[REPUBLIC ACT NO.

10142]

AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF

FINANCIALLY DISTRESSED ENTERPRISES AND INDIVIDUALS

Be it enacted by the Senate and House of Representatives of the Philippines

in Congress assembled:

CHAPTER I

GENERAL PROVISIONS

SECTION 1. Title. — This Act shall be known as the “Financial Rehabilitation

and Insolvency Act (FRIA) of 2010”.

SEC. 2. Declaration of Policy. — It is the policy of the State to encourage

debtors, both juridical and natural persons, and their creditors to collectively
and realistically resolve and adjust competing claims and property rights. In
furtherance thereof, the State shall ensure a timely, fair, transparent, effective
and efficient rehabilitation or liquidation of debtors. The rehabilitation or
liquidation shall be made with a view to ensure or maintain certainty and
predictability in commercial affairs, preserve and maximize the value of the
assets of these debtors, recognize creditor rights and respect priority of
claims, and ensure equitable treatment of creditors who are similarly situated.
When rehabilitation is not feasible, it is in the interest of the State to facilitate a
speedy and orderly liquidation of these debtors’ assets and the settlement of
their obligations.

SEC. 3. Nature of Proceedings. — The proceedings under this Act shall be in

rem. Jurisdiction over all persons affected by the proceedings shall be
considered as acquired upon publication of the notice of the commencement
of the proceedings in any newspaper of general circulation in the Philippines
in the manner prescribed by the rules of procedure to be promulgated by the
Supreme Court.

The proceedings shall be conducted in a summary and non-adversarial

manner consistent with the declared policies of this Act and in accordance
with the rules of procedure that the Supreme Court may promulgate.

SEC. 4. Definition of Terms. — As used in this Act, the term:

(a) Administrative expenses shall refer to those reasonable and necessary

expenses:

(1) incurred or arising from the filing of a petition under the provisions of this
Act;

(2) arising from, or in connection with, the conduct of the proceedings under
this Act, including those incurred for the rehabilitation or liquidation of the
debtor;
(3) incurred in the ordinary course of business of the debtor after the
commencement date;

(4) for the payment of new obligations obtained after the commencement date
to finance the rehabilitation of the debtor;

(5) incurred for the fees of the rehabilitation receiver or liquidator and of the
professionals engaged by them; and

(6) that are otherwise authorized or mandated under this Act or such other
expenses as may be allowed by the Supreme Court in its rules.

(b) Affiliate shall refer to a corporation that directly or indirectly, through one or
more intermediaries, is controlled by, or is under the common control of
another corporation.

(c) Claim shall refer to all claims or demands of whatever nature or character
against the debtor or its property, whether for money or otherwise, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, including, but not limited to: (1) all claims of the government,
whether national or local, including taxes, tariffs and customs duties; and (2)
claims against directors and officers of the debtor arising from acts done in
the discharge of their functions falling within the scope of their
authority: Provided, That, this inclusion does not prohibit the creditors or third
parties from filing cases against the directors and officers acting in their
personal capacities.

(d) Commencement date shall refer to the date on which the court issues the
Commencement Order, which shall be retroactive to the date of filing of the
petition for voluntary or involuntary proceedings.

(e) Commencement Order shall refer to the order issued by the court under
Section 16 of this Act.

(f) Control shall refer to the power of a parent corporation to direct or govern
the financial and operating policies of an enterprise so as to obtain benefits
from its activities. Control is presumed to exist when the parent owns, directly
or indirectly through subsidiaries or affiliates, more than one-half (1/2) of the
voting power of an enterprise unless, in exceptional circumstances, it can
clearly be demonstrated that such ownership does not constitute control.
Control also exists even when the parent owns one-half (1/2) or less of the
voting power of an enterprise when there is power:

(1) over more than one-half (1/2) of the voting rights by virtue of an agreement
with investors;

(2) to direct or govern the financial and operating policies of the enterprise
under a statute or an agreement;
(3) to appoint or remove the majority of the members of the board of directors
or equivalent governing body; or

(4) to cast the majority votes at meetings of the board of directors or

equivalent governing body.

(g) Court shall refer to the court designated by the Supreme Court to hear and
determine, at the first instance, the cases brought under this Act.

(h) Creditor shall refer to a natural or juridical person which has a claim
against the debtor that arose on or before the commencement date.

(i) Date of liquidation shall refer to the date on which the court issues the
Liquidation Order.

(j) Days shall refer to calendar days unless otherwise specifically stated in this
Act.

(k) Debtor shall refer to, unless specifically excluded by a provision of this Act,
a sole proprietorship duly registered with the Department of Trade and
Industry (DTI), a partnership duly registered with the Securities and Exchange
Commission (SEC), a corporation duly organized and existing under
Philippine laws, or an individual debtor who has become insolvent as defined
herein.

(l) Encumbered property shall refer to real or personal property of the debtor
upon which a lien attaches.

(m) General unsecured creditor shall refer to a creditor whose claim or a

portion thereof is neither secured, preferred nor subordinated under this Act.

(n) Group of debtors shall refer to and can cover only: (1) corporations that
are financially related to one another as parent corporations, subsidiaries or
affiliates; (2) partnerships that are owned more than fifty percent (50%) by the
same person; and (3) single proprietorships that are owned by the same
person. When the petition covers a group of debtors, all reference under
these rules to debtor shall include and apply to the group of debtors.

(o) Individual debtor shall refer to a natural person who is a resident and
citizen of the Philippines that has become insolvent as defined herein.

(p) Insolvent shall refer to the financial condition of a debtor that is generally
unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets.

(q) Insolvent debtor’s estate shall refer to the estate of the insolvent debtor,
which includes all the property and assets of the debtor as of commencement
date, plus the property and assets acquired by the rehabilitation receiver or
liquidator after that date, as well as all other property and assets in which the
debtor has an ownership interest, whether or not these property and assets
are in the debtor’s possession as of commencement date: Provided, That
trust assets and bailment, and other property and assets of a third party that
are in the possession of the debtor as of commencement date, are excluded
therefrom.

(r) Involuntary proceedings shall refer to proceedings initiated by creditors.

(s) Liabilities shall refer to monetary claims against the debtor, including
stockholder’s advances that have been recorded in the debtor’s audited
financial statements as advances for future subscriptions.

(t) Lien shall refer to a statutory or contractual claim or judicial charge on real
or personal property that legally entitles a creditor to resort to said property for
payment of the claim or debt secured by such lien.

(u) Liquidation shall refer to the proceedings under Chapter V of this Act.

(v) Liquidation Order shall refer to the Order issued by the court under Section
112 of this Act.

(w) Liquidator shall refer to the natural person or juridical entity appointed as
such by the court and entrusted with such powers and duties as set forth in
this Act: Provided, That, if the liquidator is a juridical entity, it must designate a
natural person who possesses all the qualifications and none of the
disqualifications as its representative, it being understood that the juridical
entity and the representative are solidarily liable for all obligations and
responsibilities of the liquidator.

(x) Officer shall refer to a 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 secretary, the
assistant corporate secretary and the external auditor.

(y) Ordinary course of business shall refer to transactions in the pursuit of the
individual debtor’s or debtor’s business operations prior to rehabilitation or
insolvency proceedings and on ordinary business terms.

(z) Ownership interest shall refer to the ownership interest of third parties in
property held by the debtor, including those covered by trust receipts or
assignments of receivables.

(aa) Parent shall refer to a corporation which has over another corporation
either directly or indirectly through one or more intermediaries.

(bb) Party to the proceedings shall refer to the debtor, a creditor, the
unsecured creditors’ committee, a stakeholder, a party with an ownership
interest in property held by the debtor, a secured creditor, the rehabilitation
receiver, liquidator or any other juridical or natural person who stands to be
benefited or injured by the outcome of the proceedings and whose notice of
appearance is accepted by the court.
(cc) Possessory lien shall refer to a lien on property, the possession of which
has been transferred to a creditor or a representative or agent thereof.

(dd) Proceedings shall refer to judicial proceedings commenced by the court’s

acceptance of a petition filed under this Act.

(ee) Property of others shall refer to property held by the debtor in which other
persons have an ownership interest.

(ff) Publication notice shall refer to notice through publication in a newspaper

of general circulation in the Philippines on a business day for two (2)
consecutive weeks.

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of

successful operation and solvency, if it is shown that its continuance of
operation is economically feasible 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 than if it is immediately liquidated.

(hh) Rehabilitation receiver shall refer to the person or persons, natural or

juridical, appointed as such by the court pursuant to this Act and which shall
be entrusted with such powers and duties as set forth herein.

(ii) Rehabilitation Plan shall refer to a plan by which the financial well-being
and viability of an insolvent debtor can be restored using various means
including, but not limited to, debt forgiveness, debt rescheduling,
reorganization or quasi-reorganization, dacion en pago, debt-equity
conversion and sale of the business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed in Section 62 hereof, or other
similar arrangements as may be approved by the court or creditors.

(jj) Secured claim shall refer to a claim that is secured by a lien.

(kk) Secured creditor shall refer to a creditor with a secured claim.

(ll) Secured party shall refer to a secured creditor or the agent or

representative of such secured creditor.

(mm) Securities market participant shall refer to a broker, dealer, underwriter,

transfer agent or other juridical persons transacting securities in the capital
market.

(nn) Stakeholder shall refer, in addition to a holder of shares of a corporation,

to a member of a nonstock corporation or association or a partner in a
partnership.

(oo) Subsidiary shall refer to a corporation more than fifty percent (50%) of the
voting stock of which is owned or controlled directly or indirectly through one
or more intermediaries by another corporation, which thereby becomes its
parent corporation.
(pp) Unsecured claim shall refer to a claim that is not secured by a lien.

(qq) Unsecured creditor shall refer to a creditor with an unsecured claim.

(rr) Voluntary proceedings shall refer to proceedings initiated by the debtor.

(ss) Voting creditor shall refer to 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 this Act.

SEC. 5. Exclusions. — The term debtor does not include banks, insurance
companies, pre-need companies, and national and local government
agencies or units.

For purposes of this section:

(a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially
or actually subject to conservatorship, receivership or liquidation proceedings
under the New Central Bank Act (Republic Act No. 7653) or successor
legislation;

(b) Insurance company shall refer to those companies that are potentially or
actually subject to insolvency proceedings under the Insurance Code
(Presidential Decree No. 1460) or successor legislation; and

(c) Pre-need company shall refer to any corporation authorized/licensed to

sell or offer to sell pre-need plans.

Provided, That government financial institutions other than banks and

government-owned or -controlled corporations shall be covered by this Act,
unless their specific charter provides otherwise.

SEC. 6. Designation of Courts and Promulgation of Procedural Rules. — The

Supreme Court shall designate the court or courts that will hear and resolve
cases brought under this Act and shall promulgate the rules of pleading,
practice and procedure to govern the proceedings brought under this Act.

SEC. 7. Substantive and Procedural Consolidation. — Each juridical entity

shall be considered as a separate entity under the proceedings in this Act.
Under these proceedings, the assets and liabilities of a debtor may not be
commingled or aggregated with those of another, unless the latter is a related
enterprise that is owned or controlled directly or indirectly by the same
interests: Provided, however, That the commingling or aggregation of assets
and liabilities of the debtor with those of a related enterprise may only be
allowed where:

(a) there was commingling in fact of assets and liabilities of the debtor and the
related enterprise prior to the commencement of the proceedings;
(b) the debtor and the related enterprise have common creditors and it will be
more convenient to treat them together rather than separately;

(c) the related enterprise voluntarily accedes to join the debtor as party
petitioner and to commingle its assets and liabilities with the debtor’s; and

(d) The consolidation of assets and liabilities of the debtor and the related
enterprise is beneficial to all concerned and promotes the objectives of
rehabilitation.

Provided, finally, That nothing in this section shall prevent the court from
joining other entities affiliated with the debtor as parties pursuant to the rules
of procedure as may be promulgated by the Supreme Court.

SEC. 8. Decisions of Creditors. — Decisions of creditors shall be made

according to the relevant provisions of the Corporation Code in the case of
stock or nonstock corporations or the Civil Code in the case of partnerships
that are not inconsistent with this Act.

SEC. 9. Creditors’ Representatives. — Creditors may designate

representatives to vote or otherwise act on their behalf by filing notice of such
representation with the court and serving a copy on the rehabilitation receiver
or liquidator.

SEC. 10. Liability of Individual Debtor, Owner of a Sole Proprietorship,

Partners in a Partnership, or Directors and Officers. — Individual debtor,
owner of a sole proprietorship, partners in a partnership, or directors and
officers of a debtor shall be liable for double the value of the property sold,
embezzled or disposed of or double the amount of the transaction involved,
whichever is higher, to be recovered for the benefit of the debtor and the
creditors, if they, having notice of the commencement of the proceedings, or
having reason to believe that proceedings are about to be commenced, or in
contemplation of the proceedings, willfully commit the following acts:

(a) Dispose or cause to be disposed of any property of the debtor other than
in the ordinary course of business or authorize or approve any transaction in
fraud of creditors or in a manner grossly disadvantageous to the debtor and/or
creditors; or

(b) Conceal, or authorize or approve the concealment, from the creditors, or

embezzles or misappropriates, any property of the debtor.

The court shall determine the extent of the liability of an owner, partner,
director or officer under this section. In this connection, in case of partnerships
and corporations, the court shall consider the amount of the shareholding or
partnership or equity interest of such partner, director or officer, the degree of
control of such partner, director or officer over the debtor, and the extent of
the involvement of such partner, director or debtor in the actual management
of the operations of the debtor.