Any benefit derived from the proceeding, to the

extent of his claim and the costs, belongs exclusively

to the creditor instituting the proceeding, and the
surplus, if any, belongs to the estate.

Where, before an order is made, the liquidator

signifies to the court his readiness to the institute
the proceeding for the benefit of the creditors, the
order shall fix the time within which he shall do so
and, in that case the benefit derived from the
proceedings, if instituted within the time limits so
fixed, belongs to the estate

Insolvency Proceedings
under the Financial
Rehabilitation and
Insolvency Act (FRIA) of
2010
Insolvency is the state of of insolvent, defined as 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. Insolvency
proceedings may cover: (a) an individual debtor,
referring to a natural person who is a resident and
citizen of the Philippines that has become insolvent
as defined under Republic Act No. 10142; or (b) a
debtor, referring to, unless specifically excluded by a
provision of Republic Act No. 10142, 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 in
Republic Act No. 10142.

1. Liquidation of Insolvent Juridical Debtors

1.1 Voluntary Liquidation
1.2 Involuntary Liquidation
1.3 Conversion by the Court into Liquidation
Proceedings
1.4 Powers of the SEC
2. Insolvency of Individual Debtors
2.1 Suspension of Payments
2.1.1 Petition
2.1.2 Action on the Petition
2.1.3 Actions suspended; Suspension Order
2.1.4 Creditors Meeting
2.1.5 Persons who may refrain from voting
2.1.6 Rejection of the proposed agreement
2.1.7 Objections
2.1.8 Effects of approval of proposed agreement
2.1.9 Failure of individual debtor to perform
agreement
2.2 Voluntary Liquidation
2.2.1 Application
2.2.2 Liquidation Order
2.3 Involuntary Liquidation
2.3.1 The Petition
2.3.2 Acts of Insolvency
2.3.3 Order to Individual Debtor to Show Cause
2.3.4 Default
2.3.5 Absent individual debtor
2.3.6 All property held for all creditors; Appeal
bonds; Exemptions to sureties
2.3.7 Sale under execution
3. Common provisions
3.1 Determination of Claims
3.1.1 Registry of Claims
3.1.2 Right of Set-off
3.1.3 Opposition or Challenge to Claims
3.1.4 Submission of Disputed to the Court
3.2 Avoidance Proceedings
1. Liquidation of Insolvent Juridical Debtors
The liquidation of insolvent debtors, as opposed to
individual debtors, may be voluntary or involuntary.
Voluntary liquidation proceedings are initiated by the
debtor itself, while involuntary insolvency
proceedings are initiate by three or more creditors.
[Back to the top]

1.1 Voluntary Liquidation

An insolvent debtor may apply for liquidation by
filing a petition for liquidation with the court. The
petition shall be verified, shall establish the
insolvency of the debtor and shall contain, whether
as an attachment or as part of the body of the
petition:

(a) a schedule of the debtors debts and liabilities

including a list of creditors with their addresses,
amounts of claims and collaterals, or securities, if
any;

(b) an inventory of all its assets including receivables

and claims against third parties; and

(c) the names of at least three (3) nominees to the

position of liquidator.
At any time during the pendency of court-supervised
rehabilitation proceedings or pre-negotiated
rehabilitation proceedings, the debtor may also
initiate liquidation proceedings by filing a motion in
the same court where the rehabilitation proceedings
are pending to convert the rehabilitation proceedings
into liquidation proceedings. The motion shall be
verified, shall contain or set forth the same matters
required in the preceding paragraph, and state that
the debtor is seeking immediate dissolution and
termination of its corporate existence.If the petition
or the motion, as the case may be, is sufficient in
form and substance, the court shall issue a
Liquidation Order. [Back to the top]

1.2 Involuntary Liquidation

Three (3) or more creditors the aggregate of whose
claims is at least either One Million Pesos
(PhP1,000,000,00) or at least twenty-five percent
(25%) of the subscribed capital stock or partners
contributions of the debtor, whichever is higher, may
apply for and seek the liquidation of an insolvent
debtor by filing a petition for liquidation of the debtor
with the court. The petition shall show that:

(a) there is no genuine issue of fact or law on the

claim/s of the petitioner/s, and that the due and
demandable payments thereon have not been made
for at least one hundred eighty (180) days or that
the debtor has failed generally to meet its liabilities
as they fall due; and

(b) there is no substantial likelihood that the debtor

may be rehabilitated.
At any time during the pendency of or after a court-
supervised rehabilitation proceedings or pre-
negotiated rehabilitation proceedings, three (3) or
more creditors whose claims is at least either One
Million Pesos (PhP1,000,000.00) or at least twenty-
five percent (25%) of the subscribed capital or
partners contributions of the debtor, whichever is
higher, may also initiate liquidation proceedings by
filing a motion in the same court where the
rehabilitation proceedings are pending to convert the
rehabilitation proceedings into liquidation
proceedings. The motion shall be verified, shall
contain or set forth the same matters required in the
preceding paragraph, and state that the movants are
seeking the immediate liquidation of the debtor.

If the petition or motion is sufficient in form and

substance, the court shall issue an Order:

(1) directing the publication of the petition or motion

in a newspaper of general circulation once a week
for two (2) consecutive weeks; and

(2) directing the debtor and all creditors who are not
the petitioners to file their comment on the petition
or motion within fifteen (15) days from the date of
last publication.

If, after considering the comments filed, the court

determines that the petition or motion is meritorious,
it shall issue the Liquidation Order. [Back to the top]

1.3 Conversion by the Court into Liquidation

Proceedings
During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court may
order the conversion of rehabilitation proceedings to
liquidation proceedings pursuant to (a) Section 25(c)
of this Act; or (b) Section 72 of this Act; or (c) Section
75 of this Act; or (d) Section 90 of this Act; or at any
other time upon the recommendation of the
rehabilitation receiver that the rehabilitation of the
debtor is not feasible. Thereupon, the court shall
issue the Liquidation Order. [Back to the top]

1.4 Powers of the SEC

The provisions regarding the liquidation of insolvent
juridical debtors shall not affect the regulatory
powers of the Securities and Exchange Commission
(SEC) under Section 6 of Presidential Decree No. 902-
A, as amended, with respect to any dissolution and
liquidation proceeding initiated and heard before it.
[Back to the top]

2. Insolvency of Individual Debtors

Insolvent individual debtors have the following
options: (a) Suspension of payments;(b) Voluntary
liquidation; and (c) Involuntary liquidation. [Back to
the top]

2.2 Suspension of Payments

2.2.1 Petition

An individual debtor who, possessing sufficient

property to cover all his debts but foreseeing the
impossibility of meeting them when they
respectively fall due, may file a verified petition that
he be declared in the state of suspension of
payments by the court of the province or city in
which he has resides for six (6) months prior to the
filing of his petition. He shall attach to his petition, as
a minimum: (a) a schedule of debts and liabilities;
(b) an inventory of assets; and (c) a proposed
agreement with his creditors. [Back to the top]

2.2.2 Action on the Petition

If the court finds the petition sufficient in form and

substance, it shall, within five (5) working days from
the filing of the petition, issue an Order:

(a) calling a meeting of all the creditors named in the

schedule of debts and liabilities at such time not less
than fifteen (15) days nor more than forty (40) days
from the date of such Order and designating the
date, time and place of the meeting;

(b) directing such creditors to prepare and present

written evidence of their claims before the scheduled
creditors meeting;

(c) directing the publication of the said order in a

newspaper of general circulation published in the
province or city in which the petition is filed once a
week for two (2) consecutive weeks, with the first
publication to be made within seven (7) days from
the time of the issuance of the Order;

(d) directing the clerk of court to cause the sending

of a copy of the Order by registered mail, postage
prepaid, to all creditors named in the schedule of
debts and liabilities;

(e) forbidding the individual debtor from selling,

transferring, encumbering or disposing in any
manner of his property, except those used in the
ordinary operations of commerce or of industry in
which the petitioning individual debtor is engaged so
long as the proceedings relative to the suspension of
payments are pending;

(f) prohibiting the individual debtor from making any

payment outside of the necessary or legitimate
expenses of his business or industry, so long as the
proceedings relative to the suspension of payments
are pending; and

(g) appointing a commissioner to preside over the

creditors meeting. [Back to the top]

2.1.3 Actions suspended; Suspension Order

Upon motion filed by the individual debtor, the court

may issue an order suspending any pending
execution against the individual debtor. Properties
held as security by secured creditors shall not be the
subject of such suspension order. The suspension
order shall lapse when three (3) months shall have
passed without the proposed agreement being
accepted by the creditors or as soon as such
agreement is denied.

No creditor shall sue or institute proceedings to

collect his claim from the debtor from the time of the
filing of the petition for suspension of payments and
for as long as proceedings remain pending except:
(a) those creditors having claims for personal labor,
maintenance, expense of last illness and funeral of
the wife or children of the debtor incurred in the sixty
(60) days immediately prior to the filing of the
petition; and (b) secured creditors. [Back to the top]

2.1.4 Creditors Meeting

The presence of creditors holding claims amounting
to at least three-fifths (3/5) of the liabilities shall be
necessary for holding a meeting. The commissioner
appointed by the court shall preside over the
meeting and the clerk of court shall act as the
secretary thereof, subject to the following rules:

(a) The clerk shall record the creditors present and

amount of their respective claims;

(b) The commissioner shall examine the written

evidence of the claims. If the creditors present hold
at least three-fifths (3/5) of the liabilities of the
individual debtor, the commissioner shall declare the
meeting open for business;

(c) The creditors and individual debtor shall discuss

the propositions in the proposed agreement and put
them to a vote;

(d) To form a majority, it is necessary: (1) that two-

thirds (2/3) of the creditors voting unite upon the
same proposition; and (2) that the claims
represented by said majority vote amount to at least
three-fifths (3/5) of the total liabilities of the debtor
mentioned in the petition; and

(e) After the result of the voting has been

announced, all protests made against the majority
vote shall be drawn up, and the commissioner and
the individual debtor together with all creditors
taking part in the voting shall sign the affirmed
propositions.

No creditor who incurred his credit within ninety (90)

days prior to the filing of the petition shall be entitled
to vote. [Back to the top]

2.1.5 Persons who may refrain from voting

Creditors who are unaffected by the Suspension

Order may refrain from attending the meeting and
from voting therein. Such persons shall not be bound
by any agreement determined upon at such
meeting, but if they should join in the voting they
shall be bound in the same manner as are the other
creditors. [Back to the top]

2.1.6 Rejection of the proposed agreement

The proposed agreement shall be deemed rejected if

the number of creditors required for holding a
meeting do not attend thereat, or if the two (2)
majorities mentioned in Section 97 hereof are not in
favor thereof. In such instances, the proceeding shall
be terminated without recourse and the parties
concerned shall be at liberty to enforce the rights
which may correspond to them. [Back to the top]

2.1.7 Objections

If the proposal of the individual debtor, or any

amendment thereof made during the creditors
meeting, is approved by the majority of creditors in
accordance with Section 97 hereof, any creditor who
attended the meeting and who dissented from and
protested against the vote of the majority may file
an objection with the court within ten (10) days from
the date of the last creditors meeting. The causes
for which objection may be made to the decision
made by the majority during the meeting shall be:
(a) defects in the call for the meeting, in the holding
thereof and in the deliberations had thereat which
prejudice the rights of the creditors; (b) fraudulent
connivance between one or more creditors and the
individual debtor to vote in favor of the proposed
agreement; or (c) fraudulent conveyance of claims
for the purpose of obtaining a majority. The court
shall hear and pass upon such objection as soon as
possible and in a summary manner.

In case the decision of the majority of creditors to

approve the individual debtors proposal or any
amendment thereof made during the creditors
meeting is annulled by the court, the court shall
declare the proceedings terminated and the creditors
shall be at liberty to exercise the rights which may
correspond to them. [Back to the top]

2.1.8 Effects of approval of proposed agreement

If the decision of the majority of the creditors to

approve the proposed agreement or any amendment
thereof made during the creditors meeting is uphold
by the court, or when no opposition or objection to
said decision has been presented, the court shall
order that the agreement be carried out and all
parties bound thereby to comply with its terms.

The court may also issue all orders which may be

necessary or proper to enforce the agreement on
motion of any affected party. The Order confirming
the approval of the proposed agreement or any
amendment thereof made during the creditors
meeting shall be binding upon all creditors whose
claims are included in the schedule of debts and
liabilities submitted by the individual debtor and who
were properly summoned, but not upon: (a) those
creditors having claims for personal labor,
maintenance, expenses of last illness and funeral of
the wife or children of the debtor incurred in the sixty
(60) days immediately prior to the filing of the
petition; and (b) secured creditors who failed to
attend the meeting or refrained from voting therein.
[Back to the top]

2.1.9 Failure of individual debtor to perform

agreement

If the individual debtor fails, wholly or in part, to

perform the agreement decided upon at the meeting
of the creditors, all the rights which the creditors had
against the individual debtor before the agreement
shall revest in them. In such case the individual
debtor may be made subject to the insolvency
proceedings in the manner established by this Act.
[Back to the top]

2.2 Voluntary Liquidation

2.2.1 Application

An individual debtor whose properties are not

sufficient to cover his liabilities, and owing debts
exceeding Five hundred thousand pesos
(Php500,000.00), may apply to be discharged from
his debts and liabilities by filing a verified petition
with the court of the province or city in which he has
resided for six (6) months prior to the filing of such
petition. He shall attach to his petition a schedule of
debts and liabilities and an inventory of assets. The
filing of such petition shall be an act of insolvency.
[Back to the top]

2.2.2 Liquidation Order

If the court finds the petition sufficient in form and
substance it shall, within five (5) working days issue
the Liquidation Order. [Back to the top]

2.3 Involuntary Liquidation

2.3.1 The Petition

Any creditor or group of creditors with a claim of, or

with claims aggregating at least Five hundred
thousand pesos (Php500, 000.00) may file a verified
petition for liquidation with the court of the province
or city in which the individual debtor resides. [Back
to the top]

2.3.2 Acts of Insolvency

The following shall be considered acts of insolvency,

and the petition for liquidation shall set forth or
allege at least one of such acts:

(a) That such person is about to depart or has

departed from the Republic of the Philippines, with
intent to defraud his creditors;

(b) That being absent from the Republic of the

Philippines, with intent to defraud his creditors, he
remains absent;

(c) That he conceals himself to avoid the service of

legal process for the purpose of hindering or
delaying the liquidation or of defrauding his
creditors;

(d) That he conceals, or is removing, any of his

property to avoid its being attached or taken on legal
process;
(e) That he has suffered his property to remain under
attachment or legal process for three (3) days for the
purpose of hindering or delaying the liquidation or of
defrauding his creditors;

(f) That he has confessed or offered to allow

judgment in favor of any creditor or claimant for the
purpose of hindering or delaying the liquidation or of
defrauding any creditors or claimant;

(g) That he has willfully suffered judgment to be

taken against him by default for the purpose of
hindering or delaying the liquidation or of defrauding
his creditors;

(h) That he has suffered or procured his property to

be taken on legal process with intent to give a
preference to one or more of his creditors and
thereby hinder or delay the liquidation or defraud
any one of his creditors;

(i) That he has made any assignment, gift, sale,

conveyance or transfer of his estate, property, rights
or credits with intent to hinder or delay the
liquidation or defraud his creditors;

(j) That he has, in contemplation of insolvency, made

any payment, gift, grant, sale, conveyance or
transfer of his estate, property, rights or credits;

(k) That being a merchant or tradesman, he has

generally defaulted in the payment of his current
obligations for a period of thirty (30) days;

(l) That for a period of thirty (30) days, he has failed,

after demand, to pay any moneys deposited with
him or received by him in a fiduciary; and
(m) That an execution having been issued against
him on final judgment for money, he shall have been
found to be without sufficient property subject to
execution to satisfy the judgment.

The petitioning creditor/s shall post a bond in such as

the court shall direct, conditioned that if the petition
for liquidation is dismissed by the court, or
withdrawn by the petitioner, or if the debtor shall not
be declared an insolvent the petitioners will pay to
the debtor all costs, expenses, damages occasioned
by the proceedings and attorneys fees. [Back to the
top]

2.3.3 Order to Individual Debtor to Show Cause

Upon the filing of such creditors petition, the court

shall issue an Order requiring the individual debtor to
show cause, at a time and place to be fixed by the
said court, why he should not be adjudged an
insolvent. Upon good cause shown, the court may
issue an Order forbidding the individual debtor from
making payments of any of his debts, and
transferring any property belonging to him. However,
nothing contained herein shall affect or impair the
rights of a secured creditor to enforce his lien in
accordance with its terms. [Back to the top]

2.3.4 Default

If the individual debtor shall default or if, after trial,

the issues are found in favor of the petitioning
creditors the court shall issue the Liquidation Order.
[Back to the top]

2.3.5 Absent individual debtor

In all cases where the individual debtor resides out of
the Republic of the Philippines; or has departed
therefrom; or cannot, after due diligence, be found
therein; or conceals himself to avoid service of the
Order to show cause, or any other preliminary
process or orders in the matter, then the petitioning
creditors, upon submitting the affidavits requisite to
procedure an Order of publication, and presenting a
bond in double the amount of the aggregate sum of
their claims against the individual debtor, shall be
entitled to an Order of the court directing the sheriff
of the province or city in which the matter is pending
to take into his custody a sufficient amount of
property of the individual debtor to satisfy the
demands of the petitioning creditors and the costs of
the proceedings. Upon receiving such Order of the
court to take into custody of the property of the
individual debtor, it shall be the duty of the sheriff to
take possession of the property and effects of the
individual debtor, not exempt from execution, to an
extent sufficient to cover the amount provided for
and to prepare within three (3) days from the time of
taking such possession, a complete inventory of all
the property so taken, and to return it to the court as
soon as completed. The time for taking the inventory
and making return thereof may be extended for good
cause shown to the court. The sheriff shall also
prepare a schedule of the names and residences of
the creditors, and the amount due each, from the
books of the debtor, or from such other papers or
data of the individual debtor available as may come
to his possession, and shall file such schedule or list
of creditors and inventory with the clerk of court.

The bonds to procure the order for custody of the

property and effects of the individual debtor shall be
conditioned that if, upon final hearing of the petition
in insolvency, the court shall find in favor of the
petitioners, such bonds and all of them shall be void;
if the decision be in favor of the individual debtor,
the proceedings shall be dismissed, and the
individual debtor, his heirs, administrators, executors
or assigns shall be entitled to recover such sum of
money as shall be sufficient to cover the damages
sustained by him, not to exceed the amount of the
respective bonds. Such damages shall be fixed and
allowed by the court. [Back to the top]

2.3.6 All property held for all creditors; Appeal

bonds; Exemptions to sureties

In all cases where property is taken into custody by

the sheriff, if it does not embrace all the property
and effects of the debtor not exempt from execution,
any other creditor or creditors of the individual
debtor, upon giving bond to be approved by the
court in double the amount of their claims, singly or
jointly, shall be entitled to similar orders and to like
action, by the sheriff; until all claims be provided for,
if there be sufficient property or effects. All property
taken into custody by the sheriff by virtue of the
giving of any such bonds shall be held by him for the
benefit of all creditors of the individual debtor whose
claims shall be duly proved. The bonds to procure
the order for custody of the property and effects of
the individual debtor shall be conditioned that if,
upon final hearing of the petition in insolvency, the
court shall find in favor of the petitioners, such bonds
and all of them shall be void; if the decision be in
favor of the individual debtor, the proceedings shall
be dismissed, and the individual debtor, his heirs,
administrators, executors or assigns shall be entitled
to recover such sum of money as shall be sufficient
to cover the damages sustained by him, not to
exceed the amount of the respective bonds. Such
damages shall be fixed and allowed by the court. If
either the petitioners or the debtor shall appeal from
the decision of the court, upon final hearing of the
petition, the appellant shall be required to give bond
to the successful party in a sum double the amount
of the value of the property in controversy, and for
the costs of the proceedings.

Any person interested in the estate may take

exception to the sufficiency of the sureties on such
bond or bonds. When excepted to the petitioners
sureties, upon notice to the person excepting of not
less than two (2) nor more than five (5) days, must
justify as to their sufficiency; and upon failure to
justify, or of others in their place fail to justify at the
time and place appointed the judge shall issue an
Order vacating the order to take the property of the
individual debtor into the custody of the sheriff, or
denying the appeal, as the case may be. [Back to the
top]

2.3.7 Sale under execution

If, in any case, proper affidavits and bonds are

presented to the court or a judge thereof, asking for
and obtaining an order of publication and an order
for the custody of the property of the individual
debtor and thereafter the petitioners shall make it
appear satisfactorily to the court or a judge thereof
that the interest of the parties to the proceedings will
be subserved by a sale thereof, the court may order
such property to be sold in the same manner as
property is sold under execution, the proceeds to
deposited in the court to abide by the result of the
proceedings. [Back to the top]

3. Common provisions
In addition to the provisions on the Liquidation Order,
Liquidation Plan and Liquidator, the following
provisions shall apply to liquidation in insolvency
proceedings of both individual debtors and juridical
debtors: [Back to the top]

3.1 Determination of Claims

3.1.1 Registry of Claims

Within twenty (20) days from his assumption into

office the liquidator shall prepare a preliminary
registry of claims of secured and unsecured
creditors. Secured creditors who have waived their
security or lien, or have fixed the value of the
property subject of their security or lien by
agreement with the liquidator and is admitted as a
creditor for the balance , shall be considered as
unsecured creditors. The liquidator shall make the
registry available for public inspection and provide
publication notice to creditors, individual debtors
owner/s of the sole proprietorship-debtor, the
partners of the partnership-debtor and shareholders
or members of the corporation-debtor, on where and
when they may inspect it. All claims must be duly
proven before being paid. [Back to the top]

3.1.2 Right of Set-off

If the debtor and creditor are mutually debtor and
creditor of each other one debt shall be set off
against the other, and only the balance, if any shall
be allowed in the liquidation proceedings.

3.1.3 Opposition or Challenge to Claims

Within thirty (30 ) days from the expiration of the

period for filing of applications for recognition of
claims, creditors, individual debtors, owner/s of the
sole proprietorship-debtor, partners of the
partnership-debtor and shareholders or members of
the corporation -debtor and other interested parties
may submit a challenge to claim or claims to the
court, serving a certified copy on the liquidator and
the creditor holding the challenged claim. Upon the
expiration of the (30) day period, the rehabilitation
receiver shall submit to the court the registry of
claims containing the undisputed claims that have
not been subject to challenge. Such claims shall
become final upon the filling of the register and may
be subsequently set aside only on grounds or fraud,
accident, mistake or inexcusable neglect. [Back to
the top]

3.1.4 Submission of Disputed to the Court

The liquidator shall resolve disputed claims and

submit his findings thereon to the court for final
approval. The liquidator may disallow claims. [Back
to the top]

3.2 Avoidance Proceedings

Any transaction occurring prior to the issuance of the
Liquidation Order or, in case of the conversion of the
rehabilitation proceedings prior to the
commencement date, entered into by the debtor or
involving its assets, may be rescinded or declared
null and void on the ground that the same was
executed with intent to defraud a creditor or
creditors or which constitute undue preference of
creditors. A disputable presumption of such intent
shall arise if the transaction:

(a) provides unreasonably inadequate consideration

to the debtor and is executed within ninety (90) days
prior to the commencement date;

(b) involves an accelerated payment of a claim to a

creditor within ninety (90) days prior to the
commencement date;

(c) provides security or additional security executed

within ninety (90) days prior to the commencement
date;

(d) involves creditors, where a creditor obtained, or

received the benefit of, more than its pro rata share
in the assets of the debtor, executed at a time when
the debtor was insolvent; or

(e) is intended to defeat, delay or hinder the ability

of the creditors to collect claims where the effect of
the transaction is to put assets of the debtor beyond
the reach of creditors or to otherwise prejudice the
interests of creditors.

The liquidator or, with his conformity, a creditor may

initiate and prosecute any action to rescind, or
declare null and void any transaction described in
the immediately preceding paragraph. If the
liquidator does not consent to the filling or
prosecution of such action, any creditor may seek
leave of the court to commence said action.

If leave of court is granted, the liquidator shall assign

and transfer to the creditor all rights, title and
interest in the chose in action or subject matter of
the proceeding, including any document in support
thereof.