INSOLVENCY PROCEEDINGS UNDER THE FINANCIAL

REHABILITATION AND INSOLVENCY ACT (FRIA) OF 2010

Insolvency is the state 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

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.

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 debtor’s 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.

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 partner’s
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 partner’s 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.

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.

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.

2. Insolvency of Individual Debtors

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

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.

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.

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.

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.

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.

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.

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 debtor’s 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.

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.

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.

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.

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.

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.

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 attorney’s fees.

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.

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.

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.
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 petitioner’s 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.

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.

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:

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.

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.

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.

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.

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.