Insolvency and the Philippines

In 2014, the World Bank reported the Philippines as one of the countries with the most improved efficiency of insolvency proceedings for 2012–13, which was largely attributable to the passing of Republic Act No 10142, or the Financial Rehabilitation and Insolvency Act of 2010 (FRIA).

In the World Bank’s 2020 Doing Business report, the Philippines ranked 65th among 190 countries under the “Resolving Insolvency” category for addressing insolvency issues through judicial proceedings. It has been reported that the Philippines scored 14 out of 16 on the strength of the insolvency framework, indicating a strong legal framework.

Republic Act No 11232, or the Revised Corporation Code (RCC), which took effect in February 2019, introduced the “one-person corporation”, or single-stockholder corporation. This new development impacts, to a certain extent, the remedies available to individual insolvent debtors in insolvency proceedings. Although a corporation has a separate juridical personality from its stockholders, the necessary consequence of recognising one-person corporations is effectively allowing an individual insolvent debtor, with respect to its assets and liabilities used by the corporation, to file rehabilitation and liquidation proceedings through the corporation. Under the FRIA, an individual may file a petition to be declared in a state of suspension of payments, or undergo voluntary or involuntary liquidation, as opposed to rehabilitation and liquidation of juridical debtors.

Recently, the Philippines passed Republic Act No 11840, amending the charter of the Philippine Deposit Insurance Corporation (PDIC), which acts as the receiver of closed banks. As an exception to the secrecy of bank deposits law, RA 11840 authorises the central banking authority and the PDIC to examine, inquire into and look into deposit records of a bank when the bank fails to implement corrective actions on capital deficiency, as declared by the Monetary Board (Republic Act No 11840, Section 10). The law also expanded the powers of the PDIC as receiver of closed banks, authorising it to convert the assets of a closed bank to cash or other forms of liquid assets by selling the same to a Financial Institution Strategic Transfer Corporation (FISTC), which is a corporation authorised to acquire non-performing loans (NPLs) and non-performing assets (NPAs) of banks and other financial institutions (Republic Act No 11840, Section 11, and Republic Act No 11523, Section 5). 

COVID-19

Impact of quarantine on the economy

By Presidential Proclamation No 922 on 8 March 2020, the Philippines was placed under a state of public health emergency due to the outbreak of the coronavirus disease (COVID-19). Beginning 15 March 2020, varying levels of community quarantine were implemented throughout the country, which limited or prohibited the operations of numerous industries and severely affected the economy. A July 2020 report by the Asian Development Bank entitled ‘The COVID-19 Impact On Philippine Business: Key Findings from the Enterprise Survey’ indicated that only 9.3% of survey respondents had enough funding to maintain their business for more than six months. The services sector reported the most serious liquidity problems, followed by the accommodation and food services sectors, and wholesale and retail trade. Credit also became difficult to obtain, even for small amounts. According to a September 2021 report from the Asian Development Bank, the Philippine economy was forecasted to contract by 7.1% due to the new COVID-19 variants, renewed local outbreaks and lockdowns, and slow and uneven vaccine rollouts. These circumstances were predicted to increase the incidence of financial restructurings and insolvencies within the country, especially in the aforementioned industries. Nevertheless, according to a September 2022 report from the Asian Development Bank, the easing of COVID-19-related restrictions, which saw the rebound of the services sector, will support domestic demand and growth of the Philippine economy, despite higher inflation due to global and local price pressures.

By Presidential Proclamation No 297 on 21 July 2023, the President lifted the state of public health emergency throughout the Philippines, effectively withdrawing all issuances that were effective only during the state of public health emergency.

Debt relief and restructuring

COVID-19 prompted the implementation of various debt relief and restructuring measures, including payment moratoriums, waivers of interest and other penalties, and staggered loan repayment schemes, as well as relaxation of regulatory and statutory restrictions and requirements on liquidity, reserves, rediscounting, and other loan and credit accommodations of banks and other non-bank financial institutions (Republic Acts Nos 11469, 11494 and 11519; Reports to the Joint Congressional Oversight Committee dated 6 and 20 April 2020 and 15 June 2020). Banks and other non-bank financial institutions that have agreed to loan extensions and restructuring beyond the year 2020 and have complied with the reportorial requirements under Revenue Memorandum Circular (RMC) No 22-2001 were granted documentary stamp tax exemptions. Further, they were granted regulatory reliefs from booking of credit losses, loan-loss provisioning, reporting of non-performing loans, and limitations on real estate loans and related party transactions (Republic Act No 11494, Section 4(aa); Republic Act No 11494, Section 4(uu); BIR Revenue Regulations (RR) No. 24-2020; Section 5.05, Rule V, Bangko Sentral ng Pilipinas Memorandum No M-2020-074).

The President also issued Executive Order No 04, Series of 2022, directing the implementation of a moratorium on the payment of the principal obligation of, and the corresponding annual interest due from, agrarian reform beneficiaries, who have been awarded lands under the agrarian laws. Under Executive Order No 04, Series of 2022, the agrarian reform beneficiaries are required to pay the value of such land in 30 annual amortisations at 6% per annum. The moratorium was extended until September 2025 by Executive Order No 40, Series of 2023.

Republic Act No 11953, or the New Agrarian Emancipation Act, wrote off individual loans, including interest, penalties and surcharges, of agrarian reform beneficiaries and exempted them from payments of estate tax which were due and payable as of the effective date of the law on 24 July 2023, on agrarian reform lands secured under agrarian reform programmes or laws.

Executive Order No 176, Series of 2022, reduced real property taxes assessed on independent power producers, and wrote off interest and penalties accruing thereon, when a power producer has build-operate-transfer contracts with government-owned and controlled corporations.   

The Financial Institutions Strategic Transfer Corporation

To further alleviate the impact of COVID-19 and ensure the financial health of the country, the Philippines enacted Republic Act No 11523, which authorises the incorporation of a Financial Institutions Strategic Transfer Corporation (FISTC), which shall have the power to, among other things, acquire NPLs and NPAs of banks and other financial institutions (Section 5). As to acquired NPAs, the FISTC may engage third parties to manage or dispose of the NPAs, or transfer the NPAs to third parties by way of sale, mortgage and other similar acts (Sections 5 (b) and (c)). As to acquired NPLs, the FISTC may enter into agreements for restructuring, writing off, payment in lieu, or other forms of debt settlement (Sections 5(d) and (f)).

To encourage the transfer of NPAs and NPLs from banks and other financial institutions to the FISTC and third parties, Republic Act No 11523 grants several incentives, such as transfer tax and value-added tax exemptions, as well as reduced property registration fees for such transactions (Republic Act No 11523, Section 15; BIR RR No 11-2021). The FISTC is also granted tax exemptions from interest income gained from additional loans extended to borrowers with NPLs (Republic Act No 11523, Section 16). Losses incurred by banks and other financial institutions as a result of the transfer of NPAs may also be carried over for a period of five consecutive taxable years (Republic Act No 11523, Section 17).

Tax implications of COVID-19 and the quarantine

The prolonged community quarantine implemented in the country resulted in a surge in small online businesses and transactions. Thus, the Bureau of Internal Revenue (BIR) reminded those conducting business transactions through any form of electronic media of the mandatory registration with the BIR (National Internal Revenue Code, Section 236; BIR Revenue Memorandum Circular (RMC) No 055-2013). Nevertheless, the BIR has waived penalties for late registration and late payment of taxes due from past electronic transactions of those who voluntarily registered and declared past electronic transactions (BIR RMC Nos 60-2020, 75-2020, and 92-2020). Due to the COVID-19 situation, the BIR extended the period within which net operating losses incurred in the years 2020 and 2021 may be claimed as deductions from gross income, from three to five consecutive taxable years immediately succeeding the year of loss (BIR RR No 25-2020).

The Philippines also enacted Republic Act No 11534, amending the National Internal Revenue Code. Among other things, Republic Act No 11534 allows projects or activities registered with an Investment Promotion Agency, such as agencies in charge of freeport zones, to carry over losses incurred during the first three years from the start of commercial operations as deductions from gross income within the next five consecutive taxable years immediately following the year of such loss (Republic Act No 11534, Section 294(C)(8)). Enterprises registered with an Investment Promotion Agency may also claim additional deductions on gross income for expenses incurred for labour, research and development, training and power, among other things (Republic Act No 11534, Section 294(C)).

The FRIA generally governs proceedings for the rehabilitation and/or liquidation of insolvent debtors.

However, the FRIA is not applicable to banks, insurance and pre-need companies, which are governed by Republic Act No 7653, or the New Central Bank Act (NCBA), Republic Act No 10607, or the Insurance Code, and Republic Act No 9829, or the Pre-Need Code, respectively, and government agencies or units (FRIA, Section 5; Securities and Exchange Commission v College Assurance Plan Philippines, Inc., GR No 213130 (09 September 2020)). The procedure for the liquidation of closed banks is governed in particular by Administrative Matter No 19-12-02-SC issued by the Philippine Supreme Court (Republic Act No 3591, as amended by Republic Act No 10846, Section 16).

Rehabilitation proceedings may be:

• court-supervised, where either the debtor (sole proprietorship, partnership, corporation) or creditor(s) file(s) a verified petition in court;
• pre-negotiated, where a rehabilitation plan endorsed by creditors is submitted to court for approval; or
• an out-of-court or informal restructuring agreement or rehabilitation plan (OCRA), where the debtor and creditors agree to implement a rehabilitation plan without need for court approval, although court assistance may be sought during implementation.

Liquidation may be initiated by either the debtor or any of its creditors. An individual debtor may also apply for suspension of payments if he or she has sufficient property but foresees the impossibility of meeting its debts as they fall due.

During rehabilitation proceedings, the court may order their conversion to liquidation proceedings upon finding that there is no substantial likelihood that the debtor will be successfully rehabilitated, or if a rehabilitation plan is not confirmed within one year from the filing of the petition for rehabilitation (FRIA, Sections 92, 25(c), 72 and 75).

Currently, there are no Philippine laws on mandatory insolvency proceedings.

Any creditor or group of creditors with an aggregate claim of at least PHP1 million, or at least 25% of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary rehabilitation proceedings against the debtor by filing a petition for rehabilitation in court, provided that:

• there is no genuine issue of fact or law on the claim(s) and the due and demandable payments have not been made for at least 60 days or the debtor has generally failed to meet its liabilities; or
• a creditor, other than the petitioning creditor(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 (FRIA, Section 13).

The involuntary liquidation of a juridical debtor may be initiated by at least three or more creditors with an aggregate claim of at least PHP1 million, or at least 25% of the subscribed capital stock or partnership contributions of the debtor, whichever is higher, by filing a petition for liquidation of the debtor in court. The petition shall show that:

• there is no genuine issue of fact or law on the claim(s), and the due and demandable payments have not been made for at least 180 days, or the debtor has generally failed to meet its liabilities as they fall due; and
• there is no substantial likelihood that the debtor may be rehabilitated (FRIA, Section 91).

At any time during the pendency of or after a court-supervised or pre-negotiated rehabilitation proceeding, three or more creditors meeting the same criteria above can also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending (FRIA, Section 91).

Furthermore, involuntary liquidation against an individual debtor may be commenced by any creditor(s) with an aggregate claim of at least PHP500,000 by filing a petition for liquidation. The petition shall set forth at least one act of insolvency under Section 105 of the FRIA.

The remedies under the FRIA become available when the debtor becomes insolvent, which is defined as a financial condition where the debtor is generally unable to pay its liabilities as they fall due in the ordinary course of business, or has liabilities that are greater than its assets (FRIA, Section 4(p)).

Restructuring and insolvency of banks and quasi-banks (collectively, banks) is governed by the NCBA. If the Monetary Board (MB) of the central bank, the Bangko Sentral ng Pilipinas, finds that a bank is continuously unable or unwilling to maintain a condition of liquidity adequate to protect the interests of depositors and creditors, it may appoint a conservator to take charge of the assets, liabilities and management, and exercise powers to restore viability. Conservatorship shall not exceed one year, and shall be terminated if the MB is satisfied that the bank can continue to operate on its own and conservatorship is no longer necessary.

If the continuation of business would result in probable losses to the bank’s depositors or creditors, the MB may summarily and without need for prior hearing forbid the bank from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation (PDIC) as receiver and direct the PDIC to proceed with the liquidation of the closed bank (NCBA, Sections 29 and 30, as amended). The PDIC shall file a petition for assistance in the liquidation of the closed bank before the appropriate courts, which have exclusive jurisdiction to adjudicate disputed claims against the closed bank (Administrative Matter No 19-12-02-SC or “Rules on Liquidation of Closed Banks”, Rule 3, Section 1(c) and Rule 4, Section 1).

In the case of insolvency of insurance companies or when continuance would be hazardous to policyholders and creditors, the Insurance Commissioner (Commissioner) shall order the company to cease and desist from doing business and designate a receiver to take charge of the assets and liabilities, and administer the same for the benefit of policyholders and creditors. The Commissioner shall then determine within 90 days whether the insurance company may be reorganised or otherwise placed in such condition so that it may be permitted to resume business with safety to its policyholders and creditors. Otherwise, the Commissioner shall order the liquidation, approve a liquidation plan to be immediately implemented, and appoint a liquidator (Insurance Code, Section 256, as amended).

For pre-need companies, whenever a pre-need company is insolvent, or when its continuance would be hazardous to its policyholders and creditors, the Commissioner shall order the company to cease and desist from transacting business and shall designate a receiver to take charge of its trust fund, assets and liabilities, collect all moneys and debts due, and exercise all powers necessary for these purposes. The Commissioner shall determine within 30 days whether the pre-need company may be reorganised or permitted to resume business. If the Commissioner determines that the pre-need company is insolvent, he or she shall order its liquidation (Pre-Need Code, Section 50).

Financial institutions are generally open to enter into debt restructuring agreements with their debtors, especially those with good credit history. These agreements are typically negotiated and executed without court intervention, in the interest of expediency. Debt restructuring agreements are typically on a single creditor-to-debtor basis.

Philippine laws generally encourage parties to settle their disputes amicably and voluntarily. However, the FRIA does not require prior mandatory restructuring negotiations before commencement of rehabilitation or insolvency proceedings.

An OCRA should be approved by the debtor, creditors representing at least 67% of the secured obligations and 75% of the unsecured obligations of the debtor, and creditors representing at least 85% of the total liabilities of the debtor (FRIA, Section 84).

A standstill period may be agreed upon by the parties pending negotiation and finalisation of the OCRA and shall be effective and enforceable not only against the contracting parties but also against other creditors, provided that the agreement is approved by creditors representing more than 50% of the total liabilities of the debtor, that notice thereof is published, and that the standstill period does not exceed 120 days. The notice must invite creditors to participate in the negotiation for an OCRA and notify them that said agreement will be binding on all creditors if the required majority votes in the preceding paragraph are met (FRIA, Section 85). A standstill agreement may include provisions similar to the effects of a suspension order issued by a rehabilitation court (AM No 12-12-11-SC, the Financial Rehabilitation Rules of the Procedure or FRIA Rules, Section 5(q), Rule 1).

An approved OCRA has the same legal effects as a confirmed court-supervised rehabilitation proceeding, the debtor being bound to comply with its provisions (FRIA, Sections 69 and 86).

Out-of-court restructuring generally does not require the appointment of steering committees.

Any amendment or modification to an OCRA must be made in accordance with the terms of the agreement and with due notice to all creditors (FRIA, Section 87).

New money may be injected through additional stock subscriptions by existing shareholders, stock subscriptions by third parties with corresponding increase in the authorised capital stock of the debtor, or “white knights” who invest in the debtor and acquire an interest through stock subscriptions or other property exchanges.

The creation of super priority liens in favour of new money investors is not typical, considering that prior security interests in specific properties of the debtor acquire priority in right regardless of subsequent encumbrances. However, customers of securities market participants or investors who previously purchased shares in the capital market have absolute priority over all other claims of whatever nature and kind insofar as trade-related assets of the debtor are concerned (FRIA, Section 136).

The FRIA does not impose duties on creditors. However, the law requires every person to act with justice, give everyone their due, and observe honesty and good faith in the exercise of their rights and in the performance of their duties (Civil Code, Article 19). A creditor that exercises its rights in a manner that results in an iniquitous distribution of the insolvent debtor’s assets, despite pending out-of-court negotiations with its co-creditors and the debtor as regards the distribution of the latter’s assets for the payment of its debts, and which results in prejudice to its co-creditors and the debtor, may be held liable for abuse of rights (Velayo v Shell Company of the Philippine Islands, Ltd, GR No L-7817, 31 October 1956).

The OCRA, being a contract among creditors and debtors, has the force of law between the parties and should be complied with in good faith (Civil Code, Article 1159). 

Notably, a dissenting creditor is not precluded from seeking court action, but the implementation of the OCRA shall not be stayed unless injunctive relief is secured from the Court of Appeals (FRIA, Section 88).

A creditor-approved OCRA results in a “cram-down effect”, which binds creditors regardless of their participation in the negotiation (FRIA, Sections 86 and 69). It is not unusual, however, for dissenting creditors to surface, in which case, a court order addressed to the dissenting creditors stating the cram-down effect may be obtained (FRIA, Section 89; FRIA Rules, Rule 4, Section 9).

Creditors may obtain security in the form of real estate (immovable) or chattel (movable) mortgage. Creditors may, alternatively, require pledge of tangible or intangible assets, suretyship, guaranty or antichresis.

Secured creditors have the option either to claim the security for the loan, through foreclosure, or alternatively, to file an ordinary action for collection before the courts (Sycamore Ventures Corporation v Metropolitan Bank and Trust Co, GR No 173183, 18 November 2013).

During court-supervised rehabilitation, a secured creditor’s security interest is generally subject to stays or deferrals (FRIA, Section 60). Nevertheless, secured creditors may still enforce their claims against other persons solidarily liable with the debtor, including accommodation mortgagors, unless the property is necessary for the rehabilitation of the debtor, and issuers of letters of credit (FRIA, Section 18).

Secured creditors may file their opposition to the petition for rehabilitation, vote against the approval of, and/or file their objections to, the rehabilitation plan. However, the court has the ultimate authority to decide whether the debtor will undergo rehabilitation.

In court-supervised liquidation, the Liquidation Order issued by the court generally does not affect the right of secured creditors to enforce their lien or foreclose on the property. However, secured creditors may choose to waive their rights under the security or lien and, instead, prove their claims in the liquidation proceedings and share in the distribution of assets (FRIA, Section 114).

Secured creditors may vote for or against the appointment of a liquidator, provided that they have filed their claims (FRIA, Section 115). They may also oppose or challenge the preliminary registry of claims prepared by the liquidator (FRIA, Sections 123 and 125).

In court-supervised rehabilitation, the security or lien of a secured creditor shall not be diminished or impaired (FRIA, Section 60). With respect to court-supervised liquidation, the Liquidation Order does not affect the right of secured creditors to enforce their lien (FRIA, Section 114).

The FRIA requires both a rehabilitation and a liquidation plan to ensure that payments made follow the rules on concurrence and preference of credits established in the Civil Code (FRIA, Sections 62 and 133).

When there is concurrence of credit, such that the properties of the debtor are simultaneously subject to the claims of several creditors, no special rules apply to the payment of claims if the assets are sufficient. The rules on preference of credit apply when the assets of the debtor are insufficient to fully pay all claims (Metropolitan Bank and Trust Company v SF Naguiat Enterprises, GR No 178407, 18 March 2015).

The rules on preference of credit recognise the superiority of certain credits and provide that these preferred credits be first satisfied before payment of ordinary credits. They confer a right to first preference in the discharge of the debtor’s assets (Development Bank of the Philippines v National Labour Relations Commission, GR No 108031, 1 March 1995).

Classification of Credits and Preferences

Under the Civil Code, credits are classified into four general categories:

• special preferred credits as to specific movable property;
• special preferred credits as to specific immovable property;
• ordinary preferred credits; and
• common credits which enjoy no preference (Civil Code, Articles 2241-2242, 2244-2245; Metropolitan Bank and Trust Company v SF Naguiat Enterprises, supra).

Special preferred credits under Articles 2241 and 2242, which are considered as mortgages or pledges of real or personal property, enjoy preference with respect to specific movable or immovable property, as provided by the Civil Code, and exclude all other credits to the extent of the value of the property. If there are concurrent liens on the same specific property, the value of the property will be divided among all lien holders, pro rata. The ordinary preferred credits under Article 2244 are not considered liens, but are given preference in the application of the debtor’s assets, following a certain sequence or order of priority (Metropolitan Bank and Trust Company v SF Naguiat Enterprises, supra).

For priority for trade-related claims of clients or customers of securities market participants, see 3.3 New Money.

In court-supervised rehabilitation, the security or lien in favour of secured creditors shall not be diminished or impaired (FRIA, Section 60). For court-supervised liquidation, the Liquidation Order does not affect the right of secured creditors to enforce their lien (FRIA, Section 114).

The FRIA confers upon trade-related claims absolute priority over other claims of whatever nature or kind insofar as trade-related assets are concerned (FRIA, Section 136).

The FRIA likewise prohibits suppliers, after the issuance of the Commencement Order, from withholding supply to the debtor, provided the debtor makes payments (FRIA, Section 16). Existing debts for the supply of goods or services prior to rehabilitation may be considered as special preferred credits with respect to a specific movable property of a debtor (Civil Code, Article 2241).

The rules on concurrence and preference of credits will apply in the implementation of the rehabilitation or liquidation plan (see 5.1 Differing Rights and Priorities).

Unsecured creditors may file their opposition to the petition for rehabilitation and vote against the approval of, and/or file their objections to, the rehabilitation plan, but the court shall ultimately decide whether to proceed with rehabilitation proceedings.

In liquidation proceedings, unsecured creditors may vote for or against the appointment of a liquidator, provided that they have filed their claims (FRIA, Section 115). They may also oppose or challenge the preliminary registry of claims prepared by the liquidator (FRIA, Sections 123 and 125).

Pre-judgment attachments and other provisional remedies in court are suspended during rehabilitation proceedings (FRIA, Sections 16-17).

Special preferred claims enjoy superiority, especially as to specific assets of the debtor. New money claims through credit arrangements, secured by mortgages of the debtor’s unencumbered property or secondary mortgages of encumbered property with the approval of senior secured parties with regard to the encumbered property, which are approved by the court upon the recommendation of the rehabilitation receiver (receiver) (FRIA, Section 55), enjoy superiority as to the specific assets.

Employees’ claims at the time of filing the petition enjoy first priority among ordinary preferred credits, unless they constitute legal liens under Articles 2241-2242 of the Civil Code (FRIA, Section 133; Civil Code, Articles 2244; Republic v Peralta, supra). However, employees’ claims during rehabilitation, which are required to carry on the business, are treated as “administrative expenses” after the commencement date (FRIA, Section 56).

In rehabilitation proceedings, upon the issuance of the Commencement Order, until the approval of the rehabilitation plan or dismissal of the petition, the imposition of taxes and fees due to the government shall be considered waived (FRIA, Section 19). In liquidation proceedings, there is no express waiver of taxes and fees provided; thus, they will be considered as ordinary preferred credits (Civil Code, Article 2244).

As stated in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, court-supervised rehabilitation may be voluntary (debtor-initiated) or involuntary (creditor-initiated). In voluntary rehabilitation, the petition filed by the debtor should be supported by majority of its board of directors or trustees and stockholders representing at least two-thirds of the outstanding capital stock or of the members in the case of a non-stock corporation (FRIA, Section 12). The threshold requirement for initiating an involuntary rehabilitation proceeding is discussed in 2.4 Commencing Involuntary Proceedings.

Process

The court, upon finding the petition sufficient in form and substance, will issue a Commencement Order which, among other things, will suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor (FRIA, Sections 15-16). Creditors will thereafter be directed to file their respective notices of claim. Creditors may nevertheless commence actions or proceedings in order to preserve, ad cautelam, their claims against a distressed corporation despite the issuance of a stay order to pause the running of the prescriptive period to file the claim (FRIA Rules, Rule 2 Section 8; Philippine Wireless, Inc. v Optimum Development Bank, GR No 208251, 10 November 2020).

At the initial hearing, the court will determine the creditors that have timely filed their claims, as well as directing the receiver to evaluate the financial condition of the debtor and submit a report within 40 days therefrom (FRIA, Section 22).

If the receiver recommends rehabilitation of the debtor, the court may give due course to the petition. Thereafter, the court shall direct the receiver to review, revise and/or recommend action on the rehabilitation plan (FRIA, Section 26). The receiver shall also confer with the debtor and creditors regarding the plan (FRIA, Section 63).

Rehabilitation Plan

The statutory contents of the rehabilitation plan are listed in Section 62 of the FRIA, which, among other things, requires that the treatment for each class of creditors be specified therein, and provides for the equal treatment of all claims within the same class.

The rehabilitation plan shall be approved by all classes of creditors whose rights are adversely modified or affected by the rehabilitation plan. A class is deemed to have approved the plan if members of the said class holding more than 50% of the total claims concur. Otherwise, it shall be deemed rejected (FRIA, Section 64).

Once approved, the receiver shall submit the rehabilitation plan to the court for confirmation (FRIA, Section 65). Creditors may still file their objections to the rehabilitation plan within 20 days from notice from the court that the plan has been submitted for confirmation.

Notwithstanding the rejection of the plan by creditors, the court may still confirm it if the following circumstances are present:

• the rehabilitation plan complies with the requirements specified in the FRIA;
• the receiver recommends its confirmation;
• the shareholders, owners or partners of the debtor lose at least their controlling interest as a result of the rehabilitation plan; and
• the rehabilitation plan would likely provide the objecting class of creditors with compensation with a net present value greater than that which they would have received if the debtor were under liquidation (FRIA, Section 64).

Once the rehabilitation plan is approved by the rehabilitation court, such rehabilitation plan is binding upon all the affected persons, which must be carried out by the debtor with the assistance of the receiver. Further, the rehabilitation court has jurisdiction over the implementation of the rehabilitation plan, and the authority to grant incidental reliefs aimed towards the successful rehabilitation of the insolvent debtor, including the issuance of orders directing a third party to pay amounts due to the insolvent debtor (City Government of Taguig v Shoppers Paradise Realty Development Corp., G.R. No. 246179, 14 July 2021).

Court Approval and Supervision

The court shall have a maximum period of one year from the date of filing the petition within which to approve the rehabilitation plan (FRIA, Section 72).

As stated above, a court-confirmed rehabilitation plan is binding upon all persons who may be affected by it (FRIA, Section 69).

The rehabilitation proceeding under the FRIA is not confidential but is, in fact, in rem such that jurisdiction over all persons affected by the proceedings shall be considered acquired upon publication of the notice of commencement of proceedings in a newspaper of general circulation (FRIA, Section 3).

Court-supervised rehabilitation shall be terminated by order of the court either declaring a successful implementation of the rehabilitation plan or a failure of rehabilitation (FRIA, Section 74).

Any Commencement Order issued by the court includes a stay or Suspension Order which will suspend all actions or proceedings, in court or otherwise, for the enforcement of claims, as well as suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor (FRIA, Section 16).

During rehabilitation, the debtor continues operating the business under its existing management, unless, upon motion of any interested party, the court directs the receiver or a management committee to assume and exercise the powers of management in any of the following cases:

• actual or imminent danger of dissipation, loss, wastage or destruction of the assets;
• paralysation of the business operations; or
• gross mismanagement, fraud or other wrongful conduct on the part of, or gross or wilful violation of the FRIA by, the existing management (FRIA, Section 36).

The debtor can borrow money during the pendency of rehabilitation proceedings, provided that the same is used to enhance rehabilitation and that the receiver recommends a loan, and it is approved by the court. Post-commencement debt shall be treated as an administrative expense (FRIA, Section 55).

However, as to a closed bank under receivership, it can only sue and be sued through its statutory receiver, the PDIC. Thus, in general, any complaint or petition filed by the closed bank without authority from the PDIC produces no legal effect (Banco Filipino Savings and Mortgage Bank v Bangko Sentral ng Pilipinas, G.R. No. 200642, 26 April 2021).

After the petition for rehabilitation is given due course and a creditors’ meeting is called, the creditors belonging to a class may formally organise a committee among themselves or, as a body, agree to form a creditors’ committee composed of a representative from each class of creditors, such as:

• secured creditors;
• unsecured creditors;
• trade creditors and suppliers; and
• employees of the debtor, among others (FRIA, Section 42).

This enumeration is not exclusive.

The creditors’ committee shall be the primary liaison between the receiver and creditors. The creditors’ committee cannot exercise or waive any right or give any consent on behalf of any creditor(s) unless specifically authorised in writing (FRIA, Section 43).

The petition and the rehabilitation plan, the preliminary registry of claims, the status reports from the receiver, and such other documents and notices furnished or made available by the receiver can be made available to the creditors (FRIA, Section 16; FRIA Rules, Rule 2, Section 26).

A court-confirmed rehabilitation plan is binding upon all persons who may be affected by it, regardless of whether they participated in the proceedings, whether they opposed the rehabilitation plan or whether their claims have been scheduled (FRIA, Section 69; China Banking Corp. v St. Francis Square Realty Corp., G.R. Nos. 232600-04, 27 July 2022). Payments shall be made to creditors according to the rehabilitation plan (FRIA, Section 69).

A rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporation’s total liabilities if it is shown that rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable (FRIA, Section 64; Banco de Oro Unibank, Inc. v International Copra Export Corporation, G.R. Nos. 218485-86, 28 April 2021). In fact, one of the consequences of the exercise of this “cram-down” power is the impairment of contracts (China Banking Corp. v St. Francis Square Realty Corp, supra).

The FRIA does not explicitly prohibit the trading of claims against a debtor undergoing rehabilitation. However, any trading of claim is subject to the approval of the receiver and/or the court (FRIA, Section 47).

A group of debtors may jointly file a petition for voluntary rehabilitation when one or more of its members foresee that there is the possibility of not meeting debts when they fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group and/or the participation of other members of the group is essential under the terms and conditions of the proposed rehabilitation plan (FRIA, Section 12).

No funds or property of the debtor shall be used or disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the rehabilitation proceedings (FRIA, Section 48).

Upon application of a secured creditor holding a lien against, or a holder of an ownership interest in the property held by, the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or receiver to take reasonable steps necessary to prevent the depreciation or to protect the security of the secured creditor (FRIA, Section 53).

During the pendency of the rehabilitation, and upon issuance of the Commencement Order, the debtor is prohibited from selling, encumbering or disposing of any of its properties in any manner, except in the ordinary course of business (FRIA, Section 16).

However, the court, upon application of the receiver, may authorise the sale of unencumbered property of the debtor outside the ordinary course of business upon showing that the property, by its nature or other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy (FRIA, Section 49). Likewise, the court may authorise the sale, transfer, conveyance or disposal of encumbered property of the debtor if, upon application of the receiver and with the consent of the secured creditor(s) and after notice and hearing, the court determines that the disposal is necessary for the continued operation of the debtor’s business and the debtor has made arrangements to provide a substitute lien or ownership right that equally provides security for the counterparty’s claim or right (FRIA, Section 50). Thus, upon authorisation by the court, the receiver shall execute any instrument necessary to transfer the property (FRIA Rules, Rule 2, Sections 48-49).

The FRIA does not expressly prohibit “stalking horse” bids or credit bidding in the sale of an insolvent debtor’s assets. There likewise appears to be no prohibition on the sale or disposition of assets of the debtor that have been pre-negotiated prior to the commencement of the rehabilitation proceedings, as long as the necessary conditions and approvals are present (FRIA, Sections 49-50).

Note that the debtor may confirm a contract prior to the rehabilitation proceedings by obtaining the written consent of the receiver and sending written notice to the counterparties concerned within 90 days from the issuance of the Commencement Order. Contracts not confirmed are automatically terminated, in which case, any claim for actual damages arising from the termination shall be considered a pre-commencement claim against the debtor, filed with the court as a separate claim. The claim shall be considered in the rehabilitation plan together with the other claims against the debtor (FRIA Rules, Rule 2, Section 56).

The issuance of the Commencement Order shall not in any way diminish or impair the security or lien of a secured creditor, or the value of its lien or security, except that its right to enforce said security or lien may be suspended during the term of the Stay Order (FRIA, Section 60).

Nevertheless, the court, upon recommendation of the receiver, may allow a secured creditor to enforce its security or lien, or foreclose upon property of the debtor securing the claim, if the property is not necessary for rehabilitation. The secured creditor shall be admitted to the rehabilitation proceedings only for the balance of its claim, if any (FRIA, Section 59).

Upon the recommendation of the receiver and approval of the court, the debtor may incur other obligations, such as credit arrangements to enhance rehabilitation, which may be secured by mortgages of its unencumbered property or secondary mortgages of encumbered property, with the approval of senior secured parties as to the encumbered property. Payments for these shall be considered administrative expenses (FRIA, Section 55).

Values of claims may be determined in the registry of claims. The receiver, within 20 days from assumption into office, shall establish a preliminary registry of claims which shall be available for inspection by the creditors (FRIA, Section 44). This registry of claims shall be submitted to the court together with the challenges, if any (FRIA, Section 45).

The rehabilitation plan is required to, among other things:

• provide for equal treatment of all claims within the same class or subclass of creditors;
• ensure that the payments made under the plan follow the rules on concurrence and preference of credits (see 5.1 Differing Rights and Priorities);
• maintain the security interest of secured creditors and preserve the liquidation value of the security; and
• disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof (FRIA, Section 62).

As to existing contracts, within 90 days following the commencement of court-supervised rehabilitation proceedings, the debtor, with the consent of the receiver, shall notify each contractual counterparty of whether it is confirming a particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the required deadline shall be considered terminated. Claims for actual damages, if any, arising from the election to terminate a contract shall be considered pre-commencement claims against the debtor (FRIA, Section 57).

There is no express provision under the FRIA that allows the release of non-debtor parties from liability and the circumstances thereof.

The set-off of any debt by and between a debtor and creditor after the commencement date is prohibited (FRIA, Section 17).

Breach of the rehabilitation plan by the debtor company may be a ground to terminate the court-supervised rehabilitation proceedings (FRIA, Section 74).

Nothing prevents existing equity owners from retaining other property on account of their ownership interests, considering that the corporation has a legal personality separate and distinct from its equity owners.

Statutory liquidation under the FRIA may either be voluntary or involuntary. The commencement of involuntary liquidation against juridical and individual debtors is discussed in 2.4 Commencing Involuntary Proceedings.

Voluntary liquidation is commenced by an individual or juridical debtor by filing a verified petition with the court. In the case of an individual debtor, his or her properties should not be sufficient to cover his or her liabilities and he or she should owe debts exceeding PHP500,000 (FRIA, Sections 90 and 103).

During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the juridical debtor may also initiate liquidation proceedings by filing a motion in the same court where rehabilitation proceedings are pending (FRIA, Section 90).

In cases of voluntary liquidation, a schedule of debts and liabilities shall be included in the petition. If the petition is found to be sufficient in form and substance, the court shall subsequently issue a Liquidation Order (FRIA, Sections 90, 103 and 104).

The Liquidation Order

The Liquidation Order shall, among other things, declare the debtor insolvent, direct payments of any claims and conveyance of any property due the debtor to the liquidator, prohibit payments by the debtor and the transfer of any property by the debtor, direct all creditors to file their claims with the liquidator, and set the case for the hearing for the election and appointment of the liquidator (FRIA, Section 112).

Upon issuance of the Liquidation Order, a juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated (FRIA, Section 113). Aside from the dissolution of the juridical entity, the Liquidation Order also has the effect of vesting legal title to and control of all the assets of the debtor (except those exempt from execution) in the liquidator or court (if a liquidator has not been appointed yet) (FRIA, Section 113). At this point, all contracts of the debtor shall be deemed terminated and/or breached (unless the liquidator declares otherwise and the contracting party agrees), no separate action for the collection of an unsecured claim shall be allowed and no foreclosure proceeding shall be allowed for 180 days (FRIA, Section 113). However, the Liquidation Order shall not affect the right of a secured creditor to enforce its lien (FRIA, Section 114).

Role of the Liquidator

Within 20 days from their assumption into office, the liquidator shall prepare a preliminary registry of claims which can be challenged by the creditors. The registry shall then be submitted to the court for approval (FRIA, Sections 123 and 125). Within three months from his or her assumption into office, the liquidator shall submit a liquidation plan to the court (FRIA, Section 129).

A liquidator or, with his or her approval, a creditor, may initiate and prosecute any action to rescind or declare null and void any transaction executed with intent to defraud a creditor(s) (FRIA, Sections 127-128). If the debtor and the creditor are mutually debtor and creditor of each other, one debt shall be set off against the other, and only the balance, if any, shall be allowed in the liquidation proceedings (FRIA, Section 124).

The liquidation plan and its implementation shall ensure that the concurrence and preference of credits under the Civil Code shall be observed (FRIA, Section 133). The liquidator shall render a quarterly report to the court. The liquidator shall likewise file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator (FRIA, Sections 121-122).

Upon determining that the liquidation has been completed, the court shall issue an order approving the report and order the Securities and Exchange Commission to remove the debtor from the registry of legal entities (FRIA, Section 134). Once removed, the court shall issue an order terminating the liquidation proceedings (FRIA, Section 135).

Upon the issuance of the Liquidation Order, legal title to and control of all the assets of the debtor shall be deemed vested in the liquidator, or in the court, pending the election or appointment of such liquidator (FRIA, Section 113).

The authority of the liquidator to sell the assets of the debtor varies, depending on whether the asset is encumbered or unencumbered.

Encumbered Assets

As to encumbered assets, the Liquidation Order does not affect the right of secured creditors based on their respective liens over the encumbered assets of the debtor (FRIA, Section 114). Thus, secured creditors may enforce their liens in accordance with the applicable contract or law (FRIA, Section 114). However, since legal title over all the assets of the debtor is vested in the liquidator, actions by secured creditors for the enforcement of their liens over the encumbered assets of the debtor must implead both the debtor and the liquidator, who is an indispensable party (Banzon v Cruz, GR No L-31789, 29 June 1972).

As an alternative, instead of enforcing their liens through courts, secured creditors may opt for the encumbered assets to be conveyed to them for the satisfaction of their claims, for value to be fixed in a manner agreed upon by the creditors and the liquidator. The creditor may also allow the liquidator to sell the encumbered asset under such terms and conditions approved by the liquidation court (Administrative Matter No 15-04-06-SC or the “Financial Liquidation and Suspension of Payments Rules”, Rule 4(B), Section 7).   

Unencumbered Assets

As to unencumbered assets, the liquidator may sell the same and convert the asset into money through a sale at a public auction (FRIA, Section 131), with the approval of the liquidation court (Financial Liquidation and Suspension of Payments Rules, Rule 4(F), Section 26). Court approval is required if the unencumbered assets will be sold in a private sale or conveyed directly to a creditor for the satisfaction of the latter’s claim (FRIA, Section 131). 

In the registry of claims and the liquidation plan, the liquidator must identify the secured and unsecured assets of and claims against the debtor (FRIA, Sections 123 and 129; Financial Liquidation and Suspension of Payments Rules, Rule 4(C), Section 17, and Rule 4(F), Section 23). When duly authorised by the court and the sale is made pursuant to the approved liquidation plan, a purchaser shall acquire good title over the assets sold during liquidation (FRIA, Sections 131 and 133).

“Stalking Horse” Bids

There is no express prohibition against “stalking horse” bids or credit bidding in the sale of insolvent debtor’s assets (FRIA, Sections 114 and 131).

Generally, transactions executed prior to the issuance of the Liquidation Order shall be binding on the parties. However, the liquidator, or, with his or her approval, a creditor may initiate an action to rescind or declare void any transaction on the ground that the same was executed with intent to defraud creditors or that it constitutes undue preference of creditors (FRIA, Section 127). If the creditor fails to secure the approval of the liquidator, it may seek permission from the court to commence an action.

See 3.2 Consensual Restructuring and Workout Processes, 6.2 Position of the Company and FRIA, Section 119(G).

Section 139 of the FRIA adopts the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (“UNCITRAL Model”).

The UNCITRAL Model provides recognition or other relief of restructuring or insolvency proceedings in other countries, except in proceedings concerning designated entities (such as banks or insurance companies) subject to a special insolvency regime in a State that wishes to exclude the said entities from such recognition or relief (UNCITRAL Model, Article 1).

Thus, a foreign representative may apply to the Philippine court for recognition of the foreign proceeding (UNCITRAL Model, Article 15), subject to limitations provided under Philippine laws. Upon application for recognition, the court may grant provisional reliefs (FRIA Rules, Rule 5, Section 11; UNCITRAL Model, Article 19).

Philippine courts may enter into protocols or arrangements with foreign courts to “co-operate to the maximum extent possible in all court-to-court communications for purposes of information or assistance” (FRIA Rules, Rule 5, Section 18).

“To harmonize the laws of different jurisdictions in cross-border insolvency proceedings, the principle of lex loci intentionis must be applied, as it relates to choice of law stipulations in various lending and security contracts.” (Standard Chartered Bank, Philippine Branch v Philippine Investment Two, Inc., G.R. Nos. 216608, 216625 & 216702-03, 26 April 2023).

The court shall refuse to take any action in any cross-border proceeding if it would be against public policy of the Philippines, or if it finds that the foreign country does not reciprocally extend recognition to Philippine rehabilitation proceedings or does not grant the same rights to a Philippine creditor in a manner substantially in accordance with Philippine law (FRIA Rules, Rule 5, Section 4).

Foreign creditors are treated equally with local creditors (FRIA Rules, Rule 5, Section 3(A)). It is a Philippine policy to “ensure equitable treatment of creditors who are similarly situated” (FRIA, Section 2).

Judicial recognition of a foreign judgment is allowed in the Philippines. A foreign judgment upon a specific thing is conclusive upon the title thereto, while a foreign judgment against a person is presumptive evidence of a right as between the parties (Rules of Court, Rule 39, Section 48). Upon judicial recognition of the foreign judgment, the right becomes conclusive (Suzuki v Office of the Solicitor General, GR No 212302, 02 September 2020).

In the recognition of foreign judgments, Philippine courts may not substitute their judgment, and are limited to resolving the question of whether to extend the effect of the foreign judgment in the Philippines. Thus, Philippine courts will only determine whether the foreign judgment is contrary to an overriding public policy in the Philippines, and whether any alleging party is able to prove an extrinsic ground to repel the foreign judgment, such as, among other things, lack of jurisdiction of the foreign court, lack of notice to the party, collusion, fraud, or clear mistake of law or fact. In the absence of any inconsistency with public policy or adequate proof to repel the judgment, Philippine courts should, by default, recognise the foreign judgment as part of the comity of nations (Suzuki v Office of the Solicitor General, GR No 212302, 02 September 2020).

For Philippine courts to judicially recognise a foreign judgment, the petitioner only needs to prove the foreign judgment as a fact under the Rules of Court through an official publication thereof or a certification or copy attested by the officer who has custody of the judgment. The copy certification should be made by the proper Philippine diplomatic or consular officer assigned to the country of origin (Suzuki v Office of the Solicitor General, GR No 212302, 02 September 2020), subject to the applicable treaties or conventions on authentication of documents, eg, Apostille Convention (Rules of Court, Rule 132, Section 24).

The statutory officers under the FRIA are the receiver and liquidator, who are appointed in rehabilitation and liquidation proceedings, respectively.

The receiver is deemed to be an officer of the court whose principal duties are to (i) preserve and maximise the value of the assets of the debtor during the rehabilitation proceedings; (ii) determine the viability of the rehabilitation of the debtor; (iii) prepare and recommend to the court a rehabilitation plan; and (iv), once approved, implement the same (FRIA, Section 31). To effectively carry out his or her mandate, the receiver shall not be subject to any action, claim or demand in connection with any act done or omitted by him or her in good faith in the exercise of his or her functions and powers as receiver (FRIA, Section 41; Gabionza, Jr. v Steel Corporation of the Philippines, GR No. 222243 (Notice), 06 July 2020).

The liquidator is likewise deemed to be an officer of the court, whose principal duties are to preserve and maximise the value and to recover the assets of the debtor, in light of his or her duty to liquidate the assets and discharge to the extent possible all the claims against the debtor (FRIA, Section 119).

Being officers of the court, both the receiver and the liquidator are accountable to it. Both are required to take an oath and file a bond to ensure the proper and faithful discharge of their respective powers, duties and responsibilities (FRIA, Sections 34 and 117). The receiver and the liquidator are required to render and submit their report to the court (FRIA, Sections 24, 73 and 121-122).

In cases of court-supervised and pre-negotiated rehabilitation proceedings, the receiver is appointed by the court upon consideration of the nominees of the debtor and/or creditors (FRIA, Section 30). In liquidation proceedings, the liquidator is selected either by election of creditors that have filed their claims with the court, or by appointment of the court in cases such as failure of election or vacancy (FRIA, Section 116).

In cases of rehabilitation, the debtor continues to exercise management, subject to the receiver’s monitoring, unless the court orders the receiver to assume management (FRIA, Sections 31 and 47). Any disbursement, payment, sale, disposal, assignment, transfer or encumbrance of property, or any other act affecting title or interest to the property, shall be subject to the approval of the receiver and/or court (FRIA, Section 47).

In liquidation, the liquidator is tasked to manage and dispose of the debtor’s assets with a view towards maximising proceeds therefrom, to pay the creditors and stockholders, and to terminate the debtor’s existence (FRIA, Section 119).

Any natural or juridical person (with an appointed natural person as representative) may serve as receiver or liquidator, provided he or she is qualified under the FRIA (FRIA, Sections 4(w), 28-29 and 118). The receiver/liquidator must:

• be a Filipino citizen or resident for at least six months prior to his or her nomination;
• be of good moral character with acknowledged integrity, impartiality and independence;
• have the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant training/experience; and
• have no conflict of interest (FRIA, Sections 29 and 118).

Appointing Professionals

Restructuring professionals, attorneys, accountants or other professionals can be appointed as receivers/liquidators provided that they meet the requirements. Moreover, considering the prohibition on conflict of interest, a creditor, owner, partner or stockholder of the debtor; a director, officer, owner, partner or employee or the auditor or accountant of the debtor; or any other individual with direct or indirect material interest in the debtor or any creditor, cannot serve as receiver or liquidator (FRIA, Section 40).

The receiver or liquidator may be removed at any time by the court, on its own, or on motion of creditor(s) representing at least 50% of the total debts. The grounds for removal of a receiver or liquidator include the following:

• incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his or her duties and powers;
• lack of a particular or specialised competency required by the specific case;
• illegal acts or conduct in the performance of his or her duties and powers;
• lack of qualification or presence of any disqualification;
• conflict of interest; and
• partiality or lack of independence (see FRIA, Sections 32 and 119 and the Financial Liquidation and Suspension of Payments Rules, Rule 4, Section 13).

In cases of vacancy for the position of receiver, the court may appoint a replacement receiver from nominees submitted by the debtor and creditors, or any other person qualified (FRIA, Section 35). As to vacancy for the position of liquidator, the court may set another hearing of the liquidator’s election (FRIA, Section 116).

Directors owe fiduciary duty to stockholders of the corporation considering that directors direct the corporate affairs and properties, and hence, the stockholders’ property interests (Bernas v Cinco, GR Nos 163356-57, 10 July 2015).

Directors and officers are subject to liabilities from the point they have notice of the commencement of insolvency proceedings, or reason to believe that proceedings are about to be commenced. From that point, as part of their duties, directors and officers cannot dispose of or conceal debtor property in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors. Directors or officers shall be liable for double the value of the property or the amount of transaction, whichever is higher, in cases of disposals just mentioned, or those made other than in the ordinary course of business, or to embezzle or misappropriate any property of the debtor (FRIA, Section 10).

Furthermore, directors, officers or employees may be held criminally liable for the following acts:

• concealing, destroying or causing to be destroyed, mutilating or falsifying any property of the debtor, or any book, deed, document relating thereto;
• making any payment, sale, assignment, transfer or conveyance of any property belonging to the debtor with intent to defraud the creditors;
• non-disclosure to the receiver or liquidator within one month from knowledge or belief of any person having a false or fictitious claim against the debtor, or attempts to account for any of the debtor’s property through fictitious losses or expense; or
• knowingly violating a prohibition or failing to undertake an obligation established by the FRIA (FRIA, Section 145).

Determining Financial Distress

There are currently no actual measures by which to determine a debtor’s financial distress or insolvency other than that it is generally unable to pay its liabilities as they fall due in the ordinary course of business. However, creditors may look into a debtor’s financial statements to determine whether its liabilities are greater than its assets.

As a general rule, directors cannot be liable for pre-insolvency obligations of the corporation, the latter being a legal personality separate and distinct from those who comprise it (Bustos v Millians Shoe, Inc, GR No 185024, 04 April 2017). Thus, directors and officers enjoy limited liability.

In addition to the directors’ liabilities under the FRIA, the RCC imposes liability on directors “who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation” (RCC, Section 30). The RCC likewise imposes criminal liability on directors guilty of fraudulent conduct of business (RCC, Sections 165 and 171).

As stated in 10.1 Duties of Directors, directors may be held criminally liable for certain acts. Any criminal action against a director shall not be affected by any proceeding commenced under the FRIA (FRIA, Section 18).

In rehabilitation proceedings, transactions entered into by the debtor or those involving its assets that transpired prior to commencement date may be rescinded or declared void, on the ground that the said transaction was executed with intent to defraud a creditor(s) or gave undue preference to a creditor(s) (FRIA, Section 58).

The grounds mentioned are likewise applicable in liquidation proceedings (FRIA, Section 127). In such case, any transaction occurring prior to the issuance of the Liquidation Order or, in conversion of the rehabilitation to liquidation proceedings prior to the commencement date, entered into by the debtor or involving its assets may be rescinded or declared void.

There is currently no look-back period provided under Philippine laws. Any transaction occurring prior to the commencement date or the issuance of a Liquidation Order may be examined.

In the event of rehabilitation or liquidation proceedings, the claim to annul transactions as described in 11.1 Historical Transactions shall be made through an action instituted by either the receiver or liquidator, as the case may be, or by any creditor but with the approval of the receiver.

If the receiver or liquidator does not consent to the filing or prosecution of such action, any creditor may file and/or prosecute such action, subject to court approval after determining that the rights of the creditors will be prejudiced if the action is not filed and/or prosecuted. Before court approval, the receiver or liquidator may still signify his or her readiness to institute the proceeding for the benefit of the creditors (FRIA, Sections 59 and 128; FRIA Rules, Rule 2, Section 58).