Law Summary
Suspension of Payments
- Debtors with sufficient property who foresee inability to pay debts may petition for suspension of payments.
- Petition filed at the court of residence with attached schedule and inventory.
- Court orders creditors' meeting within 2 to 8 weeks after petition.
- Injunction restrains debtor from disposing property or paying debts outside business operations during proceedings.
Creditor Meetings and Voting Procedures
- Only creditors listed in the schedule are notified and admitted to meetings.
- Meeting requires presence of creditors representing at least 60% of liabilities.
- Decisions require two-thirds creditor majority by number and three-fifths by amount.
- Certain creditors (personal labor claims, mortgages) may abstain from voting and are not bound by agreements unless they concur.
- If agreement is rejected or insufficient quorum, proceedings terminate.
Objection and Enforcement of Agreements
- Creditors dissenting from favorable decisions may file objections within 10 days.
- Court reviews objections summarily and declares validity of agreement.
- Valid agreements are binding on all attending creditors but not on abstaining categories unless they consent.
- Failure by debtor to comply with agreement reinstates creditors’ pre-agreement rights.
Voluntary Insolvency
- Debtor owing over 1,000 pesos may petition for discharge by surrendering non-exempt property.
- Petition must include detailed schedule and inventory verified by affidavit.
- Court adjudicates debtor insolvent, appoints receiver or assignee, and stays civil proceedings.
- Sheriff takes possession of debtor’s property pending appointment.
Involuntary Insolvency
- Three or more creditors with aggregate claims over 1,000 pesos can petition insolvency citing specified acts of insolvency.
- Court issues order to show cause and may prohibit debtor from disposing property.
- Service of summons is by personal delivery or publication if debtor cannot be found.
- Debtor must answer or demur; court adjudicates insolvency upon default or adverse findings.
- Sheriff takes custody of property; creditor meeting set for assignee election.
Custody and Sale of Property
- Sheriff to inventory and custody property subject to bonds posted by creditors.
- Creditors may bear costs and post bonds when seeking property custody.
- Court may order sale of property before adjudication if necessary to preserve value.
Assignees: Election and Powers
- Claims must be filed and verified before voting for assignee.
- Secured creditors must release security or have value fixed to vote on balance.
- Majority in number and amount elect assignee.
- Assignee files bond, receives title to debtor’s estate, and manages collection and disposition.
- Assignee can sue, settle accounts, sell property at auction, redeem mortgages, and prosecute or defend suits.
- Assignee must record assignment in provinces with debtor’s real estate and notify creditors.
Assignee’s Accounts and Compensation
- Assignee files accounts quarterly or as ordered; creditors may contest.
- Court audits accounts and orders dividends.
- Assignees compensated by sliding scale commissions on money handled.
- Failure or misconduct leads to removal and replacement.
Creditor Classification and Preference
- Property owned by third parties, such as consigned goods or dowry, excluded from estate.
- General creditors share pro rata after deductions.
- Preferred claims include legal/admin expenses, funeral expenses, and taxes owed to government entities.
- Personal services debts limited to 200 pesos per claimant are preferred.
Partnerships and Corporations
- Partnerships may be adjudged insolvent; partnership and partners’ properties accounted separately.
- Surpluses managed proportionally between partnership and partners.
- Corporations subject to insolvency except banks and those with special liquidation laws; no discharge granted to corporations.
Proof of Debts
- Debts due and contingent, including future liabilities, may be proved.
- Bail, surety, or guarantor liabilities provable when they become fixed.
- Set-off allowed only for debts provable against estate; no set-off for recent transfers of claims.
- Secured creditors prove balance after credit for security value.
- Proving debt waives suits against debtor except if discharge is refused.
Compositions
- Insolvent may propose compositions after filing schedules.
- Compositions require majority acceptance and sufficient funds deposited.
- Court confirmation based on good faith and creditor interest.
- Confirmed compositions extinguish estate administration; fraud discovered post-confirmation allows setting aside.
Discharge
- Debtor may apply for discharge 3 months to 1 year after adjudication.
- Court notifies creditors for objections.
- Grounds for denial include false oath, concealment, fraud, destruction of documents, fraudulent preferences, previous discharges, and improper bookkeeping.
- Discharge releases debtor from provable debts except specified exclusions.
- Discharge effective as bar to suits; may be annulled within one year on fraud grounds.
Fraudulent Preferences and Transfers
- Transfers or preferences within 30 days with intent to defraud or hinder insolvency operation are void.
- Property transfers recorded in registries deemed effective from filing date.
- Payments or transfers not in ordinary business course are prima facie fraudulent.
Penal Provisions
- Penalties include imprisonment (3 months to 5 years) for acts such as concealment, false statements, fraudulent conveyances, destructive acts, and violating court injunctions.
- Specific acts during proceedings or suspension of payments are punishable.
Miscellaneous Provisions
- Insolvency proceedings continue despite debtor’s death.
- Statutes of limitations suspended during insolvency.
- Creditors may be represented by agents or attorneys with voting rights.
- Courts may exempt homesteads and property from execution.
- Receivers may be appointed before assignee for asset recovery.
- Appeals to the Supreme Court permitted from specific insolvency orders.
- Dismissal of proceedings allowed before assignee appointment, with creditor consent after.
This comprehensive legislation governs all aspects of insolvency, balancing debtor relief with creditor protection and providing clear procedures, rights, and penalties to ensure orderly insolvency administration in the Philippines.