitted upon filing of the petition for CSR. The rehabilitation receiver may propose changes thereto, considering the views and comments of the debtor and creditors Sec. (63, FRIA). The rehabilitation plan is approved by a majority of each class of creditors, the majority being based on the

FRIA – LPIgnacio 9 value of claims held by the creditors in each class. If no such majority is obtained, the rehabilitation plan is considered rejected (Sec. 64). The court, however, exercise its cram-down power and approve the rehabilitation plan over the objection of any class of creditors under the following circumstances: (a) the rehabilitation receiver recommended the confirmation of the rehabilitation plan; (b) the rehabilitation plan would give the objecting class of creditors greater compensation (computed at net present value) than at liquidation; or (c) the shareholders of debtor loses their controlling interest in the debtor as a result of the rehabilitation plan. A breach of the rehabilitation plan may result in the liquidation of the debtor (Sec. 64, second par., FRIA). The provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor (Sec. 68 last par., FRIA). The court shall have a maximum period of one (1) year from the date of filing of the petition to confirm a rehabilitation plan. If no rehabilitation plan is confirmed within the said period, the proceedings may upon motion or motu propio, be converted into one for the liquidation of the debtor (Sec. 72, FRIA). The rehabilitation plan is an indispensable requirement in corporate rehabilitation proceedings (Siochi Fishery Ent. Inc. v. BPI, GR No. 193872, 19 October 2011). Court may approve a rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor (Pacific Wide Realty and Dev’t. Corp. v. Puerto Azul Land Inc., 605 SCRA 503, 25 November 2009). Filing of objections to rehabilitation plan (Sec. 64, Rule 1, F-Rules) A creditor may file a verified opposition containing its written objections to the Rehabilitation Plan accompanied by affidavits and supporting documents within twenty (20) days from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a Rehabilitation Plan shall be limited to the following: (A) the creditors' support was induced by fraud; (B) the documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or (C) the Rehabilitation Plan is in fact not supported by the voting creditors. The court shall hear and decide on the objections which shall not be later than ten (10) days from expiration of the filing of the objections. If the court finds merit in the objection, it shall order the rehabilitation receiver or other party to cure the defect, whenever feasible. If the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into one for the liquidation of the debtor (Sec. 65, Rule 1, F-Rules). Confirmation of rehabilitation plan The provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor: provided, that the terms thereof are necessary to restore the financial wellbeing and viability of the insolvent debtor (Sec. 66, Rule 1, F-Rules). The rehabilitation plan, once approved, is binding upon the debtor and all persons who may be effected by it, including the creditors, whether such persons have or have not participated in the proceedings or have opposed the plan or whether their claims have or have not been scheduled ( Veterans Philippine Scout Security Agency, Inc. v. First Dominion Prime Holdings, Inc., 679 SCRA 168, 23 August 2012). Review of decision or order on rehabilitation plan An order approving or disapproving a rehabilitation plan can only be reviewed through a petition for certiorari to the Court of Appeals under Rule 65 of the Rules of Court within fifteen (15) days from notice of the decision or order (Sec. 2, Rule 6, F-Rules).

Pre-Negotiated Rehabilitation (PNR) An insolvent debtor may choose to initially negotiate a rehabilitation plan with its creditors out-of-court. If creditors holding two-thirds of the total liabilities of the debtor, including those holding 50% each of the secured and unsecured claims, approve or endorse the rehabilitation plan, the debtor may file a verified petition with the court for the approval of such pre-negotiated rehabilitation plan (PNR) (Sec. 76, FRIA).

FRIA – LPIgnacio 10 If the court determines that the petition is sufficient in form and substance within five (5) days from the filing of the petition (Sec. 2, Rule 2, F-Rules), it shall issue an order allowing any creditor to oppose the petition and a suspension or stay order (similar to the one discussed under CSR) (Sec. 77). If there are no objections, the court will approve the rehabilitation plan (Sec. 78, FRIA). If there are objections, the court will hear them (Sec. 80). The court has a maximum of 120 days from the time of the filing of petition to approve the rehabilitation plan. The rehabilitation plan shall be deemed approved if the court fails to act within the 120-day period (Sec. 81, FRIA). Effectivity and duration of stay or suspension order It shall retroact to the date of the filing of the petition and shall be effective for one hundred twenty (120) days from the filing of the petition unless earlier lifted by the court on account of (a) the approval of the Pre-Negotiated Rehabilitation Plan, or (b) the termination of the rehabilitation proceedings (Sec. 3, Rule 3, F-Rules). Limited grounds to object the petition for rehabilitation (Sec. 5, Rule 3, F-Rules) Any creditor or other interested party can only object on the following limited grounds: (A) the allegations in the petition or the Pre-Negotiated Rehabilitation Plan, or the attachments thereto, are materially false or misleading; (B) the majority of any class of creditors do not in fact support the Pre-Negotiated Rehabilitation Plan; (C) the support of the creditors or any of them was induced by fraud; or (D) the Pre-Negotiated Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim is not categorically declared as a contested claim. The court shall hear and decide objections not earlier than twenty (20) days nor later than thirty (30) days from the date of the second publication of the Order. If the court finds the objection meritorious, it shall direct the debtor, when feasible, to cure the defect within fifteen (15) days from receipt of the order. If the court determines that the debtor or creditors supporting the Pre Negotiated Rehabilitation Plan acted in bad faith, or that the objection is non curable, the court may convert the rehabilitation proceedings into liquidation. A finding by the court that the objection has no substantial merit or that the same has been cured shall be deemed an approval of the Pre-Negotiated Rehabilitation Plan. (Sec. 7, Rule 3, F-Rules) Out-of-court or Informal Restructuring Agreements or Rehabilitation Plans (OCRA) The FRIA sets the minimum requirements for out-of-court or informal restructuring agreements or rehabilitation plans such as debtor’s consent thereto and approval of creditors holding 67% of the secured claims, 75% of the unsecured claims and 85% of the total obligations, secured or unsecured (Sec. 84,FRIA). There shall be a standstill period pending the negotiation and finalization of the out-of-court or informal restructuring agreements or rehabilitation plans which shall not exceed 120 days. The standstill period shall be approved by creditors holding 50% of the total liabilities of the debtor (Sec. 85, FRIA). Effective and expiration of the standstill period The standstill period shall be effective after publication of the notice once a week for two (2) consecutive weeks in a newspaper of general circulation in the Philippines (Sec. 3[7], Rule 4, F-Rules). The standstill period shall expire upon (1) the lapse of 120 days from the effectivity of the standstill agreement, (2) the effectivity of the OCRA, or (3) the termination of the negotiations for the OCRA as declared by creditors representing more than fifty percent (50%) of the total liabilities of the debtor, whichever comes first (Sec. 3, Rule 4, F-Rules). Binding effect of the OCRA If duly approved, the OCRA shall be binding on the debtor and all affected persons, including the creditors, whether or not they will participate in the negotiations (Sec. 2, Rule 4, F-Rules).

Stay of implementation of OCRA Any court action or other proceedings arising from or relating to, the out-of-court or informal restructuring/workout or rehabilitation plan shall not stay its implementation, unless the relevant party is able to secure a temporary restraining order or injunctive relief from the Court of Appeals (Sec. 88, FRIA) via an original action under Rule 65 of the Rules of Court (Sec. 7, Rule 4, F-Rules). Court assistance

FRIA – LPIgnacio 11 An insolvent debtor and/or creditor may file a petition with the Regional Trial Court where the insolvent debtor resides or where the principal business is located for court assistance to execute or implement a standstill agreement or an OCRA (Secs. 8 & 9, Rule 4, F-Rules). The court may issue a writ of execution to enforce its terms or issue other forms of additional assistance as maybe necessary to execute or implement the standstill agreement or OCRA, including the award of damages properly pleaded and proved, and to protect the interests of the creditors, the debtor, and other interested parties (Sec. 10, Rule 4, F-Rules). The judgment of the court shall be final and immediately executory (Sec. 16, Rule 4, F-Rules). However, any judgment of the court may be elevated to the Court of Appeals under Rule 65 of the Rules of Court (ibid.). Annulment of OCRA or standstill agreement The debtor or creditor may file a petition to annul (1) the standstill agreement or (2) the OCRA based on the ground of non-compliance with the requirements for a standstill agreement or an OCRA. Vitiation of consent due to fraud, intimidation, or violence may be raised as a ground to annul the standstill agreement or the OCRA if committed against such number of creditors required for the approval of the standstill agreement or OCRA, as the case may be (Sec. 10, Rule 4, F-Rules). The respondent shall file a verified comment or opposition within five (5) days from receipt of summons (Sec. 13, Rule 4, F-Rules). The court will determine the existence of a genuine issue of material facts or whether the petition will be granted. If no comment is filed, a clarificatory hearing may be conducted. Upon a determination of genuine issue of material facts, the court shall conduct a summary hearing not later than 20-days from the filing of the petition. A judgement shall be rendered not later than 60-days from filing of the petition (Secs. 14 & 15, Rule 4, F-Rules). The judgment shall be final within 10-days from receipt of the decision and is immediately executory. However, any judgment of the court may be elevated to the Court of Appeals under Rule 65 of the Rules of Court (Sec. 16, Rule 4, F-Rules). Liquidation in Insolvency There are two kinds of liquidation proceedings – voluntary and involuntary. In voluntary liquidation, the insolvent debtor may directly file a verified petition for liquidation with the court attaching a schedule of its debts, inventory of assets and names of nominees for liquidator. The insolvent debtor may also convert proceedings for CSR or PNR into liquidation by filing a motion with the court (Sec. 90, FRIA). In involuntary liquidation, three or more creditors with claims of at least P1 million or holding 25% of the total paid-up capital or partners’ contributions of the debtor may directly file a verified petition for the liquidation of the debtor. Such creditors may also convert proceedings for CSR or PNR into liquidation by filing a motion with the court (Sec. 91, FRIA). If the court finds the petition sufficient in form and substance, it shall issue a liquidation order declaring the debtor insolvent which shall have the following effects: the debtor shall be deemed dissolved, and its corporate or juridical existence terminated, legal title to the assets of the debtor shall be deemed vested in the liquidator, and all contracts of the debtor are deemed terminated, no foreclosure proceedings shall be allowed for a period of one hundred eighty (180) days (Sec. 113, FRIA). The liquidation order shall not affect the rights of the secured creditors to enforce his security, although he may waive his security (Sec.114, FRIA). The Liquidator is elected by creditors who filed their claims within the period set by the court. A secured creditor cannot vote unless he waives his security (Sec. 115, FRIA). The liquidator has the power to recover all the assets belonging to the debtor, take possession thereof, and sell the same (Sec. 119, FRIA). The liquidator also has the duty to prepare the registry of claims which, after entertaining any opposition or challenge, shall be submitted to the court for final approval (Sec. 123, FRIA).

The liquidator may sell, but only at public auction, unencumbered assets of the debtor and convert them to money. Private sale may be allowed if a) the goods are perishable, quickly deteriorate or disproportionately expensive to keep or maintain, or b) it is to the best interest of the debtors and creditors (Sec. 131, FRIA). Within three (3) months from assumption of office, the liquidator shall submit a liquidation plan which shall govern the manner of disposition of the assets of the debtor (Sec. 129, FRIA). In the disposition of the assets, the Civil Code provisions on concurrence and preference of credits shall be observed (Sec. 133, FRIA). Cross-Border Insolvency

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The Court may issue orders, in connection with an insolvency or rehabilitation proceedings taking place in a foreign jurisdiction (Sec. 140, FRIA), suspending any actions to enforce claims against the entity or otherwise seize or foreclose on property of the foreign entity located in the Philippines, requiring the surrender of property of the foreign entity to the foreign representative, or providing other necessary relief (Sec. 141, FRIA). Scope of application This Rule applies where: (A) assistance is sought in a Philippine court by a foreign court or a foreign representative in connection with a foreign proceeding; (B) assistance is sought in a foreign State in connection with a proceeding governed by the FRIA and these Rules; or (C) a foreign proceeding and a proceeding governed by the FRIA and the F-Rules are concurrently taking place; or (D) Creditors in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under Rules 2, 3, and 4 of the F-Rules. The mere filing of a petition does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local Courts for any purpose other than the petition for recognition and resulting related proceedings (Sec. 1, Rule 5, F-Rules). *****

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