Court-Supervised Rehabilitation (Chapter II): Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act of 2010)

[Republic Act No. 10142; Chapter I; Chapter II; Chapter III; Chapter IV; Chapter V; Chapter VI; Chapter VII; Chapter VIII; Chapter IX; Chapter X; See also Introduction to Insolvency in the Philippines]

CHAPTER II

COURT-SUPERVISED REHABILITATION

(A) Initiation Proceedings.

(1) Voluntary Proceedings.

SEC. 12. Petition to Initiate Voluntary Proceedings by Debtor. — When approved by the owner in case of a sole proprietorship, or by a majority of the partners in case of a partnership, or, in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds hereinafter specifically provided. The petition shall be verified to establish the insolvency of the debtor and the viability of its rehabilitation, and include, whether as an attachment or as part of the body of the petition, as a minimum, the following:

(a) Identification of the debtor, its principal activities and its addresses;

(b) Statement of the fact of and the cause of the debtor’s insolvency or inability to pay its obligations as they become due;

(d) The grounds upon which the petition is based;

(e) Other information that may be required under this Act depending on the form of relief requested;

(f) 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;

(g) An inventory of all its assets including receivables and claims against third parties;

(h) A Rehabilitation Plan;

(i) The names of at least three (3) nominees to the position of rehabilitation receiver; and

(j) Other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated by the Supreme Court.

A group of debtors may jointly file a petition for rehabilitation under this Act when one or more of its members foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group and/or the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan.

(2) Involuntary Proceedings.

SEC. 13. Circumstances Necessary to Initiate Involuntary Proceedings. — Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or partners’ contributions, whichever is higher, may initiate involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if:

(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 sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due; or

(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.

SEC. 14. Petition to Initiate Involuntary Proceedings. — The creditor/s’ petition for rehabilitation shall be verified to establish the substantial likelihood that the debtor may be rehabilitated, and include:

(a) identification of the debtor, its principal activities and its address;

(b) the circumstances sufficient to support a petition to initiate involuntary rehabilitation proceedings under Section 13 of this Act;

(d) a Rehabilitation Plan;

(e) the names of at least three (3) nominees to the position of rehabilitation receiver;

(f) other information that may be required under this Act depending on the form of relief requested; and

(g) other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated by the Supreme Court.

(B) Action on the Petition and Commencement of Proceedings.

SEC. 15. Action on the Petition. — If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within five (5) working days from the filing of the petition, issue a Commencement Order. If, within the same period, the court finds the petition deficient in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the five (5) working days provided above for the issuance of the Commencement Order shall be reckoned from the date of the filing of the amended or supplemental petition or the submission of such documents.

SEC. 16. Commencement of Proceedings and Issuance of a Commencement Order. — The rehabilitation proceedings shall commence upon the issuance of the Commencement Order, which shall:

(a) identify the debtor, its principal business or activity/ies and its principal place of business;

(b) summarize the ground/s for initiating the proceedings;

(d) state the legal effects of the Commencement Order, including those mentioned in Section 17 hereof;

(e) declare that the debtor is under rehabilitation;

(f) direct the publication of the Commencement Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance;

(g) if the petitioner is the debtor, direct the service by personal delivery of a copy of the petition on each creditor holding at least ten percent (10%) of the total liabilities of the debtor as determined from the schedule attached to the petition within five (5) days; if the petitioner/s is/are creditor/s, direct the service by personal delivery of a copy of the petition on the debtor within five (5) days;

(h) appoint a rehabilitation receiver who may or may not be from among the nominees of the petitioner/s, and who shall exercise such powers and duties defined in this Act as well as the procedural rules that the Supreme Court will promulgate;

(i) summarize the requirements and deadlines for creditors to establish their claims against the debtor and direct all creditors to file their claims with the court at least five (5) days before the initial hearing;

(j) direct the Bureau of Internal Revenue (BIR) to file and serve on the debtor its comment on or opposition to the petition or its claim/s against the debtor under such procedures as the Supreme Court may hereafter provide;

(k) prohibit the debtor’s suppliers of goods or services from withholding the supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services or goods supplied after the issuance of the Commencement Order;

(l) authorize the payment of administrative expenses as they become due;

(m) set the case for initial hearing, which shall not be more than forty (40) days from the date of filing of the petition for the purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated;

(n) make available copies of the petition and rehabilitation plan for examination and copying by any interested party;

(o) indicate the location or locations at which documents regarding the debtor and the proceedings under this Act may be reviewed and copied;

(p) state that any creditor or debtor, who is not the petitioner, may submit the name or nominate any other qualified person to the position of rehabilitation receiver at least five (5) days before the initial hearing;

(q) include a Stay or Suspension Order which shall:

(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;

(2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;

(3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and

(4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.

SEC. 17. Effects of the Commencement Order. — Unless otherwise provided for in this Act, the court’s issuance of a Commencement Order shall, in addition to the effects of a Stay or Suspension Order described in Section 16 hereof:

(a) vest the rehabilitation receiver with all the powers and functions provided for in this Act, such as the right to review and obtain all records to which the debtor’s management and directors have access, including bank accounts of whatever nature of the debtor, subject to the approval by the court of the performance bond filed by the rehabilitation receiver;

(b) prohibit, or otherwise serve as the legal basis for rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collect on or enforce a claim against the debtor after the commencement date unless otherwise allowed in this Act, subject to the provisions of Section 50 hereof;

(c) serve as the legal basis for rendering null and void any set-off after the commencement date of any debt owed to the debtor by any of the debtor’s creditors;

(d) serve as the legal basis for rendering null and void the perfection of any lien against the debtor’s property after the commencement date; and

(e) consolidate the resolution of all legal proceedings by and against the debtor to the court: Provided, however, That the court may allow the continuation of cases in other courts where the debtor had initiated the suit.

Attempts to seek legal or other recourse against the debtor outside these proceedings shall be sufficient to support a finding of indirect contempt of court.

SEC. 18. Exceptions to the Stay or Suspension Order. — The Stay or Suspension Order shall not apply:

(a) to cases already pending appeal in the Supreme Court as of commencement date: Provided, That any final and executory judgment arising from such appeal shall be referred to the court for appropriate action;

(b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court, is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;

(c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;

(d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter’s business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;

(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;

(f) the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and

(g) any criminal action against the individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under this Act.

SEC. 19. Waiver of Taxes and Fees Due to the National Government and to Local Government Units (LGUs). — Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees, including penalties, interests and charges thereof, due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation.

SEC. 20. Application of Stay or Suspension Order to Government Financial Institutions. — The provisions of this Act concerning the effects of the Commencement Order and the Stay or Suspension Order on the suspension of rights to foreclose or otherwise pursue legal remedies shall apply to government financial institutions, notwithstanding provisions in their charters or other laws to the contrary.

SEC. 21. Effectivity and Duration of Commencement Order. — Unless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated. In determining whether there is substantial likelihood for the debtor to be successfully rehabilitated, the court shall ensure that the following minimum requirements are met:

(a) The proposed Rehabilitation Plan submitted complies with the minimum contents prescribed by this Act;

(b) There is sufficient monitoring by the rehabilitation receiver of the debtor’s business for the protection of creditors;

(c) The debtor has met with its creditors to the extent reasonably possible in attempts to reach a consensus on the proposed Rehabilitation Plan;

(d) The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the underlying assumptions and the financial goals stated in the petitioner’s Rehabilitation Plan are realistic, feasible and reasonable; or, if not, there is, in any case, a substantial likelihood for the debtor to be successfully rehabilitated because, among others:

(1) there are sufficient assets with which to rehabilitate the debtor;

(2) there is sufficient cash flow to maintain the operations of the debtor;

(3) the debtor’s owner/s, partners, stockholders, directors and officers have been acting in good faith and with due diligence;

(4) the petition is not a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group of creditors; and

(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;

(e) The petition, the Rehabilitation Plan and the attachments thereto do not contain any materially false or misleading statement;

(f) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least three-fourths (3/4) of its total obligations to the extent reasonably possible and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; if the petitioner/s is/are a creditor or group of creditors, that the petitioner/s has/have met with the debtor and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; and

(g) The debtor has not committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors.

SEC. 22. Action at the Initial Hearing. — At the initial hearing, the court shall:

(a) determine the creditors who have made timely and proper filing of their notice of claims;

(b) hear and determine any objection to the qualifications or the appointment of the rehabilitation receiver and, if necessary, appoint a new one in accordance with this Act;

(c) direct the creditors to comment on the petition and the Rehabilitation Plan, and to submit the same to the court and to the rehabilitation receiver within a period of not more than twenty (20) days; and

(d) direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit to the court within forty (40) days from the initial hearing the report provided in Section 24 hereof.

SEC. 23. Effect of Failure to File Notice of Claim. — A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a notice of claim in accordance with the Commencement Order but subsequently files a belated claim shall not be entitled to participate in the rehabilitation proceedings but shall be entitled to receive distributions arising therefrom.

SEC. 24. Report of the Rehabilitation Receiver. — Within forty (40) days from the initial hearing, and with or without the comments of the creditors or any of them, the rehabilitation receiver shall submit a report to the court stating his preliminary findings and recommendations on whether:

(a) the debtor is insolvent and if so, the causes thereof and any unlawful or irregular act or acts committed by the owner/s of a sole proprietorship, partners of a partnership, or directors or officers of a corporation in contemplation of the insolvency of the debtor or which may have contributed to the insolvency of the debtor;

(b) the underlying assumptions, the financial goals and the procedures to accomplish such goals as stated in the petitioner’s Rehabilitation Plan are realistic, feasible and reasonable;

(d) the petition should be dismissed; and

(e) the debtor should be dissolved and/or liquidated.

SEC. 25. Giving Due Course to or Dismissal of Petition, or Conversion of Proceedings. — Within ten (10) days from receipt of the report of the rehabilitation receiver mentioned in Section 24 hereof, the court may:

(a) give due course to the petition upon a finding that:

(1) the debtor is insolvent; and

(2) there is a substantial likelihood for the debtor to be successfully rehabilitated;

(b) dismiss the petition upon a finding that:

(1) debtor is not insolvent;

(2) the petition is a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group of creditors;

(3) the petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading statements; or

(4) the debtor has committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors;

(1) the debtor is insolvent; and

(2) there is no substantial likelihood for the debtor to be successfully rehabilitated as determined in accordance with the rules to be promulgated by the Supreme Court.

SEC. 26. Petition Given Due Course. — If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court within a period of not more than ninety (90) days.

The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration or other modes of dispute resolution, as provided for under Republic Act No. 9285, or the Alternative Dispute Resolution Act of 2004, should it determine that such mode will resolve the dispute more quickly, fairly and efficiently than the court.

SEC. 27. Dismissal of Petition. — If the petition is dismissed pursuant to paragraph (b) of Section 25 hereof, then the court may, in its discretion, order the petitioner to pay damages to any creditor or to the debtor, as the case may be, who may have been injured by the filing of the petition, to the extent of any such injury.

SEC. 28. Who May Serve as a Rehabilitation Receiver. — Any qualified natural or juridical person may serve as a rehabilitation receiver: Provided, That if the rehabilitation receiver is a juridical entity, it must designate a natural person/s who possess/es all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative/s are solidarily liable for all obligations and responsibilities of the rehabilitation receiver.

SEC. 29. Qualifications of a Rehabilitation Receiver. — The rehabilitation receiver shall have the following minimum qualifications:

(a) A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding his nomination;

(b) Of good moral character and with acknowledged integrity, impartiality and independence;

(c) Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant training and/or experience that may be necessary to enable him to properly discharge the duties and obligations of a rehabilitation receiver; and

(d) Has no conflict of interest: Provided, That such conflict of interest may be waived, expressly or impliedly, by a party who may be prejudiced thereby.

Other qualifications and disqualifications of the rehabilitation receiver shall be set forth in procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.

SEC. 30. Initial Appointment of the Rehabilitation Receiver. — The court shall initially appoint the rehabilitation receiver, who may or may not be from among the nominees of the petitioner. However, at the initial hearing of the petition, the creditors and the debtor who are not petitioners may nominate other persons to the position. The court may retain the rehabilitation receiver initially appointed or appoint another who may or may not be from among those nominated.

In case the debtor is a securities market participant, the court shall give priority to the nominee of the appropriate securities or investor protection fund.

If a qualified natural person or entity is nominated by more than fifty percent (50%) of the secured creditors and the general unsecured creditors, and satisfactory evidence is submitted, the court shall appoint the creditors’ nominee as rehabilitation receiver.

SEC. 31. Powers, Duties and Responsibilities of the Rehabilitation Receiver. — The rehabilitation receiver shall be deemed an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan. To this end, and without limiting the generality of the foregoing, the rehabilitation receiver shall have the following powers, duties and responsibilities:

(a) To verify the accuracy of the factual allegations in the petition and its annexes;

(b) To verify and correct, if necessary, the inventory of all of the assets of the debtor, and their valuation;

(d) To evaluate the validity, genuineness and true amount of all the claims against the debtor;

(e) To take possession, custody and control, and to preserve the value of all the property of the debtor;

(f) To sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor;

(g) To have access to all information necessary, proper or relevant to the operations and business of the debtor and for its rehabilitation;

(h) To sue and recover, with the approval of the court, all property or money of the debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or which constitute undue preference of creditor/s;

(i) To monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other than in the ordinary course of business;

(j) With the court’s approval, to engage the services of or to employ persons or entities to assist him in the discharge of his functions;

(k) To determine the manner by which the debtor may be best rehabilitated, to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court for approval;

(l) To implement the Rehabilitation Plan as approved by the court, if so provided under the Rehabilitation Plan;

(m) To assume and exercise the powers of management of the debtor, if directed by the court pursuant to Section 36 hereof;

(n) To exercise such other powers as may, from time to time, be conferred upon him by the court; and

(o) To submit a status report on the rehabilitation proceedings every quarter or as may be required by the court motu proprio, or upon motion of any creditor, or as may be provided in the Rehabilitation Plan.

Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation receiver shall not take over the management and control of the debtor but may recommend the appointment of a management committee over the debtor in the cases provided by this Act.

SEC. 32. Removal of the Rehabilitation Receiver. — The rehabilitation receiver may be removed at any time by the court, either motu proprio or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of procedure may provide which shall include, but are not limited to, the following:

(a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers;

(b) Lack of a particular or specialized competency required by the specific case;

(d) Lack of qualification or presence of any disqualification;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of the stakeholders.

SEC. 33. Compensation and Terms of Service. — The rehabilitation receiver and his direct employees or independent contractors shall be entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing. Prior to such hearing, the rehabilitation receiver and his direct employees shall be entitled to reasonable compensation based on quantum meruit. Such costs shall be considered administrative expenses.

SEC. 34. Oath and Bond of the Rehabilitation Receiver. — Prior to entering upon his powers, duties and responsibilities, the rehabilitation receiver shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities.

SEC. 35. Vacancy. — In case the position of rehabilitation receiver is vacated for any reason whatsoever, the court shall direct the debtor and the creditors to submit the name/s of their nominee/s to the position. The court may appoint any of the qualified nominees, or any other person qualified for the position.

SEC. 36. Displacement of Existing Management by the Rehabilitation Receiver or Management Committee. — Upon motion of any interested party, the court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint a management committee that will undertake the management of the debtor, upon clear and convincing evidence of any of the following circumstances:

(a) Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties;

(b) Paralyzation of the business operations of the debtor; or

(c) Gross mismanagement of the debtor, or fraud or other wrongful conduct on the part of, or gross or willful violation of this Act by, existing management of the debtor or the owner, partner, director, officer or representative/s in management of the debtor.

In case the court appoints the rehabilitation receiver to assume the powers of management of the debtor, the court may:

(1) require the rehabilitation receiver to post an additional bond;

(2) authorize him to engage the services or to employ persons or entities to assist him in the discharge of his managerial functions; and

(3) authorize a commensurate increase in his compensation.

SEC. 37. Role of the Management Committee. — When appointed pursuant to the foregoing section, the management committee shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities.

The specific powers and duties of the management committee, whose members shall be considered as officers of the court, shall be prescribed by the procedural rules.

SEC. 38. Qualifications of Members of the Management Committee. — The qualifications and disqualifications of the members of the management committee shall be set forth in the procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.

SEC. 39. Employment of Professionals. — Upon approval of the court, and after notice and hearing, the rehabilitation receiver or the management committee may employ specialized professionals and other experts to assist each in the performance of their duties. Such professionals and other experts shall be considered either employees or independent contractors of the rehabilitation receiver or the management committee, as the case may be. The qualifications and disqualifications of the professionals and experts may be set forth in procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.

SEC. 40. Conflict of Interest. — No person may be appointed as a rehabilitation receiver, member of a management committee, or be employed by the rehabilitation receiver or the management committee if he has a conflict of interest.

An individual shall be deemed to have a conflict of interest if he is so situated as to be materially influenced in the exercise of his judgment for or against any party to the proceedings. Without limiting the generality of the foregoing, an individual shall be deemed to have a conflict of interest if:

(a) he is a creditor, owner, partner or stockholder of the debtor;

(b) he is engaged in a line of business which competes with that of the debtor;

(c) he is, or was, within five (5) years from the filing of the petition, a director, officer, owner, partner or employee of the debtor or any of the creditors, or the auditor or accountant of the debtor;

(d) he is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor;

(e) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owner/s of a sole proprietorship-debtor, partners of a partnership-debtor or to any stockholder, director, officer, employee or underwriter of a corporation-debtor; or

(f) he has any other direct or indirect material interest in the debtor or any of the creditors.

Any rehabilitation receiver, member of the management committee or persons employed or contracted by them possessing any conflict of interest shall make the appropriate disclosure either to the court or to the creditors in case of out-of-court rehabilitation proceedings. Any party to the proceeding adversely affected by the appointment of any person with a conflict of interest to any of the positions enumerated above may however waive his right to object to such appointment and, if the waiver is unreasonably withheld, the court may disregard the conflict of interest, taking into account the general interest of the stakeholders.

SEC. 41. Immunity. — The rehabilitation receiver and all persons employed by him, and the members of the management committee and all persons employed by it, shall not be subject to any action, claim or demand in connection with any act done or omitted to be done by them in good faith in connection with the exercise of their powers and functions under this Act or other actions duly approved by the court.

SEC. 42. Creditors’ Committee. — After the creditors’ meeting called pursuant to Section 63 hereof, the creditors belonging to a class may formally organize a committee among themselves. In addition, the creditors may, as a body, agree to form a creditors’ committee composed of a representative from each class of creditors, such as the following:

(a) Secured creditors;

(b) Unsecured creditors;

(d) Employees of the debtor.

In the election of the creditors’ representatives, the rehabilitation receiver or his representative shall attend such meeting and extend the appropriate assistance as may be defined in the procedural rules.

SEC. 43. Role of Creditors’ Committee. — The creditors’ committee when constituted pursuant to Section 42 of this Act shall assist the rehabilitation receiver in communicating with the creditors and shall be the primary liaison between the rehabilitation receiver and the creditors. The creditors’ committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor. The creditors’ committee may be authorized by the court or by the rehabilitation receiver to perform such other tasks and functions as may be defined by the procedural rules in order to facilitate the rehabilitation process.

(D) Determination of Claims.

SEC. 44. Registry of Claims. — Within twenty (20) days from his assumption into office, the rehabilitation receiver shall establish a preliminary registry of claims. The rehabilitation receiver shall make the registry available for public inspection and provide publication notice to the debtor, creditors and stakeholders on where and when they may inspect it. All claims included in the registry of claims must be duly supported by sufficient evidence.

SEC. 45. Opposition or Challenge of Claims. — Within thirty (30) days from the expiration of the period stated in the immediately preceding section, the debtor, creditors, stakeholders and other interested parties may submit a challenge to claim/s to the court, serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim/s. Upon the expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to the court the registry of claims which shall include undisputed claims that have not been subject to challenge.

SEC. 46. Appeal. — Any decision of the rehabilitation receiver regarding a claim may be appealed to the court.

(E) Governance.

SEC. 47. Management. — Unless otherwise provided herein, the management of the juridical debtor shall remain with the existing management subject to the applicable law/s and agreement/s, if any, on the election or appointment of directors, managers or managing partner. However, all disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property, or any other act affecting title or interest in property, shall be subject to the approval of the rehabilitation receiver and/or the court, as provided in the following subchapter.

(F) Use, Preservation and Disposal of Assets and Treatment of Assets and Claims after Commencement Date.

SEC. 48. Use or Disposition of Assets. — Except as otherwise provided herein, no funds or property of the debtor shall be used or disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the rehabilitation proceedings.

SEC. 49. Sale of Assets. — The court, upon application of the rehabilitation receiver, may authorize the sale of unencumbered property of the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy.

SEC. 50. Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties Held by Debtor. — The court may authorize the sale, transfer, conveyance or disposal of encumbered property of the debtor, or property of others held by the debtor where there is a security interest pertaining to third parties under a financial, credit or other similar transactions if, upon application of the rehabilitation receiver and with the consent of the affected owners of the property, or secured creditor/s in the case of encumbered property of the debtor and, after notice and hearing, the court determines that:

(a) such sale, transfer, conveyance or disposal is necessary for the continued operation of the debtor’s business; and

(b) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right.

Provided, That properties held by the debtor where the debtor has authority to sell such as trust receipt or consignment arrangements may be sold or disposed of by the debtor, if such sale or disposal is necessary for the operation of the debtor’s business, and the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party’s claim or right.

Sale or disposal of property under this section shall not give rise to any criminal liability under applicable laws.

SEC. 51. Assets of Debtor Held by Third Parties. — In the case of possessory pledges, mechanic’s liens or similar claims, third parties who have in their possession or control property of the debtor shall not transfer, convey or otherwise dispose of the same to persons other than the debtor, unless upon prior approval of the rehabilitation receiver. The rehabilitation receiver may also:

(a) demand the surrender or the transfer of the possession or control of such property to the rehabilitation receiver or any other person, subject to payment of the claims secured by any possessory lien/s thereon;

(b) allow said third parties to retain possession or control, if such an arrangement would more likely preserve or increase the value of the property in question or the total value of the assets of the debtor; or

(c) undertake any other disposition of the said property as may be beneficial for the rehabilitation of the debtor, after notice and hearing, and approval of the court.

SEC. 52. Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. — The court may rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor’s unencumbered property or any encumbering thereof by the debtor or its agents or representatives after the commencement date which are not in the ordinary course of the business of the debtor: Provided, however, That the unencumbered property may be sold, encumbered or otherwise disposed of upon order of the court after notice and hearing:

(a) if such are in the interest of administering the debtor and facilitating the preparation and implementation of a Rehabilitation Plan;

(b) in order to provide a substitute lien, mortgage or pledge of property under this Act;

(d) for payments to victims of quasi delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the debtor for the payments made;

(e) for payments made to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale under this Act; or

(f) for payments made to reclaim property of the debtor held pursuant to a possessory lien.

SEC. 53. Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value. — Upon the application of a secured creditor holding a lien against or holder of an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable steps necessary to prevent the depreciation. If depreciation cannot be avoided and such depreciation is jeopardizing the security or property interest of the secured creditor or owner, the court shall:

(a) allow the encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between the debtor and the secured creditor, applicable rules of procedure and relevant legislation: Provided, That the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits; or

(b) upon motion of, or with the consent of the affected secured creditor or interest owner, order the conveyance of a lien against or ownership interest in substitute property of the debtor to the secured creditor: Provided, That other creditors holding liens on such property, if any, do not object thereto, or, if such property is not available;

(c) order the conveyance to the secured creditor or holder of an ownership interest of a lien on the residual funds from the sale of encumbered property during the proceedings; or

(d) allow the sale or disposition of the property: Provided, That the sale or disposition will maximize the value of the property for the benefit of the secured creditor and the debtor, and the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits.

SEC. 54. Post-commencement Interest. — The rate and term of interest, if any, on secured and unsecured claims shall be determined and provided for in the approved Rehabilitation Plan.

SEC. 55. Post-commencement Loans and Obligations. — With the approval of the court upon the recommendation of the rehabilitation receiver, the debtor, in order to enhance its rehabilitation, may:

(a) enter into credit arrangements; or

(b) enter into credit arrangements, secured by mortgages of its unencumbered property or secondary mortgages of encumbered property with the approval of senior secured parties with regard to the encumbered property; or

The payment of the foregoing obligations shall be considered administrative expenses under this Act.

SEC. 56. Treatment of Employees, Claims. — Compensation of employees required to carry on the business shall be considered an administrative expense. Claims of separation pay for months worked prior to the commencement date shall be considered a pre-commencement claim. Claims for salary and separation pay for work performed after the commencement date shall be an administrative expense.

SEC. 57. Treatment of Contracts. — Unless cancelled by virtue of a final judgment of a court of competent jurisdiction issued prior to the issuance of the Commencement Order, or at anytime thereafter by the court before which the rehabilitation proceedings are pending, all valid and subsisting contracts of the debtor with creditors and other third parties as at the commencement date shall continue in force: Provided, That within ninety (90) days following the commencement of proceedings, the debtor, with the consent of the rehabilitation receiver, shall notify each contractual counter-party of whether it is confirming the particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the required deadline shall be considered terminated. Claims for actual damages, if any, arising as a result of the election to terminate a contract shall be considered a pre-commencement claim against the debtor. Nothing contained herein shall prevent the cancellation or termination of any contract of the debtor for any ground provided by law.

(G) Avoidance Proceedings.

SEC. 58. Rescission or Nullity of Certain Pre-commencement Transactions. — Any transaction occurring prior to commencement date entered into by the debtor or involving its funds or 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. Without limiting the generality of the foregoing, a disputable presumption of such design 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;

(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.

Provided, however, That nothing in this section shall prevent the court from rescinding or declaring as null and void a transaction on other grounds provided by relevant legislation and jurisprudence: Provided, further, That the provisions of the Civil Code on rescission shall in any case apply to these transactions.

SEC. 59. Actions for Rescission or Nullity. — (a) The rehabilitation receiver or, with his conformity, any creditor may initiate and prosecute any action to rescind, or declare null and void any transaction described in Section 58 hereof. If the rehabilitation receiver does not consent to the filing or prosecution of such action, any creditor may seek leave of the court to commence said action.

(b) If leave of court is granted under subsection (a), the rehabilitation receiver 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.

(c) Any benefit derived from a proceeding taken pursuant to subsection (a), 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.

(d) Where, before an order is made under subsection (a), the rehabilitation receiver (or liquidator) signifies to the court his readiness to 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 proceeding, if instituted within the time limits so fixed, belongs to the estate.

(H) Treatment of Secured Creditors.

SEC. 60. No Diminution of Secured Creditor Rights. — The issuance of the Commencement Order and the Suspension or Stay Order, and any other provision of this Act, shall not be deemed in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the Stay Order.

The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce his security or lien, or foreclose upon property of the debtor securing his/its claim, if the said property is not necessary for the rehabilitation of the debtor. The secured creditor and/or the other lien holders shall be admitted to the rehabilitation proceedings only for the balance of his claim, if any.

SEC. 61. Lack of Adequate Protection. — The court, on motion or motu proprio, may terminate, modify or set conditions for the continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that:

(a) a creditor does not have adequate protection over property securing its claim; or

(b) the value of a claim secured by a lien on property which is not necessary for rehabilitation of the debtor exceeds the fair market value of the said property.

For purposes of this section, a creditor shall be deemed to lack adequate protection if it can be shown that:

(a) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured;

(b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or

Upon showing of a lack of protection, the court shall order the debtor or the rehabilitation receiver to make arrangements to provide for the insurance or maintenance of the property; or to make payments or otherwise provide additional or replacement security such that the obligation is fully secured. If such arrangements are not feasible, the court may modify the Stay Order to allow the secured creditor lacking adequate protection to enforce its security claim against the debtor: Provided, however, That the court may deny the creditor the remedies in this paragraph if the property subject of the enforcement is required for the rehabilitation of the debtor.

(I) Administration of Proceedings.

SEC. 62. Contents of a Rehabilitation Plan. — The Rehabilitation Plan shall, as a minimum:

(a) specify the underlying assumptions, the financial goals and the procedures proposed to accomplish such goals;

(b) compare the amounts expected to be received by the creditors under the Rehabilitation Plan with those that they will receive if liquidation ensues within the next one hundred twenty (120) days;

(c) contain information sufficient to give the various classes of creditors a reasonable basis for determining whether supporting the Plan is in their financial interest when compared to the immediate liquidation of the debtor, including any reduction of principal interest and penalties payable to the creditors;

(d) establish classes of voting creditors;

(e) establish subclasses of voting creditors if prior approval has been granted by the court;

(f) indicate how the insolvent debtor will be rehabilitated 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 a new business entity or other similar arrangements as may be necessary to restore the financial well-being and viability of the insolvent debtor;

(g) specify the treatment of each class or subclass described in subsections (d) and (e);

(h) provide for equal treatment of all claims within the same class or subclass, unless a particular creditor voluntarily agrees to less favorable treatment;

(i) ensure that the payments made under the plan follow the priority established under the provisions of the Civil Code on concurrence and preference of credits and other applicable laws;

(j) maintain the security interest of secured creditors and preserve the liquidation value of the security unless such has been waived or modified voluntarily;

(k) disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof;

(l) describe the disputed claims and the provisioning of funds to account for appropriate payments should the claim be ruled valid or its amount adjusted;

(m) identify the debtor’s role in the implementation of the Plan;

(n) state any rehabilitation covenants of the debtor, the breach of which shall be considered a material breach of the Plan;

(o) identify those responsible for the future management of the debtor and the supervision and implementation of the Plan, their affiliation with the debtor and their remuneration;

(p) address the treatment of claims arising after the confirmation of the Rehabilitation Plan;

(q) require the debtor and its counter-parties to adhere to the terms of all contracts that the debtor has chosen to confirm;

(r) arrange for the payment of all outstanding administrative expenses as a condition to the Plan’s approval unless such condition has been waived in writing by the creditors concerned;

(s) arrange for the payment of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise settlement with the BIR or other applicable tax authorities;

(t) include a certified copy of a certificate of tax clearance or evidence of a compromise settlement with the BIR;

(u) include a valid and binding resolution of a meeting of the debtor’s stockholders to increase the shares by the required amount in cases where the Plan contemplates an additional issuance of shares by the debtor;

(v) state the compensation and status, if any, of the rehabilitation receiver after the approval of the Plan; and

(w) contain provisions for conciliation and/or mediation as a prerequisite to court assistance or intervention in the event of any disagreement in the interpretation or implementation of the Rehabilitation Plan.

SEC. 63. Consultation with Debtor and Creditors. — If the court gives due course to the petition, the rehabilitation receiver shall confer with the debtor and all the classes of creditors, and may consider their views and proposals in the review, revision or preparation of a new Rehabilitation Plan.

SEC. 64. Creditor Approval of Rehabilitation Plan. — The rehabilitation receiver shall notify the creditors and stakeholders that the Plan is ready for their examination. Within twenty (20) days from the said notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless approved by all classes of creditors whose right are adversely modified or affected by the Plan. For purposes of this section, the Plan is deemed to have been approved by a class of creditors if members of the said class holding more than fifty percent (50%) of the total claims of the said class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of their respective claims based on the registry of claims submitted by the rehabilitation receiver pursuant to Section 44 hereof.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the following circumstances are present:

(a) The Rehabilitation Plan complies with the requirements specified in this Act;

(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.

SEC. 65. Submission of Rehabilitation Plan to the Court. — If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the same to the court for confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court shall notify the creditors that the Rehabilitation Plan has been submitted for confirmation, that any creditor may obtain copies of the Rehabilitation Plan and that any creditor may file an objection thereto.

SEC. 66. Filing of Objections to Rehabilitation Plan. — A creditor may file an objection to the Rehabilitation Plan within twenty (20) days from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a Rehabilitation Plan shall be limited to the following:

(a) The creditors’ support was induced by fraud;

(b) The documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or

SEC. 67. Hearing on the Objections. — If objections have been submitted during the relevant period, the court shall issue an order setting the time and date for the hearing or hearings on the objections.

If the court finds merit in the objection, it shall order the rehabilitation receiver or other party to cure the defect, whenever feasible. If the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into one for the liquidation of the debtor under Chapter V of this Act.

SEC. 68. Confirmation of the Rehabilitation Plan. — If no objections are filed within the relevant period or, if objections are filed, the court finds them lacking in merit, or determines that the basis for the objection has been cured, or determines that the debtor has complied with an order to cure the objection, the court shall issue an order confirming the Rehabilitation Plan.

The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made adequate provisions for paying such claims.

For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor: Provided, That the terms thereof are necessary to restore the financial well-being and viability of the insolvent debtor.

SEC. 69. Effect of Confirmation of the Rehabilitation Plan. — The confirmation of the Rehabilitation Plan by the court shall result in the following:

(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor and all persons who may be affected by it, including the creditors, whether or not such persons have participated in the proceedings or opposed the Rehabilitation Plan or whether or not their claims have been scheduled;

(b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall take all actions necessary to carry out the Plan;

(d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the Rehabilitation Plan;

(e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the Plan is successfully implemented; and

(f) Claims arising after approval of the Plan that are otherwise not treated by the Plan are not subject to any Suspension Order.

The Order confirming the Plan shall comply with Rule 36 of the Rules of Court: Provided, however, That the court may maintain jurisdiction over the case in order to resolve claims against the debtor that remain contested and allegations that the debtor has breached the Plan.

SEC. 70. Liability of General Partners of a Partnership for Unpaid Balances Under an Approved Plan. — The approval of the Plan shall not affect the rights of creditors to pursue actions against the general partners of a partnership to the extent they are liable under relevant legislation for the debts thereof.

SEC. 71. Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced. — Amounts of any indebtedness or obligations reduced or forgiven in connection with a Plan’s approval shall not be subject to any tax, in furtherance of the purposes of this Act.

SEC. 72. Period for Confirmation of the Rehabilitation Plan. — The court shall have a maximum period of one (1) year from the date of the filing of the petition to confirm a Rehabilitation Plan.

If no Rehabilitation Plan is confirmed within the said period, the proceedings may, upon motion or motu proprio, be converted into one for the liquidation of the debtor.

SEC. 73. Accounting Discharge of Rehabilitation Receiver. — Upon the confirmation of the Rehabilitation Plan, the rehabilitation receiver shall provide a final report and accounting to the court. Unless the Rehabilitation Plan specifically requires and describes the role of the rehabilitation receiver after the approval of the Rehabilitation Plan, the court shall discharge the rehabilitation receiver of his duties.

(J) Termination of Proceedings.

SEC. 74. Termination of Proceedings. — The rehabilitation proceedings under Chapter II shall, upon motion by any stakeholder or the rehabilitation receiver, be terminated by order of the court either declaring a successful implementation of the Rehabilitation Plan or a failure of rehabilitation.

There is failure of rehabilitation in the following cases:

(a) Dismissal of the petition by the court;

(b) The debtor fails to submit a Rehabilitation Plan;

(c) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be rehabilitated within a reasonable period;

(d) The Rehabilitation Plan or its amendment is approved by the court but in the implementation thereof, the debtor fails to perform its obligations thereunder, or there is a failure to realize the objectives, targets or goals set forth therein, including the timelines and conditions for the settlement of the obligations due to the creditors and other claimants;

(e) The commission of fraud in securing the approval of the Rehabilitation Plan or its amendment; and

(f) Other analogous circumstances as may be defined by the rules of procedure.

Upon a breach of, or upon a failure of the Rehabilitation Plan, the court, upon motion by an affected party, may:

(1) issue an order directing that the breach be cured within a specified period of time, failing which the proceedings may be converted to a liquidation;

(2) issue an order converting the proceedings to a liquidation;

(3) allow the debtor or rehabilitation receiver to submit amendments to the Rehabilitation Plan, the approval of which shall be governed by the same requirements for the approval of a Rehabilitation Plan under this subchapter;

(4) issue any other order to remedy the breach consistent with the present regulation, other applicable law and the best interests of the creditors; or

(5) enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.

SEC. 75. Effects of Termination. — Termination of the proceedings shall result in the following:

(a) The discharge of the rehabilitation receiver, subject to his submission of a final accounting; and

(b) The lifting of the Stay Order and any other court order holding in abeyance any action for the enforcement of a claim against the debtor.

Provided, however, That if the termination of proceedings is due to failure of rehabilitation or dismissal of the petition for reasons other than technical grounds, the proceedings shall be immediately converted to liquidation as provided in Section 92 of this Act.

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Court-Supervised Rehabilitation (Chapter II): Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act of 2010)

CHAPTER II

COURT-SUPERVISED REHABILITATION

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