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 rehabilitation plan more if the debtor continues as a
going concern than if it is immediately liquidated.

• The situation here involves a debtor whose assets may not be enough to pay its debts as they
may fall due so, one option in this situation is to terminate the existence of the debtor so it can
sell off its assets and use the proceeds from that sale to pay its debts however, this option
carries major disadvantages one of which is not the proceeds from the sale of the debtors’
assets may usually not be enough to pay all of its debts in full and another disadvantage is that
once the debtor is dissolved, and its assets are already liquidated and distributed there will be
nothing left to pay the creditors.

But Rehabilitation presents an alternative.

- Instead of dissolving the debtor and liquidating its assets and paying the creditor with
the scraps, the debtor corporate life and activities are permitted to continue so that the
creditors may be paid from the earnings.

 When is it permitted to continue???? REM

 When is rehabilitation denied?
In case the debtors insolvency appears to be irreversible or where the sole purpose is to
the delay or evade the enforcement of the rights of the creditors then the rehabilitation
must be denied.
 When to apply for rehabilitation?
It is not necessary that the claims of creditors are due already. But it is necessary if the
debtor is unable to pay its debts as they fall due because FRIA does not distinguish
between a debtor which is already in debt and a debtor who foresees the possibility of
being unable to pay a debt not yet due. Thus, whether the debtor is about to be or is
already insolvent, a petition for rehabilitation may be filed.
 Whom can file for petition?
It depends on the type of the rehabilitation (Voluntary and Involuntary), but in all cases,
 rehabilitation can only be availed by a partnership, sole proprietorship or corporation;
and not by a natural person or actual debtor/person.

Two types of rehabilitation

 Voluntary
 Involuntary

Involuntary rehabilitation

Involuntary rehabilitation is a legal process initiated by a creditor or group of creditors when a

debtor is in financial distress and is unable to meet its obligations. Rehabilitation is initiated by
them if :

1. No Genuine Issue of Fact or Law on the Claim/s of the Petitioner/s

This condition means that there is no dispute or question regarding the legitimacy or validity of
the claims made by the creditors. In other words, the debtor does not have any valid defense or
argument against the debts claimed. The court must be convinced that the creditor’s claim is
clear and uncontested.

Example: A creditor files for involuntary rehabilitation because a debtor owes them a sum of
money under a loan contract. The debtor does not dispute the debt or raise any legal objections,
such as fraud or error in the contract, making it a straightforward claim.

2. No Payments on the Due and Demandable Debts Have Been Made for at Least
60 Days

This refers to the situation where the debtor has failed to make payments on debts that are
already due for a period of at least 60 days. The debts must be demandable, meaning the creditor
has the right to demand payment, and the due date for these payments has passed without any
action from the debtor.

Example: A debtor has a loan with a repayment schedule, and payments were due on May 1. If
by July 1 (60 days later), the debtor has not made any payments, the creditor may initiate
involuntary rehabilitation based on this criterion.

3. The Debtor Has Failed Generally to Meet Its Liabilities as They Fall Due
This condition means that the debtor has not been able to pay most, if not all, of its financial
obligations as they become due. It reflects a general inability to meet obligations, which could
indicate that the debtor is insolvent or in serious financial trouble.

Example: A company has several creditors—banks, suppliers, and lenders—and has been
unable to pay any of them for months. The company's failure to meet these obligations as they
come due shows a widespread financial issue, making it eligible for involuntary rehabilitation.

4. A Creditor, Other Than the Petitioner/s, Has Initiated Foreclosure

Proceedings

If another creditor (not the one filing for rehabilitation) has started foreclosure proceedings, this
may severely affect the debtor's ability to pay its other debts or push the debtor into insolvency.
Foreclosure often results in the sale of the debtor’s assets, which could deplete the debtor’s
resources, leaving them unable to pay other creditors.

Example: A bank begins foreclosure on the debtor’s property due to non-payment of a

mortgage. If the property is critical to the debtor’s operations or represents a significant portion
of its assets, this foreclosure could prevent the debtor from continuing its business or paying off
other debts, which may lead to insolvency.

These conditions are designed to protect creditors and ensure that debtors facing insolvency can
be reorganized or liquidated to maximize the value of assets for repayment.

Who will file? Creditors with claims or aggregate of whose claim is at least P1M or 25% of the
subscribed capital stock or partners’ contributions, whichever is higher

Voluntary Rehabilitation

• as the name implies it refers to proceedings that come from the debtor's own initiative, meaning it is
the debtor itself that files the petition or it may be possible that both the debtor and creditor file the
petition jointly
• initiated by the insolvent debtor by himself by filing a verified petition for the court so it's either by the
soil proprietor, by majority of the partners or by the directors together with OCS or the trustees
together with the two-thirds of the members

Read PPT
What is commencement order?

It is the order that commences the rehabilitation proceedings which is issued by the
Rehabilitation Court after it finds the petition for rehabilitation as sufficient in form and
substance. The Stay Order is a court-issued order that temporarily halts certain actions by
creditors and others against the debtor. It is a critical component of the rehabilitation process and
serves several purposesREAD PPT

Say for Example Scenario:

If a company files for bankruptcy, the court will issue a commencement order to officially start
the bankruptcy proceedings. This order will:

 Establish a stay on creditor actions, preventing them from seizing assets or initiating lawsuits.
 Appoint a bankruptcy trustee to manage the company’s assets and oversee the bankruptcy
process.
 Notify all creditors and stakeholders about the bankruptcy, allowing them to file claims and
participate in the process.

Stay order then halts creditor actions against the debtor, preserves assets, facilitates negotiations,
ensures compliance, and supports the rehabilitation plan’s implementation.

The commencement order is essential for initiating and guiding the insolvency or rehabilitation
process. It provides legal authority, implements protective measures, notifies stakeholders, and
establishes the framework for managing the debtor's financial difficulties.

The Commencement Order is issued within 5 days from the filing of the petition.

Duration: the entire duration of the rehabilitation proceeding but may be lifted if there is no substantial
likelihood for the debtor to be successfully rehabilitated.

COURT ACTION: Upon filing of the petition for rehabilitation, the court may:

1. Give due course to the petition if:

a. The debtor is insolvent; and
b. There is substantial likelihood for the debtor to be successfully rehabilitated

2. Deny the petition, if any of the following are present:

a. When the debtor is not insolvent;
b. The petition is a sham filing intended only to delay the enforcement of the rights of the creditors
c. The petition/rehabilitation plan/and the attachments are materially false or misleading statements; o
d. The debtor has committed acts of misrepresentation in fraud of creditors
3. Covert the proceedings to liquidation – there is no substantial likelihood for the debtor to be
successfully rehabilitated

WHO WILL MANAGE THE BUSINESS OF THE DEBTOR: during the rehabilitation
proceeding, the management shall be done by the:
1. Existing Board and/or management; or
2 Upon motion, the court may appoint:
a. Rehabilitation Receiver; or
b. Management Committee

A Rehabilitation Receiver is an individual or entity appointed by the court to oversee the

rehabilitation process of a debtor. The receiver’s primary responsibility is to protect and preserve
the assets of the debtor while ensuring the implementation of the rehabilitation plan.

Key Functions:

 Supervision: The receiver oversees the debtor's operations during the rehabilitation process,
ensuring that the business continues to operate in accordance with the rehabilitation plan.
 Asset Management: Protects and preserves the debtor’s assets to prevent dissipation or misuse
during the proceedings.
 Reporting: Submits periodic reports to the court and creditors on the financial condition of the
debtor, the progress of the rehabilitation plan, and any issues that arise.
 Negotiation with Creditors: Works with the debtor and creditors to ensure that the
rehabilitation plan is feasible and can be implemented.
 Monitoring Compliance: Ensures that the debtor follows the rehabilitation plan and any orders
issued by the court.

Example: If a company is under financial distress and undergoing rehabilitation, the

Rehabilitation Receiver ensures that creditors are fairly treated, the company's assets are
protected, and the business follows the approved plan for restructuring its debts.

2. Management Committee (ManCom):

A Management Committee (ManCom) is sometimes appointed by the court when there is a

high level of distrust between the debtor and its creditors, or when the court deems that the
debtor’s management cannot be trusted to oversee the company’s operations during
rehabilitation.

Key Functions:

 Control of Operations: The committee may take over the management and operation of the
debtor’s business if it is deemed necessary.
 Decision-Making: Acts as a decision-making body that oversees significant business decisions,
such as major financial transactions, contracts, or asset disposals.
  Replacing Management: If the court determines that the debtor’s existing management is
incompetent or untrustworthy, the Management Committee takes over the role of managing
the company until the rehabilitation plan is fully implemented.
 Creditor Representation: The committee is often composed of representatives from creditors,
ensuring that their interests are protected throughout the rehabilitation process.

Rehabilitation Plan is a comprehensive strategy designed to restore the financial health of an insolvent
debtor using various means:.

1. Debt forgiveness;
2. Debt rescheduling;
3. Reorganization or quasi-reorganization;
4. Dacion en pago;
5. Debt-equity conversion; and
6. Sale of the business (or parts of it) as a going concern; or
7. Setting up of new business entity; or
8. Other similar arrangements,

A rehabilitation plan must have the following characteristics to be considered economically feasible:

✓ The debtor has assets that can generate more cash if used in its daily operations than if sold.
✓ Liquidity issues can be addressed by a practicable business plan that will generate enough cash to
sustain daily operations, and the debtor has a definite source of financing for the proper and full
implementation of a rehabilitation plan that is anchored on realistic assumptions and goals.

WHO APPROVES REHABILITATION PLAN? approved by the court or creditors.

Approval required:

1. Creditors representing more than 50% of total claims and the confirmation of the court; or
2. The court even without approval of the creditors or even over the objections of the creditors,
in the following cases: a. The Rehabilitation Plan complies with the requirements of the FRIA; b.
The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan; c. The
shareholders, owners or partners of the juridical debtor lose at least their controlling interest as
a result of the Rehabilitation Plan; and d. The Rehabilitation Plan would likely provide the
 objecting class of creditors with compensation which has a net present value greater than that
which they would have received if the debtor were under liquidation.

Cram Down Effect: the rehabilitation plan approved by the court shall be binding upon the: 1. Debtor
and 2. All persons who may be affected by it, including creditors, whether or not such persons: a. have
participated in the proceedings, b. opposed the plan, or c. whether or not the claims have been
scheduled.

The petition for rehabilitation will be dismissed if:

 If the insolvent debtor, who has the ability to file the petition, is determined not to be
insolvent.
 If the petition is a fraudulent attempt to postpone the execution of obligations.
 Any materially inaccurate or deceptive statements are present in the Rehabilitation plan
or its accompanying documents.
 The debtor has engaged in deceptive practices or defrauded creditors.

In any case, proceedings may be done either in or out of court:

• It may be formal in nature

o As when it is done with court supervision.
• It may be more informal
o These are known as out-of-court or informal restructuring agreements (OCR)
o The parties meet and attempt to settle the debtor's liabilities amicably by agreeing upon a plan
for the debtor's rehabilitation and the payment of its debts.

An Out-of-Court or Informal Restructuring Agreement (OCRA) or Rehabilitation Plan is an alternative to

formal court-supervised rehabilitation proceedings. It allows a debtor and its creditors to negotiate and
agree on the restructuring of the debtor’s obligations without resorting to court intervention.

While the parties are negotiating and pending the finalization of the OCR, the debtor and its
creditors may agree upon a standstill period which as the name implies it preserves the status
quo among the debtor and its creditors by suspending the claims against the debtor especially
since as stated in the FRIA rules of procedure, the standstill agreement may include provisions
having the same legal effects as a commencement order under court supervised rehabilitation
which would include a stay or suspension order where seizure, sales, set of collection, creation of
new liens, or otherwise enforcing claims against the debtor are suspended or otherwise
prohibited.
What is the purpose of the standstill period? To enable the debtor and its creditors to negotiate
and ultimately enter into an OCR and that is why the enforcement of claims is put on hold by the
standstill period, to prevent interruption or interference with the negotiation of the OCR.

It will be effective and enforceable not only against the parties thereto but also against other
creditors provided that the following conditions are met:

✓ The agreement is approved by creditors representing more than 50 percent of the total
liabilities of the debtor.
✓Notice of the agreement is published in a newspaper of general circulation in the Philippines
once a week for two consecutive weeks to invite creditors to participate in the negotiation of the
OCR and to notify them that the OCR will be binding on all creditors once it is finally approved.
✓The standstill period must not exceed 120 days (about 4 months) from the date of effectivity.

This standstill period will expire under whichever of the following three instances comes first:
✓ Either first upon the lapse of the 120 days
✓ Upon the effectivity of the OCR, or
✓ Upon the termination of the negotiations for the OCR as declared by creditors representing
more than 50 percent of the total liabilities of the debtor.

By the expiration of the standstill period, the parties will have completed negotiations on their
OCR.

To validate, the OCR only needs two things: approval and publication

The following requirements must be met for such an agreement to be valid and enforceable:

1.)The debtor must agree to the out-of-court or informal

restructuring/workout agreement or Rehabilitation Plan;

2.) Approval Thresholds from Creditors:

For an OCRA to be effective, it must meet the following approval thresholds:

 At least 67% (2/3) of the secured creditors (based on the total principal amount of claims).
 At least 75% (3/4) of the unsecured creditors (based on the total principal amount of claims).
 At least 85% of the total liabilities (based on the principal amount of claims) must approve the
plan.

The approval is based on the amount of liabilities and not based on number of creditors.
These thresholds ensure that the majority of creditors, both secured and
unsecured, are in agreement with the restructuring or rehabilitation plan.

Publication
• After approval, the OCR notice will be published in a newspaper for three weeks. It takes effect
15 days after the last publication. The OCR and its provisions, such as payment rescheduling,
become binding on the debtor and all affected parties, including creditors who may have opposed
it. This is called the cram-down effect.

• If issues occur after the OCR takes effect, the parties can ask the court's help for execution or
annulment by filing a petition. They can also seek court approval for a pre-negotiated
rehabilitation plan, which means the debtor and creditors have already discussed the plan and
need the court's endorsement for implementation.

What is Pre-negotiated Rehabilitation?

Pre-negotiated rehabilitation is a form of voluntary court supervised rehabilitation which involves

proceedings where the debtor rehabilitation plan.

Under what conditions may the Rehabilitation Court approve a pre-negotiated Rehabilitation
Plan?

1. Endorsement by Creditors: The pre-negotiated rehabilitation plan must have the

support or approval of creditors holding at least:
o Two-thirds (2/3) of the total liabilities (based on the principal amount).
o A majority (50% + 1) of the total number of creditors.
o Two-thirds (2/3) of secured creditors and two-thirds (2/3) of unsecured
creditors (based on the principal amount).

Addition to that (other conditions to be met):

2. Compliance with Legal Requirements: The pre-negotiated rehabilitation plan must

comply with the rules and procedures outlined in the relevant insolvency laws. It must be
filed with the necessary documentation, such as the certification of creditor approval and
a detailed rehabilitation plan.
3. No Objections or Valid Opposition: If no objections are raised by creditors or if the
court finds any opposition to be without merit, the rehabilitation plan can be approved. If
objections exist, they must be resolved in favor of proceeding with the plan.
 4. Debtor's Solvency Concerns: The plan must demonstrate a feasible way to address the
debtor's financial distress, ensuring that it has a reasonable chance of rehabilitating the
debtor, continuing business operations, and providing a way to meet the creditors' claims.

Effects of Approval:

 The plan becomes binding on the debtor and all creditors.

 A stay order halts all legal actions against the debtor.
 The debtor must implement the plan.
 The debtor's assets are preserved during the rehabilitation process.
 Debts may be restructured or discharged based on the plan’s terms.

To implement the verified petition:

✓ It must be endorsed or approved by creditors holding at least 2/3 of the total liabilities of the
debtor.
✓ Secured creditors holding more than 50 percent of the total secured claims of the debtor.
✓ Unsecured creditors holding more than 50 percent of the total unsecured claims.
Exception: The court will still have to hear objections to the plan if there are any. They only
have a maximum of 120 days (about 4 months) from the filing of the petition within which to
approve or disapprove the pre-negotiated rehabilitation plan, as opposed to the one-year period in
other court proceedings.
In case of the failure of the court to act within the 120-day period, the plan will be deemed
approved. Nevertheless, if the court finds that either party had acted in bad faith or if there is an
objection to the plan that is not curable, then the court may instead convert the rehabilitation
proceedings into proceedings for liquidation.

What if the debtor and its creditors had not previously negotiated? Then, just follow the regular
procedure, which may either be voluntary or involuntary.

What are the types of liquidation proceedings?

Voluntary Liquidation:
Voluntary liquidation is initiated by the debtor themselves. This usually occurs when the debtor
(such as a company) acknowledges its inability to continue operations or settle its debts and
decides to liquidate its assets to pay creditors.

Involuntary Liquidation
Involuntary liquidation is initiated by creditors of the debtor. This happens when creditors seek
to force the debtor into liquidation due to non-payment of debts.
Comparison of Voluntary and Involuntary Liquidation

Aspect Voluntary Liquidation Involuntary Liquidation

Acts of Acts of insolvency need not be alleged Creditors must prove acts of
Insolvency and proved. insolvency.
The individual debtor files the A creditor or group of creditors files
Petition Filing
petition. the petition.
The debtor
is not Applies even in the case of an
absent as absent debtor (one
Debtor’s
he is the who resides or has departed from the
Presence
one who Philippines, cannot be found, or
files the conceals himself).
petition.
Posting of bond by creditors not Posting of bond by creditors is
Posting of Bond
required. required.
Issuance of
Liquidation order issued only after
Liquidation Liquidation order issued without trial.
trial.
Order
Must be 3 or more creditors whose
claim is at least PHP 1M or at least
Number of 25% of the subscribed capital stock
Number of creditors immaterial.
Creditors or partners’ contributions, whichever
is higher. (Same requirement as in
rehabilitation.)
Examples of acts of insolvency which must be ALLEDGE.
o Debtor leave the Philippines with the intent to defraud his creditors.
o The debtor concealed himself or his property to evade payment or legal process for collection.
o Did that door transferred or disposed his property with the intent to delay/evade/defraud payment.

 Bond Requirement: When filing a petition for liquidation, a bond must be posted. This bond ensures
that if the petition is dismissed or if the debtor is found not to be insolvent, the petitioners (creditors
or those who filed the petition) will cover all expenses, damages, and attorney's fees resulting from
the proceedings.

LIQUIDATION ORDER is an order that formally initiates the process of winding up a company or
individual’s financial affairs. It marks the official start of the liquidation process, where the debtor's
assets are collected, sold, and the proceeds are distributed to creditors.