Ficial Rehabilitation and Insolvency Act

State policy and proceeding character

Section 2 declares State policy to encourage debtors and creditors to collectively and realistically resolve and adjust competing claims and property rights.
Section 2 requires timely, fair, transparent, effective and efficient rehabilitation or liquidation, with certainty and predictability in commercial affairs.
Section 2 mandates preservation and maximization of the debtor’s asset value, recognition of creditor rights and priority of claims, and equitable treatment of similarly situated creditors.
Section 2 directs that when rehabilitation is not feasible, the State should facilitate a speedy and orderly liquidation and settlement of obligations.
Section 3 provides that proceedings are in rem and that jurisdiction over all persons affected is acquired upon publication of the notice of commencement in a Philippine newspaper of general circulation in the manner prescribed by Supreme Court rules.
Section 3 requires a summary and non-adversarial conduct consistent with FRIA’s policies and Supreme Court procedural rules.

Key court designations and rules-making

Section 6 empowers the Supreme Court to designate the court or courts that hear and resolve FRIA cases.
Section 6 directs the Supreme Court to promulgate rules of pleading, practice and procedure governing FRIA proceedings.
Section 3 requires publication and procedural mechanics to follow the Supreme Court’s rules of procedure.

Core definitions for FRIA use

Section 4(a) defines “Administrative expenses” to include reasonable and necessary expenses incurred or arising from filing a petition, arising from conduct of proceedings (including rehabilitation or liquidation), incurred in ordinary course after commencement, for new obligations after commencement to finance rehabilitation, fees of the rehabilitation receiver or liquidator and their professionals, and expenses otherwise authorized/allowed by the Supreme Court in its rules.
Section 4(c) defines “Claim” to cover all claims/demands of whatever nature against the debtor or its property, including government claims (including taxes, tariffs, customs duties) and claims against directors and officers arising from acts done in discharge of functions within authority, while expressly allowing suits against directors and officers acting in their personal capacities.
Section 4(d) defines “Commencement date” as the date of the court’s Commencement Order, retroactive to the date of filing of the petition for both voluntary and involuntary proceedings.
Section 4(f) defines “Control” and presumes it exists when a parent owns more than one-half (1/2) of voting power unless exceptional circumstances clearly negate control; control also exists through voting-right agreements, statute/agreements governing financial and operating policies, appointment/removal of majority of directors/equivalent governing body, or casting majority votes.
Section 4(k) defines “Debtor” to include (unless excluded) a DTI-registered sole proprietorship, SEC-registered partnership, SEC-registered corporation, or an individual debtor who has become insolvent as defined, subject to FRIA exclusions.
Section 4(q) defines “Insolvent” as generally unable to pay liabilities as they fall due in ordinary course, or liabilities greater than assets.
Section 4(r) defines “Insolvent debtor’s estate” as all property and assets as of commencement date plus property/assets acquired after that date, including property where the debtor has ownership interest, excluding trust assets and bailment and other third-party assets held by the debtor as of commencement date.
Section 4(ff) defines “Publication notice” as notice through publication in a Philippine newspaper of general circulation on a business day for two (2) consecutive weeks.

Who is covered and who is excluded

Section 5 excludes banks, insurance companies, pre-need companies, and national and local government agencies or units from the term “debtor.”
Section 5 defines “Bank” as any duly licensed bank or quasi-bank potentially or actually subject to conservatorship, receivership or liquidation under Republic Act No. 7653 or successor legislation.
Section 5 defines “Insurance company” as those potentially or actually subject to insolvency proceedings under Presidential Decree No. 1460 or successor legislation.
Section 5 defines “Pre-need company” as any corporation authorized/licensed to sell or offer to sell pre-need plans.
Section 5 provides that government financial institutions other than banks and government-owned or controlled corporations are covered by FRIA unless their specific charter provides otherwise.

Consolidation, decisions, committees

Section 7 treats each juridical entity as a separate entity and prohibits commingling/aggregation of assets and liabilities with another debtor entity, unless the latter is a related enterprise owned/controlled by the same interests.
Section 7 allows commingling/aggregation only where: (1) there was factual commingling prior to commencement; (2) debtor and related enterprise share common creditors and it is more convenient to treat them together; (3) the related enterprise voluntarily accedes to join as a party petitioner; and (4) consolidation is beneficial to all concerned and promotes rehabilitation objectives.
Section 8 requires creditor decisions to follow the relevant Corporation Code provisions for stock/nonstock corporations or the Civil Code provisions for partnerships, so long as not inconsistent with FRIA.
Section 9 allows creditors to designate representatives to vote or act by filing notice with the court and serving a copy on the rehabilitation receiver or liquidator.

Financial rehabilitation initiation and petition

Section 12 allows a debtor to initiate voluntary proceedings only upon corporate/owner approvals: sole proprietorship owner approval; partnership majority partners approval; corporations by majority board vote and authorization by stockholders representing at least two-thirds (2/3) of outstanding capital stock; nonstock corporations by vote of at least two-thirds (2/3) of members.
Section 12 requires the voluntary rehabilitation petition to be verified to establish insolvency and viability and to include, at minimum: identification; fact and cause of insolvency/inability to pay; specific relief sought; grounds; required other information depending on requested relief; schedule of debts/liabilities with creditor list and collaterals/security; inventory of assets and receivables/claims; a Rehabilitation Plan; at least three (3) nominees to rehabilitation receiver; and other documents required by FRIA and Supreme Court rules.
Section 12 allows a group of debtors to jointly file a rehabilitation petition when one or more foresee impossibility of meeting debts, distress would likely adversely affect others, and participation of others is essential under the proposed Rehabilitation Plan.
Section 13(a) allows involuntary proceedings to be initiated by any creditor or group with at least PHP 1,000,000.00 or at least twenty-five percent (25%) of subscribed capital stock or partners’ contributions, whichever is higher, if either: (1) no genuine issue of fact/law on claim and payments due for at least sixty (60) days are not made, or debtor fails generally to meet liabilities as they fall due; or (2) another creditor’s foreclosure will prevent payment as due or will render debtor insolvent.
Section 14(a) requires the involuntary petition be verified to establish substantial likelihood of rehabilitation and include: debtor identification and address; circumstances supporting Section 13; specific relief; Rehabilitation Plan; at least three (3) nominees; other required information depending on relief; and other documents required by FRIA and Supreme Court rules.

Petition action and Commencement Order mechanics

Section 15(a) provides that if the petition is sufficient, the court must issue a Commencement Order within five (5) working days from filing.
Section 15(a) provides that if deficient, the court may in discretion give a reasonable period to amend/supplement or submit needed documents; the five (5) working days for Commencement Order then runs from filing of amended/supplemental petition or submission of documents.
Section 16(a) provides that rehabilitation proceedings commence upon issuance of the Commencement Order.
Section 16(a) mandates that the Commencement Order identify the debtor, summarize grounds, state relief and legal effects (including those in Section 17), declare the debtor under rehabilitation, and direct publication once a week for at least two (2) consecutive weeks, with first publication within seven (7) days from issuance.
Section 16(a) mandates personal delivery service of the petition: (a) if petitioner is the debtor, to each creditor holding at least ten percent (10%) of total liabilities within five (5) days; and (b) if petitioner/s is/are creditors, to the debtor within five (5) days.
Section 16(a) requires appointment of a rehabilitation receiver and provision of creditor requirements/deadlines for establishing claims at least five (5) days before initial hearing.
Section 16(a) directs Bureau of internal Revenue (BIR) to file and serve comment/opposition under Supreme Court procedures.
Section 16(a) prohibits debtor suppliers from withholding goods/services in ordinary course for so long as debtor makes payment for supplied goods/services after Commencement Order.
Section 16(a) authorizes payment of administrative expenses as they become due.
Section 16(a) sets an initial hearing not more than forty (40) days from filing of the petition to determine substantial likelihood of rehabilitation.
Section 16(a) requires the petition and Rehabilitation Plan be made available for examination and copying and sets locations for review/copying documents.
Section 16(a) allows any creditor or debtor not petitioning to nominate a qualified rehabilitation receiver person at least five (5) days before initial hearing.
Section 16(a) directs inclusion of a Stay or Suspension Order that: suspends enforcement of claims (in court or otherwise); suspends enforcement of judgments, attachments or provisional remedies; prohibits debtor from selling/encumbering/transferring/disposal except in ordinary course; and prohibits debtor from making payments of liabilities outstanding as of commencement date except as provided in FRIA.

Effects of Commencement Order and stay scope

Section 17(a) makes the Stay or Suspension Order effects plus additional effects upon issuance of the Commencement Order, unless otherwise provided.
Section 17(a) vests rehabilitation with powers under FRIA, including right to review and obtain records accessible to debtor management, subject to the court’s approval of performance bond filed by rehabilitation receiver.
Section 17(a) provides that extrajudicial activities/processes to seize property, sell encumbered property, or enforce claims after commencement are null and void unless allowed by FRIA, subject to Section 50.
Section 17(a) nullifies setoff after commencement date of any debt owed to the debtor by its creditors.
Section 17(a) nullifies perfection of any lien against the debtor’s property after commencement date.
Section 17(a) consolidates resolution of all legal proceedings by and against the debtor to the court, while allowing continuation of cases in other courts when the debtor initiated the suit.
Section 17(a) makes attempts to seek legal relief outside the proceedings sufficient for a finding of indirect contempt of court.

Exceptions to Stay or Suspension Order

Section 18(a) states the Stay or Suspension Order does not apply to: (1) cases already pending appeal in the Supreme Court as of commencement date, with final and executory judgments referred to the court for appropriate action.
Section 18(a) allows, at court discretion, certain cases pending/filed in specialized courts or quasi-judicial agencies if they can resolve the claim more quickly, fairly, efficiently; final and executory judgments are referred to the court as non-disputed claims.
Section 18(a) excludes enforcement of claims against sureties and solidarily liable persons and third-party/accommodation mortgagors and issuers of letters of credit, unless the property subject of the third-party/accommodation mortgage is necessary for rehabilitation as determined by the court on recommendation of the rehabilitation receiver.
Section 18(a) excludes actions of customers/clients of securities market participants to recover monies/securities entrusted in ordinary course and actions by securities market participant or regulators/self-regulatory organizations to pay/settle such claims.
Section 18(a) excludes actions of a licensed broker/dealer to sell pledged securities pursuant to a securities pledge or margin agreement under the Securities Regulation Code and implementing rules.
Section 18(a) excludes clearing/settlement of financial transactions through authorized/recognized clearing agencies, and reimbursement actions for transactions settled for the debtor by authorized agencies/entities.
Section 18(a) provides that criminal actions against the individual debtor or owner/partner/director/officer are not affected by proceedings commenced under FRIA.

Taxes and government financial institutions

Section 19(a) provides that upon issuance of the Commencement Order and until approval of the Rehabilitation Plan or dismissal of the petition (whichever is earlier), imposition of all taxes and fees, including penalties, interests and charges due to the national government or LGUs is waived in furtherance of rehabilitation.
Section 20(a) applies Stay effects on suspension of foreclosure and pursuit of legal remedies to government financial institutions notwithstanding charter or other legal provisions.

Duration and conditions for maintaining Commencement Order

Section 21(a) provides the Commencement Order lasts for the duration of rehabilitation proceedings unless lifted by the court, so long as there is substantial likelihood of successful rehabilitation.
Section 21(a) requires the court to ensure minimum requirements including: compliance of Rehabilitation Plan with minimum contents; sufficient monitoring by the rehabilitation receiver; creditor meetings to the extent reasonably possible for consensus; and a rehabilitation receiver report (preliminary evaluation) that underlying assumptions and goals are realistic/feasible/reasonable or, if not, substantial likelihood still exists due to sufficient assets, sufficient cash flow, good faith and due diligence by debtor/partners/stockholders/directors/officers, absence of sham filing, realistic and viable plan pursuit, and no materially false or misleading statements.
Section 21(a) requires the court to consider: debtor meeting creditors representing at least three-fourths (3/4) of total obligations to the extent reasonably possible (if petitioner is debtor) or meeting debtor and good faith consensus efforts (if petitioner is creditor/group).
Section 21(a) requires ensuring the petition and Rehabilitation Plan show no misrepresentation or fraud by debtor toward creditors.

Initial hearing and creditor claim treatment

Section 22(a) requires that at the initial hearing, the court: determine creditors who filed timely and properly their notices of claims; hear and decide objections to rehabilitation receiver qualification and appoint if needed; direct creditors to comment on the petition and Rehabilitation Plan and submit within a period of not more than twenty (20) days; and direct the rehabilitation receiver to evaluate financial condition and submit a report within forty (40) days from initial hearing.
Section 23(a) provides that a creditor not listed in the schedule and who fails to file a notice of claim per the Commencement Order, but later files a belated claim, is not entitled to participate in rehabilitation proceedings, but is entitled to receive distributions arising therefrom.

Rehabilitation receiver report and court actions

Section 24(a) requires the rehabilitation receiver to submit within forty (40) days from initial hearing (with or without creditor comments) a report to the court on whether: debtor is insolvent and causes thereof and any unlawful/irregular acts in contemplation of insolvency; Rehabilitation Plan assumptions/goals/procedures are realistic/feasible/reasonable; there is substantial likelihood for successful rehabilitation; whether petition should be dismissed; and whether debtor should be dissolved and/or liquidated.
Section 25(a) requires that within ten (10) days from receipt of the Section 24 report, the court may: give due course, dismiss, or convert proceedings.
Section 25(a) provides due course if debtor is insolvent and there is substantial likelihood of successful rehabilitation.
Section 25(a) requires dismissal if debtor is not insolvent; petition is a sham filing intended to delay enforcement; petition/Rehabilitation Plan/attachments contain materially false or misleading statements; or debtor committed acts of misrepresentation or fraud against creditors or group.
Section 25(a) requires conversion to liquidation if debtor is insolvent and there is no substantial likelihood of successful rehabilitation as determined under Supreme Court rules.
Section 26(a) requires that if petition is given due course, the court directs the rehabilitation receiver to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new plan to court within not more than ninety (90) days.
Section 26(a) authorizes court referral of disputes relating to the Rehabilitation Plan or proceedings to arbitration or other dispute resolution under Republic Act No. 9285, when it will resolve disputes more quickly, fairly and efficiently than the court.
Section 27(a) provides that if petition is dismissed under Section 25(b), the court may order petitioner to pay damages to any creditor or the debtor injured by the filing, to the extent of injury.

Rehabilitation receiver appointment and status

Section 28(a) provides that any qualified natural or juridical person may serve as rehabilitation receiver, with the requirement that if a juridical entity serves, it must designate qualified natural person representative, and both juridical entity and representative are solidarily liable for all obligations and responsibilities.
Section 29(a) requires minimum qualifications for rehabilitation receiver: Filipino citizen or Philippine resident in the six (6) months immediately preceding nomination; good moral character and acknowledged integrity, impartiality and independence; requisite knowledge of insolvency and relevant commercial laws/rules/procedures plus training/experience; and no conflict of interest.
Section 29(a) allows conflict of interest waiver express or implied by a party prejudiced.
Section 30(a) requires initial appointment by the court, with creditors and debtor non-petitioners able to nominate at initial hearing; court may appoint retain initially appointed or appoint another; if debtor is a securities market participant, court gives priority to nominee of the appropriate securities or investor protection fund.
Section 30(a) provides the court shall appoint the creditors’ nominee as rehabilitation receiver when a qualified natural person/entity is nominated by more than fifty percent (50%) of secured creditors and general unsecured creditors and satisfactory evidence is submitted.

Rehabilitation receiver powers, duties, removal

Section 31(a) deems the rehabilitation receiver an officer of the court with principal duty to preserve and maximize value of debtor assets, determine rehabilitation viability, prepare and recommend Rehabilitation Plan, and implement the approved plan.
Section 31(a) grants powers/duties including: verifying petition allegations; verifying/correcting asset inventory and valuation; verifying/correcting schedules of debts/liabilities; evaluating validity/genuineness/true amount of claims; taking possession/custody/control and preserving debtor property value; suing/recovering amounts/properties owed or pertaining to the debtor with court approval; accessing information necessary for operations and rehabilitation; suing/recovering fraud/undue preference transactions with court approval; monitoring operations to prevent non-ordinary course payments/transfers; employing professionals with court approval; determining best rehabilitation actions and recommending plan actions; implementing the Rehabilitation Plan as approved; assuming management powers when directed by court under Section 36; exercising other court-conferred powers; and submitting status reports every quarter or as required motu proprio, upon creditor motion, or as in the Rehabilitation Plan.
Section 31(a) prohibits the rehabilitation receiver from taking over management/control unless appointed pursuant to Section 36, while allowing recommendation for appointment of a management committee in cases provided by FRIA.
Section 32(a) allows the court to remove the rehabilitation receiver at any time motu proprio or upon motion by creditors holding more than fifty percent (50%) of total obligations, on grounds including incompetence, gross negligence, failure to perform, failure to exercise proper care, lack of specialized competency, illegal acts, lack of qualification/disqualification, post-appointment conflict of interest, or manifest lack of independence detrimental to stakeholder body.

Compensation, bond, oath, and vacancy

Section 33(a) entitles rehabilitation receiver and direct employees/independent contractors to compensation for reasonable fees/expenses from the debtor under court-approved terms after notice and hearing.
Section 33(a) allows, prior to such hearing, reasonable compensation based on quantum meruit, and characterizes such costs as administrative expenses.
Section 34 requires the rehabilitation receiver, before taking powers, to take an oath and file a bond in amount fixed by the court, conditioned on faithful and proper discharge of powers/duties.
Section 35(a) provides that if receiver position is vacated, the court directs debtor and creditors to submit nominees; court appoints qualified nominees or another qualified person.

Displacement of management and management committee role

Section 36(a) authorizes, on motion of any interested party, the court to direct the rehabilitation receiver to assume management powers or appoint a management committee upon clear and convincing evidence of: actual/imminent danger of dissipation/loss/wastage/destruction of assets; paralyzation of business operations; gross mismanagement; or fraud or wrongful conduct, or gross/willful violation of FRIA by existing management or the debtor’s owner/partner/director/officer/representatives in management.
Section 36(a) authorizes the court, if it appoints the rehabilitation receiver for management, to require additional bond; authorize engagement of assistance for managerial functions; and authorize commensurate increases in compensation.
Section 37(a) provides that when appointed, the management committee takes the place of management and assumes rights and responsibilities.
Section 37(a) provides that management committee members are officers of the court and their specific powers/duties are prescribed by procedural rules.
Section 38(a) requires that qualifications/disqualifications of management committee members be set forth in procedural rules considering the debtor’s business nature and stakeholder protection needs.
Section 39(a) authorizes, upon court approval and after notice and hearing, employment of specialized professionals and experts; treats them as employees or independent contractors of the rehabilitation receiver or management committee depending on context; provides their qualifications/disqualifications are set by procedural rules.
Section 41(a) grants immunity from action, claim, or demand for acts or omissions done in good faith connected with exercise of powers/functions under FRIA or duly court-approved actions for the rehabilitation receiver, those employed by him, management committee, and those employed by it.

Conflict of interest rules

Section 40(a) prohibits appointment as rehabilitation receiver, management committee member, or employment by them when the person has a conflict of interest.
Section 40(a) treats conflict of interest as material influence in judgment for or against any party, and deems conflict exists when the individual is a creditor, owner, partner, or stockholder of the debtor; competes in a competing line of business; was within five (5) years a director/officer/owner/partner/employee of the debtor or any creditor or the auditor/accountant of the debtor; was within two (2) years an underwriter of the debtor’s outstanding securities; is related by consanguinity or affinity within the fourth civil degree to certain debtor/creditor persons/stockholders/directors/officers/employees/underwriters; or has any other direct/indirect material interest in debtor or creditors.
Section 40(a) requires disclosure of conflicts to the court or to creditors in out-of-court rehabilitation proceedings.
Section 40(a) allows adversely affected parties to waive right to object; if waiver is unreasonably withheld, the court may disregard the conflict based on general stakeholder interest.

Creditors’ committee formation and limits

Section 42(a) provides that after the creditors’ meeting called under Section 63, creditors belonging to a class may organize a committee among themselves and may agree to form a committee with a representative from each class of creditors including secured creditors, unsecured creditors, trade creditors and suppliers, and employees of the debtor.
Section 42(a) requires the rehabilitation receiver (or representative) to attend creditors’ representative election meetings and extend assistance as defined by procedural rules.
Section 43(a) provides that the creditors’ committee assists the rehabilitation receiver in communicating with creditors and is the primary liaison.
Section 43(a) prohibits the creditors’ committee from exercising or waiving any right or giving consent on behalf of any creditor unless specifically authorized in writing by that creditor.
Section 43(a) authorizes the court or rehabilitation receiver to authorize the committee to perform other tasks/functions defined in procedural rules to facilitate rehabilitation.

Claims registry and challenges

Section 44(a) requires the rehabilitation receiver, within twenty (20) days from assumption into office, to establish a preliminary registry of claims.
Section 44(a) requires the registry be available for public inspection and requires publication notice to debtor, creditors and stakeholders on where/when they may inspect it.
Section 44(a) requires that all claims in the registry be supported by sufficient evidence.
Section 45(a) provides that within thirty (30) days from expiration of the Section 44 period, debtor/creditors/stakeholders/other interested parties may submit challenges to claims, with certified copy served on the rehabilitation receiver and the creditor holding the challenged claim.
Section 45(a) provides that after the thirty (30)-day period, the rehabilitation receiver must submit to the court the registry of claims including undisputed claims not subject to challenge.
Section 46(a) allows any decision of the rehabilitation receiver regarding a claim to be appealed to the court.

Governance and asset use rules after commencement

Section 47(a) provides that management of the juridical debtor remains with existing management subject to applicable laws and agreements, but all disbursements/payments or sale/disposal/assignment/transfer/encumbrance of property or any act affecting title or interest require approval of the rehabilitation receiver and/or the court as provided in the subchapter.
Section 48(a) provides that no funds or property of the debtor shall be used or disposed except in ordinary course of business or when necessary to finance administrative expenses of rehabilitation proceedings.
Section 49(a) authorizes the court, upon application of the rehabilitation receiver, to authorize sale of unencumbered property outside ordinary course upon showing the property is perishable, costly to maintain, susceptible to devaluation, or otherwise in jeopardy by nature or other circumstance.

Rules on encumbered assets and third-party assets

Section 50(a) authorizes the court, upon application by rehabilitation receiver and with consent of affected owners of third-party encumbered property or secured creditors for debtor’s encumbered property, and after notice and hearing, to authorize sale/transfer/conveyance/disposal of encumbered debtor property or third-party property held by the debtor where the court finds such sale/disposal is necessary for continued operation and the debtor provides a substitute lien/ownership right with equal level of security for the counter-party’s claim/right.
Section 50(a) provides that trust receipt or consignment arrangements may be sold/disposed by the debtor when necessary for operation and when substitute lien/ownership right with equal security is arranged.
Section 50(a) provides that sale/disposal under this section does