Special Commercial Laws - Preliminary Exam Reviewer PDF

Tab 1  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY...

Tab 1  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER — II. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 11. Voting Creditor 2010 ( R.A. 10142) — ​ a creditor that is a member of a class of creditors, the consent of which is necessary for the approval of a Rehabilitation Plan under Art. 2237. Insolvency shall be governed by special laws insofar as they this Act are not inconsistent with the Civil Code. 12. Liquidator Financial Rehabilitation and Insolvency Act (FRIA) ​ natural person or juridical entity appointed as such by the court ​ Lapsed into law on July 18, 2010 and entrusted with such powers and duties as set forth in this Act ​ Expressly repealed the Insolvency Law ​ if the liquidator is a juridical entity, it must designated a natural person who possesses all the qualifications and none of the Purpose: (Sec. 2) disqualifications as its representative, it being understood that ​ To encourage debtors, both juridical and natural persons and the juridical entity and the representative are solidarity liable for their creditors to collectively and realistically resolve and adjust all obligations and responsibilities of the liquidator competing claims and property rights. ​ To ensure a timely, fair, transparent, effective, and efficient 13. Officer rehabilitation or liquidation of debtors. ​ natural person holding a management position described in or contemplated by a juridical entity's articles of incorporation, bylaws or equivalent documents, except for the corporate A. DEFINITION OF TERMS secretary, the assistant corporate secretary and the external auditor 1. Rehabilitation ​ restoration of the debtor to a condition of successful operation 14. Stakeholder and solvency, if it is shown that its continuance of operation is ​ a holder of shares of a corporation economically feasible and its creditors can recover by way of the ​ a member of a nonstock corporation or association present value of payments projected in the plan, more if the ​ a partner in a partnership. debtor continues as a going concern than if it is immediately liquidated. 15. Securities Market Participant 2. Insolvent ​ a broker-dealer, underwriter, transfer agent or other juridical ​ the financial condition of a debtor that is: persons transacting securities in the capital market. ○​ Generally unable to pay liabilities as they fall due on the 16. Parent ordinary course of business (hence illiquid); OR ​ a corporation which has control over another corporation either ○​ Has liabilities that are greater than its or his assets directly or indirectly through one or more intermediaries. (balance sheet insolvent). 17. Subsidiary 3. Liabilities ​ a corporation more than fifty percent (50%) of the voting stock ​ money claims against the debtor of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby 4. Debtor (SPIC) becomes its parent corporation. ​ Sole proprietorship registered with the Department of Trade and Industry (DTI) 18. Affiliate ​ Partnership registered with the Securities and Exchange ​ a corporation that directly or indirectly, through one or more Commission (SEC) intermediaries, is controlled by, or is under the common control ​ Individual debtor, who is a natural person that is a resident of another corporation. citizen, that has become insolvent. ​ Corporation duly registered and existing under Philippine laws 19. Commencement date ​ the date on which the court issues the Commencement Order, Exclusions which shall be retroactive to the date of filing of the petition for ○​ Bank voluntary or involuntary proceedings. ○​ Insurance companies ○​ Pre-need companies B. SUSPENSION FOR PAYMENTS ○​ National and local government agencies or units 5. Individual Debtor Suspension of payments ​ Natural person who is a resident and citizen of the Philippines ​ a judicial insolvency proceeding by which an individual debtor that has become insolvent. submits, for approval by his debtors, a proposed agreement, containing propositions delaying or extending the time of 6. Group of Debtors payment of his debts. ​ Corporations financially related to one another as parent corporations, subsidiaries, or affiliates; Who can avail? ​ Partnerships owned more than 50% by the same person ​ Only an INDIVIDUAL DEBTOR (illiquid debtor) may file a petition ​ Single proprietorships owned by the same person. for suspension of payment. The debtor possesses sufficient property to cover all his debts but foresees the impossibility of 7. Creditor meeting them when they respectively fall due ​ Natural or juridical person which has a claim against the debtor that arose on or before the commencement date. Purpose: ​ Debt moratorium: To delay or extend the time of payment of 8. General Unsecured Creditor one’s debts. ​ Creditor whose claim or a portion thereof its neither secured, ​ Allows distressed debtor to defer payment of his debts by preferred nor subordinated under the FRIA. presenting a plan. ○​ Must relate to a schedule of payments 9. Secured Creditor ○​ No haircut (reduction of debts), only a grace period to pay ​ A creditor with secured claim the debts How Initiated 10. Unsecured Creditor ​ Illiquid debtor files a duly verified petition that he be declared in ​ A creditor with unsecured claim the state of suspension of payments by the court of the Preliminary Exam Mentoring Series | 1  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER province/city in which he has resided for 6 months prior to the ​ Disposing of his property except those used in the filing of the petition ordinary operations of commerce or industry in which he is engaged Minimum Requirements for Petition ​ Making any payment outside of the necessary or 1.​ Schedule of debts and liabilities legitimate expenses of his business 2.​ Inventory of assets 3.​ Proposed agreement with his creditors Approval or Disapproval of Proposed Agreement/Creditors’ Meeting Suspension of Payments vs Rehabilitation and Liquidation 1.​ The presence of creditors holding claims amounting to at least Suspension of Payments Rehabilitation 3/5 of the liabilities of the debtor is necessary for the meeting. Applies only to Individual Debtor Applies to Business Organizations ○​ A creditor has no right to vote if he incurred his credit within 90 days prior to the filing of the petition for The debtor has sufficient assets The debtor is insolvent suspension. to cover it liabilities 2.​ Doble Majority is necessary for the approval of proposed agreement with the creditors, wit: Secured debtors are not affected Secured debtor are affected by a.​ 2/3 of the creditors voting unite upon the same stay order proposition b.​ The claims represented by said majority vote amount to Filed by the debtor This may be initiated by the: at least 3/5 of total liabilities of the debtor mentioned in ​ Debtor (voluntary the petition rehabilitation) ​ Creditors (involuntary Effect of Approval by the Creditors rehabilitation) ​ Once a majority vote is reached in the creditors meeting, the court shall issue an Order that the agreement be carried out and There is no minimum The claim of, or the aggregate of all parties bound thereby with its terms requirements for the amount of claims against the debtor is ​ Order shall be binding upon all creditors. whose claims are claims atleast 25% of the Subscribed included in the schedule of debts and liabilities submitted by the Capital Stock or Partners’ individual debtor, and who were properly summoned. Contributions, whichever is higher Effect of Disapproval by the Creditors ​ The suspension of payments proceedings will be terminated and Suspension of Payments Liquidation the creditors shall be at liberty to enforce their rights which correspond to them. The debtor is not insolvent Debtor is insolvent Payment of obligations stays The obligations are discharged C. REHABILITATION ACCOUNTING FOR FINAL TAXES Applies only to individual debtor Can cover juridical persons and A. REHABILITATION individual debtor Rehabilitation ​ restoration of the debtor to a condition of successful operation May be filed by the debtor This may be initiated by the: and solvency, if it is shown that ​ Debtor (voluntary ○​ its continuance of operation is economically feasible insolvency) ○​ its creditors can recover by way of the present value of ​ Creditors (involuntary payments projected in the plan, more if the debtor insolvency) continues as a going concern than if it is immediately There is no minimum amount of It is required that the debt of the liquidated. liabilities prescribed individual debtor is not less than Rehabilitation proceedings are: Php 500,000 1. In Rem: Jurisdiction over all persons affected is considered as acquired upon publication of the notice of proceedings. Summary and Non-Adversarial SUSPENSION OF PAYMENT ORDERS 2. Summary and Non-Adversarial When Issued? ​ Within 5 working days if the court finds the petition sufficient in TYPES OF REHABILITATION PROCEEDINGS form and substance ​ Remains effective from the time of the filing of the petition until 1. Court-supervised the termination of the proceedings ​ A judicial proceeding; may be voluntary or involuntary. Most Important Elements Proceedings Covered by FRIA 1.​ Automatic Stay: No creditor except those exempt shall institute a. Voluntary Rehabilitation - proceedings initiated by the debtor proceedings to collect its claim from the time of filing until the termination of the proceedings Types of Business Who will approve/File the ​ Exempt from stay order: Organization petition ○​ Claims for personal labor and maintenance ○​ Expense of last illness and funeral of the wife or Sole Proprietorship Owner/Proprietor children of the debtor incurred in the 60 days (Registered with DTI) immediately prior to the filing of the petition Partnership Majority of the partners ○​ Secured creditors (Registeted with SEC) ​ These excepted creditors are not affected by the proposed agreement with the Corporation Stock Corporation: debtor unless they participated and voted ​ Majority of the Board of in the creditor’s meeting. Directors ​ 2/3 of the Outstanding 2.​ Injunction against debtor: The individual debtor is subjected Capital Stock to an injunction against: Preliminary Exam Mentoring Series | 2  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER an Order. Non-stock Corporation: Objections to the Petition or Rehabilitation Plan (Sec. 79) ​ Majority of the Board of Any creditor or other interested party may submit to the court a verified Trustees objection to the petition or the Rehabilitation Plan not later than 8 days ​ 2/3 of the Members from the date of the second publication of the Order. A group of debtors may file a petition for rehabilitation when: 1.​ One of more of its members foresee the impossibility of meeting The objections shall be limited to the following: debts when they respectively fall due a.​ The allegations in the petition or the Rehabilitation Plan, or the 2.​ The financial distress would likely adversely affect the financial attachments thereto, are materially false or misleading condition and/or operations of the other members of the group, b.​ The majority of any class of creditors do not in fact support the and/or the participation of the other members of the group is Rehabilitation Plan essential under the terms and conditions of the Rehabilitation c.​ The Rehabilitation Plan fails to accurately account for a claim Plan. against the debtor and the claim is not categorically declared as a contested claim The debtor must file a verified petition for rehabilitation with the court, d.​ The support of the creditors, or any of them, was induced by to establish: fraud. 1.​ The insolvency of the debtor 2.​ The viability of the rehabilitation. Hearing on the Objections (Sec. 80) ​ The date of the hearing b. Involuntary Rehabilitation - proceedings initiated by the creditor ○​ no earlier than 20 days and no later than 30 days from Types of Business Who will approve/File the the date of the second publication of the Order. Organization petition ​ If the court finds merit in the objection, Sole Proprietorship Creditor or group creditor with a ○​ it shall direct the debtor, when feasible to cure the detect (Registered with DTI) claim of, aggregate thereof, must within a reasonable period amount to: Partnership ​ at least Php 1 million or at ​ If the court determines that the debtor or creditors supporting (Registeted with SEC) least 25% of the the Rehabilitation Plan acted in bad faith, or that the objection is subscribed capital stock non-curable, Corporation OR ○​ the court may order the conversion of the proceedings ​ partners’ contributions, into liquidation. Note: whichever is higher Approval of the Plan (Sec. 78, 81) ​ Within 10 days from the date of the second publication of the Circumstances for Involuntary Rehabilitation Order There is no genuine issue of fact or law on the claims of the creditors ○​ the court shall approve the Rehabilitation Plan unless an 1.​ That the due and demandable payments have not been made for objection is submitted. at least 60 days 2.​ The debtor has failed generally to meet its liabilities as they fall ​ The court has a maximum period of 120 days from the date of due (illiquidity) the filing of the petition to approve the Rehabilitation Plan. 3.​ At least one creditor, other than the petitoner(s), has initiated ○​ If the court fails to act within the same period, the Plan foreclosure proceedings against the debtor that will prevent the shall be deemed approved. debtor from paying its debtsas they become due or will render itinsolvent. Effect of the Approval (Sec. 82) 2. Pre-negotiated ​ Approval of a Plan has the same legal effect as confirmation of a An insolvency proceeding involving a prenegotiated Rehabilitation Plan Plan in CourtSupervised Rehabilitation. between the debtor and the creditor(s). It commences as an ​ It also results in a cram down, as it binds not only the debtor but extrajudicial proceeding but terminates as a judicial proceeding. also all persons affected by it. 3. Out-of-Court or Informal Restructuring Agreement (OCRA) Requirements (Sec. 76) ​ An extrajudicial insolvency An insolvent debtor, either by itself or jointly with any of its creditors, ​ a restructuring of the claims negotiated between the debtor and may file a verified petition for approval of the Pre-Negotiated the creditor Rehabilitation Plan that complies with the following: ​ Approval of creditors holding at least 2/3 of the total liabilities of Requirements (Sec. 84) the debtor, including: a.​ The debtor must agree to the out-of-court or informal ○​ Secured creditors holding more than 50% of the total restructuring/workout agreement or Rehabilitation Plan secured claims b.​ It must be approved by creditors representing ○​ Unsecured creditors holding more than 50% of the total ○​ at least 67% of the secured obligations unsecured claims. ○​ at least 75% of the unsecured obligations ○​ at least 85% of the total liabilities, secured or unsecured, ​ The petition shall include as a minimum: of the debtor ○​ Schedule of the debtor's debts and liabilities ○​ an inventory of the debtor's assets Effects ○​ the pre-negotiated Rehabilitation Plan, including the 1.​ Results in a cram down names of at least three (3) qualified nominees for ○​ binding not only the debtor but also all persons affected rehabilitation receiver ○​ summary of disputed claims against the debtor and a 2.​ Any proceedings arising or relating to the OCRA shall not stay its report on the provisioning of funds to account for implementation appropriate payments should any such claims be ruled ○​ unless the relevant party secures a TRO or injunctive valid or their amounts adjusted. relief from the Court of Appeals. Issuance of Order (Sec. 77) ​ Within five working days, and after determination that the Standstill Period (Sec. 85) petition is sufficient in form and substance, the court shall issue ​ the period agreed upon by the debtor and its creditors to enable Preliminary Exam Mentoring Series | 3  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER them to negotiate and enter into an out-of-court or informal against the debtor after the commencement date, unless restructuring/workout agreement or rehabilitation plan. otherwise allowed under the FRIA 3.​ Serves as the legal basis for rendering null and void any setoff The standstill period/agreement is effective and enforceable not only after the commencement date of any debt owed to the debtor by against contracting parties but also against other creditors, provided any of the debtor's creditors that: 4.​ Serves as the legal basis for rendering null and void the 1.​ Such agreement is approved by creditors representing more than perfection of any lien against the debtor's property, after the 50% of the total liabilities of the debtor commencement date 2.​ Notice of the standstill agreement is published in a newspaper of 5.​ Consolidates the resolution of all legal proceedings by and general circulation in the Philippines once a week for two against the debtor to the court; however, the court may allow the consecutive weeks continuation of cases on other courts where the debtor had 3.​ The standstill period does not exceed 120 days from the date initiated the suit. of effectivity. 6.​ Exempt the debtor from liability for taxes and fees, including penalties, interests, and charges. The notice must invite creditors to participate in the negotiation for the OCRA and inform them that the agreement would bind all creditors if the Effectivity and Duration of the Commencement Order (Sec. 21) minimum vote requirements were met. Unless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a Annulment of the OCRA or Standstill Agreement substantial likelihood that the debtor will be successfully rehabilitated The debtor or creditor may file a petition to annul based only on the following grounds: Minimum Requirements for Substantial Likelihood 1.​ Non-compliance with the requirements for a standstill a.​ The proposed Rehabilitation Plan complies with the minimum agreement or an OCRA under the FRIA or the implementing rules contents prescribed by the FRIA 2.​ Vitiation of consent due to fraud, intimidation or violence if b.​ There is sufficient monitoring by the rehabilitation receiver of committed against such number of creditors required to approve the debtor's business for the protection of creditors the OCRA or the standstill agreement c.​ The debtor has met with its creditors to the extent reasonably possible in attempts to reach consensus on the proposed Rehabilitation Plan COMMENCEMENT ORDER d.​ The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the underlying assumptions Commencement Order and the goals stated in the petitioner's Rehabilitation Plan are ​ If the petition for rehabilitation is deficient in form and realistic, feasible and reasonable or if not, there is, in any case, a substance, the court may give a reasonable period to amend or substantial likelihood for thedebtor to be successfully supplement the petition. rehabilitated because, among others ​ If such deficiency is not complied with, the court may dismiss the 1.​ There are sufficient assets with/which to rehabilitate petition. If the petition for rehabilitation is sufficient in form and the debtor substance, it shall issue a Commencement Order within five (5) 2.​ There is sufficient cash flow to maintain the operations working days from the filing of the petition. of the debtor ​ The rehabilitation proceedings shall commence upon the issuance 3.​ The debtor's, partners, stockholders, directors and officers of the Commencement Order. have been acting in good faith and which due diligence 4.​ The petition is not a sham filing intended only to delay Contents of the Commencement Order (Sec. 16) the enforcement of the rights of the creditor's or of any 1.​ Identifies the debtor, its principal business and principal place of group of creditors business 5.​ The debtor would likely be able to pursue a viable 2.​ Summarize the grounds for initiating proceedings Rehabilitation Plan 3.​ States the legal effects of the Order e.​ The petition, the Rehabilitation Plan and the attachments thereto 4.​ Declares the debtor is under rehabilitation do not containany materially false or misleading statement 5.​ The publication of the Commencement Order f.​ If the petitioner is the debtor, that the debtor has met with its 6.​ Directs service by personal delivery of a copy of the petition to creditor/s representing at least three-fourths (3/4) of its total the creditor or to the debtor (not the petitioner) obligations to the extent reasonably possible and made a good 7.​ Appoints a rehabilitation receiver faith effort to reach a consensus on the proposed Rehabilitation 8.​ Summarizes the requirements and deadlines for creditors to Plan; or if the petitioner/s is/are a creditor or group of creditors, establish their claims against the debtor that/ the petitioner/s has/have met with the debtor and made a 9.​ Directs the BIR to file and serve its comment or opposition good faith effort to reach a consensus on the proposed 10.​Prohibits the debtor’s suppliers from withholding the supply of Rehabilitation Plan goods and services in the ordinary course of business for as long g.​ The debtor has not committed acts of misrepresentation or in as the debtor makes payments for services/goods supplied after fraud of its creditor/s or a group of creditors. issuance of the Order 11.​Authorizes the payment of administrative expenses 12.​Sets the case for initial hearing STAY OR SUSPENSION ORDER 13.​Makes available copies of the petition and Rehabilitation Plan for examination and copying by any interested party An order included in the Commencement Order that has the following 14.​Indicates the location(s) at which documents may be reviewed effects: (CJ-SP) and copied a.​ suspend all actions or proceedings, in court or otherwise, for the 15.​States that any creditor or debtor, not the petitioner, may submit enforcement of claims against the debtor the name or nominate any other qualified person to the position b.​ suspend all actions to enforce any judgment, attachment or of rehabilitation receiver other provisional remedies against the debtor 16.​Includes a Stay or Suspension Order. c.​ prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the Effects of the Commencement Order (Sec. 17) ordinary course of business In addition to the effects of a Stay or Suspension Order: d.​ prohibit the debtor from making any payment of its liabilities 1.​ Vests the rehabilitation receiver with all the powers and outstanding as of the commencement date except as may be functions provided for this Act, subject to the approval by the provided herein. court of the performance bond filed by the rehabilitation receiver 2.​ Prohibits or otherwise serves as the legal basis rendering null and Continuance of Stay Order void the results of any attempt to collect or enforce a claim The court, on motion, motu proprio, may terminate, modify or set Preliminary Exam Mentoring Series | 4  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER conditions for the continuance of suspension of payment, or relieve a If the receiver is a juridical entity, he must designate a natural person as claim from the coverage thereof, upon showing that: a representative. Such representative must possess all the qualifications 1.​ A creditor does not have adequate protection over property and none of thedisqualifications securing its claim 2.​ The value of a claim secured by a lien on property which is not Qualifications of the Rehabilitation Receiver necessary for rehabilitation of the debtor exceeds the fair market Natural Person Juridical Person value of the said property. Filipino ctizen or resident for at Authorized to do business in the For purposes of Section 61, a creditor shall be deemed to lack adequate least 6 months immediately prior Philippines for at least 6 years protection if it can be shown that: to nomination prior to its appointment a.​ the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured good moral character and with Good standing b.​ the debtor fails or refuses to take commercially reasonable steps acknowledged integrity, to maintain the property; or impartiality and independence c.​ the property has depreciated to an extent that the creditor is under secured. Has the requisite knowledge of Designate a natural person as insolvency and other relevant representative Exceptions to the Stay or Suspension Order (S4 AB C2) commercial laws, rules and Under Sec. 18, the following actions or claims are not affected by a stay procedures, as well as the order: relevant training and/or 1.​ Cases already pending appeal in the Supreme Court as of experience that may be necessary commencement date to enable him to properly ○​ Provided, That any final and executory judgment arising discharge the duties and from such appeal shall be referred to the court for obligations of a receiver appropriate action Expertise and acumen to manage Undertaking to be solidariliy liable 2.​ Subject to the discretion of the court, cases pending or filed at a and operate a business similar to with said persons specialized court or quasi-judicial agency which, upon the debtor determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court: Has no conflict of inerest but such Has not been previously ○​ Provided, That any final and executory judgment of such conflict of interest may be dismissed as a receiver court or agency shall be referred to the court and shall be waived, expressly or impliedly, by treated as a nondisputed claim a party who may be prejudiced ○​ Any final and executory judgment of such court or agency thereby. shall be referred to the court and shall be treated as a No conflict of interest non-disputed claim 3.​ Enforcement of claims against sureties and other persons Conflicts of Interest Test (Sec. 40) solidarily liable with the debtor, and third party or accommodation An individual is deemed to have a conflict of interest if he is so situated mortgagors as well as issuers of letters of credit, unless the as to be materially influenced in the exercise of his judgment for or property subject of the third party or accommodation mortgage is against any party to the proceedings. necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver. An individual may have a conflict of interest if: a.​ He is a creditor, owner, partner or stockholder of the debtor 4.​ Any form of action of customers or clients of a securities b.​ He is engaged in a line of business which competes with that of market participant to recover or otherwise claim moneys and the debtor securities entrusted to the latter in the ordinary course of the c.​ He is, or was, within five (5) years from the filing of the petition, latter's business as well as any action of such securities market a director, officer, owner, partner or employee of the participant or the appropriate regulatory agency or self-regulatory debtor or any of the creditors, or the auditor or organization to pay or settle such claims or liabilities accountant of the debtor d.​ He is, or was, within two (2) years from the filing of the petition, 5.​ Claims against accommodation mortgagors and issuers of an underwriter of the outstanding securities of the debtor letters of credit applied for by the debtor. e.​ He is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sale 6.​ Actions of a licensed broker or dealer to sell pledged securities proprietorship-debtor, partners of a partnership- debtor or to any of a debtor pursuant to a securities pledge or margin agreement stockholder, director, officer, employee or underwriter of a for the settlement of securities transactions in accordance with corporation-debtor the provisions of the Securities Regulation Code and its f.​ He has any other direct or indirect material interest in the implementing rules and regulations debtor or any of the creditors 7.​ Clearing and settlement of financial transactions through the Principal Duties (Sec. 31) facilities of a clearing agency or similar entities duly authorized, 1.​ Preserving and maximizing the value of the assets of the debtor registered and/or recognized by the appropriate regulatory during the rehabilitation proceedings agency like the BSP and the SEC as well as any form of actions of 2.​ Determining the viability of the rehabilitation of the debtor such agencies or entities to reimburse themselves for any 3.​ Preparing and recommending a Rehabilitation Plan transactions settled for the debtor 4.​ Implementing the approved Rehabilitation Plan 8.​ Criminal action against individual debtor or owner, partner, Management director or officer of a debtor. Unless otherwise provided, the management of the debtor remains with the existing management, subject to laws and agreements, if any, on election or appointment of directors, managers, or managing partner. REHABILITATION RECEIVER The debtor retains control of its business and properties, subject only to Any qualified person, natural or juridical, may serve as a receiver. (Sec. monitoring by the receiver. This is referred to as the principle of 28) debtor–in–possession or debtor–in–place Preliminary Exam Mentoring Series | 5  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER Exception: The following are subject to the approval of the receiver or 2.​ Actual or imminent danger of dissipation, loss, waste or the court: destruction of the debtor’s assets or other properties; ​ Disbursements affecting title or interest in the property; 3.​ Paralyzation of the business operations of the debtor; or ​ Payments affecting title or interest in property; 4.​ Gross mismanagement of the debtor, or fraud or other wrongful ​ Sale, disposal, assignment, transfer or encumbrance of property; conduct, or gross or willful violation of the FRIA. [Sec. 36] or ​ Any other act affecting title or interest in property Immunity from Suit (Sec. 41) ​ Rehabilitation plan The receiver, the management committee, and all persons they engage are not subject to any action, claim or demand for any act or omission in good faith in the exercise of their powers and functions. Rehabilitation Plan Report of the Receiver Refers to a plan by which the financial well- being and viability of an Within 40 days from the initial hearing, the receiver shall submit a insolvent debtor can restored using various means including, but not report to the court on whether: limited to: 1.​ The debtor is insolvent, and if so, the causes thereof; and 1. ​ Debt Forgiveness: Condoning and/or waiving the claims; 2.​ There is any unlawful or irregular act(s) committed by the 2. Debt Rescheduling: Extending the timeto pay the claim; management of the debtor in contemplation of the insolvency or 3. ​ Reorganization ​ or ​ Quasi- Reorganization: which may have contributed to the insolvency; Changing the equity, corporate or operating structure of the 3.​ The assumptions, goals and procedures of the Rehabilitation Plan debtor; are realistic, feasible and reasonable; 4.​ There is a substantial likelihood of successful rehabilitation; 4. ​ Dacion en Pago: Assigning property and assets as payment 5.​ The petition should be dismissed; and for certain claims; 6.​ The debtor should be dissolved and/or liquidated 5. ​ Debt to Equity Conversion: The issuance of equity and/or ownership interests as payment for certain claims; Removal 6. ​ Sale of the Business (or parts of it) as a going concern; The receiver may be removed at any time by the court, either by (1) 7. ​ Setting up of new business entities; or motu propio or (2) motion by any creditor(s) holding more than 50% of 8. ​ Other similar arrangements as may be approved by the the total obligations of the creditor, on the following grounds: court or the creditors. [Sec. 4(ii); Somera] 1.​ Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his Important Requirements of A Rehabilitation Plan duties and powers; 2.​ Lack of particular or specialized competency required by the specific case; (a) ​Concept of Feasibility 3.​ Illegal acts or conduct in the performance of his duties and powers; 4.​ Lack or qualification or presence of any disqualification; Rehabilitation, otherwise referred to as the restoration of the debtor to 5.​ Conflict of interest that arises after his appointment; and a condition of successful operation and solvency, is resorted to when it 6.​ Manifest lack of independence that is detrimental to the general is shown that the continuance of its operation is economically feasible body of the stakeholders. and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern The Implementing Rules add the following grounds for removal: than if it is immediately liquidated. [Sec. 4(gg)] 1.​ Failure, without just cause, to perform any of the powers and functions under the Rules; or Hence, the Rehabilitation Plan must contain such relevant information 2.​ Any of the grounds for removing a trustee under the general to enable a reasonable investor to make an informed decision on the principles for trusts [FR Rules, Rule 2, Sec. 27] feasibility of the Plan. [FR Rules, Rule 2, Sec. 61(BB)] Note: Findings as to whether the assumptions, goals and procedures of the Rehabilitation Plan are realistic, feasible and reasonable are MANAGEMENT COMMITTEE also part of the Report of the Rehabilitation Receiver. [Sec. 24] Upon motion of any interested party, the court may appoint either: (b) ​It must comply with the required contents under FRIA 1.​ the rehabilitation receiver and FR Rules. Aside from the above, this includes, 2.​ a management committee to assume the management of the among others: debtor. i. Material Financial Commitments The Rehabilitation Composition of the Committee Three qualified members appointed as follows: Plan, shall “include material financial undertakings or 1.​ The first member shall be appointed by the debtor; commitments to support [it].” [FR Rules, Rule 2, Sec.61 (Y)] 2.​ The second member shall be appointed by the creditor(s) holding more than 50% of the total obligations of the debtor A material financial commitment becomes significant in gauging 3.​ The third member shall be appointed by the first and second the resolve, determination, earnestness and good faith of the members within 10 from the appointment. distressed corporation in financing the proposed rehabilitation plan. In case of failure to nominate, the court shall appoint the member(s) concerned. In case the decision to appoint a management committee is This commitment may include the voluntary undertakings of the due to the third ground (mismanagement, etc.), the court shall appoint stockholders or the would-be investors of the debtor-corporation the first member. indicating their readiness, willingness and ability to contribute funds or property to guarantee the continued successful Grounds (Sec. 36) operation of the debtor corporation during the period of 1.​ There must be clear and convincing evidence of any of the rehabilitation. [Philippine Bank of Communications v. Basic following circumstances: Preliminary Exam Mentoring Series | 6  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER Polyprinters and Packaging Corporation, G.R. No. 187581 Objections to Rehabilitation Plan (2014)] The creditor may file an objection to the Plan with 20 days from receipt of notice that it has been submitted for confirmation. Where the only proposed source of revenue the Rehabilitation Plan suggests is the capital which would come potential investors, with whom negotiations are merely pending, such Objections are limited to the following: Plan is bereft of any material financial commitment which would inspire confidence that the rehabilitation would turn out to be 1. ​ The creditors’ support was induced by fraud; successful. [BPI Family Savings Bank, Inc. v. St. Michael Medical 2. ​ The documents or data relied upon in the Plan are Center, Inc., G.R. 205469 (2015)] materially false or misleading; [T]he conversion of all deposits for future subscriptions to 3. ​ The Plan is in fact not supported by the voting creditors. common stock and the treatment of all payables to officers and [Sec. 66] stockholders as trade payables was hardly constituting material ​ financial commitments. Such “conversion” of cash advances to trade payables was, in fact, a If upon hearing, the court finds merit in the objections, it should order the curing of the defect. mere re-classification of the liability entry and had no effect on the If the court determines the debtor acted in bad faith, or that it is shareholders’ deficit. [Wonder Book Corporation v. Philippine Bank not possible to cure the defect, the court shall convert the of Communications, G.R. No. 187316 (2012)] proceedings into one for liquidation. ii. Liquidation Analysis As one of the required contents of a Rehabilitation Plan, a Confirmation of the Rehabilitation Plan liquidation analysis sets out for each creditor or each class of The court has a maximum period of one year from the date of filing creditor, as applicable, the amounts they expect to receive under to confirm a Rehabilitation Plan. the Rehabilitation Plan and those that they will receive if liquidation ensues within one hundred twenty (120) days after the filing of the If no Rehabilitation Plan is confirmed, the proceedings may be petition. [FR Rules, Rule 2, Sec. 61 (B)] converted into one for liquidation. [Sec. 72] The total liquidation assets and the estimated liquidation return to the creditors, as well as the fair market value vis-a-vis the forced Confirmation has the following effects: liquidation value of the fixed assets were not shown. As such, the Court could not ascertain if the petitioning debtor's creditors can 1. ​ The Plan and its provisions shall be binding upon the recover by way of the present value of payments projected in the debtor and all persons who may be affected by it; plan, more if the debtor continues as a going concern than if it is immediately liquidated. [Philippine Asset Growth Two, Inc. v. Fastech Synergy Phils. Inc., G.R. 206528 (2016)] 2. ​ The debtor shall comply with the provisions of the Plan and shall take all actions necessary to carry out the Plan; 3. Payments shall be made to the creditors in accordance with the provisions of the Plan; Note: 4. Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent Effect: The failure of the Rehabilitation Plan to state any material that they do not conflict with the provisions of the Rehabilitation financial commitment to support rehabilitation, as well as to include Plan; a liquidation analysis, renders the CA's considerations for approving the same as actually unsubstantiated, and hence, insufficient to 5. ​ Any compromises on amounts or rescheduling of timing of decree the feasibility of respondents' rehabilitation. It is well to payments by the debtor shall be binding on creditors regardless of emphasize that the remedy of rehabilitation should be denied to whether the Plan is successfully implemented; and corporations that do not qualify under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the 6. Claims arising after approval of the Plan that are otherwise enforcement of any of the rights of the creditors. [Ibid] not treated by the Plan are not subject to any Suspension Order. [Sec. 69] Approval of the Rehabilitation Plan The receiver shall notify the stakeholders that the Plan is ready for ​ Cram down effect examination. Within 20 Cram Down Effect – Notwithstanding the rejection of the creditors of days from notification, the receiver shall convene the creditors to the Rehabilitation Plan, the court may nonetheless confirm the vote on the Plan. Rehabilitation Plan in what is known as a cram down. The Plan must be approved by all classes of creditors whose rights The effect of the cram down is to bind the debtor and all persons who are adversely modified or affected. Otherwise, it is deemed may be affected, whether or not they participated in the proceedings rejected. or opposed the plan. The Plan is approved by a class of creditors if members of the said A cram down is permitted only if all of the following circumstances are class holding more than 50% of the total claims of the class vote in present: favor of the Plan. [Sec. 64] 1. ​ The Rehabilitation Plan complies with the requirements specified in the FRIA; 2. ​ The receiver recommends confirmation of the Rehabilitation If the Plan is approved, the receiver shall submit the same to the Plan; court for confirmation. Preliminary Exam Mentoring Series | 7  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER 3. ​ The shareholders, owners or partners of the debtor lost at Proceedings that may be Availed of vis-à-vis Type of Debtor least their controlling interest as a result of the Rehabilitation Plan; and 4. ​ The Rehabilitation Plan would likely provide the objecting class or creditors with compensation which has a net present value greater than that which they would have received if the debtor were under liquidation. [Sec. 64] An ​ act ​ of insolvency Liquidation alleged in the petition Liquidation is a judicial insolvency proceeding by which the debtor’s Juridical Voluntary Insolvent: assets are reduced and converted to cash in order to discharge the Either unable to claims against the debtor. [Somera] pay liabilities as they fall due or The concept of liquidation is thus diametrically opposed to that of assets rehabilitation, and both cannot be undertaken at the same time. are insufficient [Philippine Veterans Bank Employees Union- NUBE v. Vega, G.R. No. to pay for 105364 (2001)] liabilities Involuntary At​ least​ Types three creditors; and With aggregate Types of Liquidation claims at least either Liquidation may be: Php 1. Voluntary: Instituted by the debtor; or 1,000,000 or 2. ​ Involuntary: Instituted by a creditor or a group of at creditors; or 3. Conversion: When the court-supervised or pre-negotiated least 25% of rehabilitation proceeding is converted by the court into subscribed liquidation proceedings (see Conversion into Liquidation capital stock Proceedings abov or partner’s contributions, whichever ​is higher Debtor Proceeding Requirements Possesses Individual Suspension sufficient of property to Payments cover debts ​ but individual foresees the debtor is impossibility of only meeting them discharged as upon they fall due terminatio (illiquid) n of the Voluntary Properties ​ proceedin are not gs. sufficient to [Somera] cover liabilities; ​ Conversion​ of​ rehabilitation​ to liquidation and proceedings Owing ​ debts Under the FRIA, court-supervised or pre- negotiated rehabilitation exceeding proceedings may be converted in the following instances: Php 500,000 1. ​ Within 10 days from receipt of the receiver’s report, a court Creditor(s) finding that the debtor is insolvent and there is no substantial Involuntary have likelihood of substantial rehabilitation; [Sec. 25(c)] claim(s) aggregatin 2. ​ If no Rehabilitation Plan is confirmed within 1 year from filing the g at petition to confirm the Plan; [Sec. 72] least ​ Php 500,000; 3. ​ If termination is due to failure or rehabilitation or dismissal and of the petition for reasons other than technical grounds [Sec. 75]; or 4. ​ Motion filed by the insolvent debtor for conversion into liquidation proceedings. [Sec. 90] Preliminary Exam Mentoring Series | 8  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER ​ Liquidation order property that legally entitles a creditor to resort to said property for payment of the debt or claim secured. Liquidation Order – Such order results in the dissolution of a juridical debtor, however, the General Rule: Upon issuance of the Liquidation Order, no foreclosure proceeding shall be allowed for 180 days. [Sec. 113] The Liquidation Order shall: 1. ​ Declare the debtor insolvent; Exception: However, the Liquidation Order shall not affect the right of a 2. ​ Order the liquidation of the debtor and, in the case of a secured creditor to enforce his lien. juridical debtor, declare it as dissolved; 3. ​ Order the sheriff to take possession and control of all the During the proceedings, a secured creditor may: property of the debtor, except those that may be exempt from a. ​ Waive his right under the security or lien, prove his claim in execution; the liquidation proceedings and share in the distribution of the assets of the debtor; or 4. ​ Order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; b. ​ Maintain his rights under the security or lien. 5. ​ Direct payments of any claims and conveyance of any property due the debtor to the liquidator; If the secured creditor maintains his rights under the security or 6. ​ Prohibit payments by the debtor and the transfer of any lien: property by the debtor; a. ​ The value of the property may be fixed in a manner agreed 7. ​ Direct all creditors to file their claims with the liquidator within upon by the creditor and the liquidator. the period set by the rules of procedure; 8. ​ Authorize the payment of administrative expenses as they become due; If the value of the property is less than the claim, the liquidator may convey the property to the secured creditor and the latter will be 9. State that the debtor and creditors who are not admitted in the liquidation proceedings as a creditor for the balance. petitioner/s may submit the names of other nominees to the position of liquidator; and 10. Set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) If its value exceeds the claim secured, the liquidator may convey the days nor more than forty-five (45) days from the date of the property to the creditor and waive the debtor's right of redemption last publication. [Sec. 112] upon receiving the excess from the creditor. Effects of the Liquidation Order: b. ​ The liquidator may sell the property and satisfy the secured 1. ​ The juridical debtor shall be deemed dissolved and its creditor's entire claim from the proceeds of the sale; or corporate or juridical existence terminated; 2. ​ Legal title to and control of all the assetsof the debtor, c. ​ The secure creditor may enforce the lien or foreclose on except those that may be exempt from execution, shall be the property pursuant to applicable laws. [Sec. 114] deemed vested in the liquidator or, pending his election or appointment, with the court; 3. ​ All contracts of the debtor shall be deemed terminated Cf. Rights of Unsecured Creditors and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise General Rule: No separate action for the collection of an unsecured and the contracting party agrees; claim shall be allowed. Actions already pending will be transferred to the liquidator. 4. ​ No separate action for the collection of an unsecured claim Exception: When the action is already on appeal, the suit may shall be allowed. Such actions already pending will be transferred proceed to judgment, and any final and executory judgment shall to the Liquidator for him to accept and settle or contest. If the be filed and allowed. [Sec. 113] liquidator contests or disputes the claim, the court shall allow, hear and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any Liquidator final and executor judgment therein for a claim against the debtor shall be filed and allowed in court; and Liquidator – Any qualified person, natural or juridical, may serve as 5. ​ No foreclosure proceeding shall be allowed for a period of a receiver. one hundred eighty (180) days. If the receiver is a juridical entity, he must designate a natural ​ Rights of secured creditors person as a representative. Such representative must possess all the qualifications and none of the disqualifications. Creditor refers to natural or juridical persons which have claims against the debtor that arose on or before the commencement date. [Sec. 4] Qualifications General Unsecured Creditor refers to a creditor whose claim or a The liquidator shall have the same qualifications as that of portion thereof is neither secured, preferred nor subordinated under rehabilitator, thus: the FRIA. 1. ​ Citizen or resident for at least six (6) months immediately Secured Creditor refers to a claim secured by a lien, which is a prior to nomination; statutory or contractual claim or juridical charge on real or personal Preliminary Exam Mentoring Series | 9  ASSOCIATION OF TAXATION AND LAW STUDENTS BRILLIANCE, EXCELLENCE, AND SUPERIORITY HONORS’ SOCIETY HIYAS NG SILANGAN HONORS’ SOCIETY UNIVERSITY OF THE EAST CALOOCAN A.Y. 2024-2025 SPECIAL COMMERCIAL LAWS - PRELIM EXAM REVIEWER 2. ​ Of good moral character and with acknowledged integrity, impartiality and independence; 3. ​ Has the requisite knowledge of insolvency and other Liquidation Plan relevant commercial laws, rules and procedures, as well as the relevant training and/or experience that may be necessary to Liquidation Plan – Within three months from assuming office, the enable him to properly discharge the duties and obligations of a liquidator shall submit a Liquidation Plan enumerating the assets, receiver; and claims and a schedule of liquidation and payment. [Sec. 129] 4. ​ Has no conflict of interest, which may be waived by a party who may be prejudiced. [Sec. 29] Properties exempted by law shall be set apart from liquidation for the use and benefit of the insolvent. [Sec. 130] Powers, Duties and Responsibilities The principal duty of the liquidator is to preserve and maximize the The Plan and its implementation shall observe the concurrence and value and recover the assets of the debtor, with the end of liquidating preference of credits under the Civil Code. [Sec. 133] them and discharging all the claims against the debtor. The powers, duties and responsibilities include: Sale of Assets in Liquidation The liquidator may sell the unencumbered assets of the debtor and 1. ​ To sue and recover all the assets, debts and claims, belonging or convert the same into money. due to the debtor; 2. ​ To take possession of all the property of the debtor except property General Rule: The sale shall be made at public auction. exempt by law from execution; Exception: A private sale may be allowed with the approval of the court 3. ​ To sell, with the approval of the court, any property of the if: debtor which has come into his possession or control; 1. ​ The goods are of perishable nature; 4. ​ To redeem all mortgages and pledges, and so satisfy any 2. ​ The goods are likely to quickly deteriorate in value; judgement which may be an encumbrance on any property sold by him; 3. ​ The ​ goods ​are ​ disproportionately expensive to keep or 5. ​ To settle all accounts between the debtor and his creditors, maintain; or subject to the approval of the court; 6. ​ To recover any property or its value, fraudulently conveyed 4. ​ The private sale is for the best interest of the debtor and by the debtor; creditors. 7. ​ To recommend to the court the creation of a creditors' committee which will assisthim in the discharge of the functions and which shall have powers as the court deems just, reasonable and necessary; and 8. ​ Upon approval of the court, to engage such professional as may be necessary and reasonable to assist him in the discharge of his duties. Determination of Claims The rules on the determination of claims are as follows: 1. ​ Within 20 days from assuming office, the liquidator shall prepare a preliminary registry of claims. 2. ​ Secured creditors who have waived their security or have fixed the value of the property subject of the security shall be considered unsecured. 3. ​ The registry shall be available for public inspection and publication notice shall be provided to stakeholders. [Sec. 123] 4. ​ The debtor and the creditor have the right to set off their debts against each other; only the balance, if any, shall be allowed in the proceedings. [Sec. 124] 5. ​ Within 30 days from expiration of the period for filing of applications for recognition of claims, interested parties may challenge claims to the court. 6. ​ Upon the expiration of the 30-day period, the liquidator shall submit the registry of claims containing the claims not subject to challenge. Such claims shall become final upon filing of the register. 7. ​ Claims that have become final may be set aside only on grounds of fraud, accident, mistake or inexcusable neglect. [Sec. 125] 8. ​ The liquidator shall submit disputed claims to court for final approval. [Sec. 126] Treatment of Contracts General Rule: All contracts are deemed terminated and/or breached. Exception: When the liquidator, within 90 days from assumption of office, declares otherwise and the contracting party agrees. [Sec. 113] Preliminary Exam Mentoring Series | 10