[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]

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CHAPTER VII

PROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY OF
INDIVIDUAL AND JURIDICAL DEBTORS

SEC. 111. Use of Term Debtor. — For purposes of this chapter, the term debtor shall include both individual debtor as defined in Section 4 (o) and debtor as defined in Section 4 (k) of this Act.

(A) The Liquidation Order.

SEC. 112. Liquidation Order. — The Liquidation Order shall:

(a) declare the debtor insolvent;

(b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;

(c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution;

(d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks;

(e) direct payments of any claims and conveyance of any property due the debtor to the liquidator;

(f) prohibit payments by the debtor and the transfer of any property by the debtor;

(g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;

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

(i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and

(j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication.

SEC. 113. Effects of the Liquidation Order. — Upon the issuance of the Liquidation Order:

(a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;

(b) legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court;

(c) all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees;

(d) no separate action for the collection of an unsecured claim shall be allowed. Such actions already pending will be transferred to the Liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executory judgment therein for a claim against the debtor shall be filed and allowed in court; and

(e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

SEC. 114. Rights of Secured Creditors. — The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may:

(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or

(b) maintain his rights under his security or lien.

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor;

(2) the liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.

(B) The Liquidator.

SEC. 115. Election of Liquidator. — Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless: (a) he waives his security or lien; or (b) has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim.

The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of amount of claims, and who is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator.

SEC. 116. Court-Appointed Liquidator. — The court may appoint the liquidator if:

(a) on the date set for the election of the liquidator, the creditors do not attend;

(b) the creditors who attend, fail or refuse to elect a liquidator;

(c) after being elected, the liquidator fails to qualify; or

(d) a vacancy occurs for any reason whatsoever. In any of the cases provided herein, the court may instead set another hearing for the election of the liquidator.

Provided, further, That nothing in this section shall be construed to prevent a rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, from being appointed as a liquidator.

SEC. 117. Oath and Bond of the Liquidator. — Prior to entering upon his powers, duties and responsibilities, the liquidator shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the proper and faithful discharge of his powers, duties and responsibilities.

SEC. 118. Qualifications of the Liquidator. — The liquidator shall have the qualifications enumerated in Section 29 hereof. He may be removed at any time by the court for cause, either motu proprio or upon motion of any creditor entitled to vote for the election of the liquidator.

SEC. 119. Powers, Duties and Responsibilities of the Liquidator. — The liquidator shall be deemed an officer of the court with the principal duty of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and discharging to the extent possible all the claims against the debtor. The powers, duties and responsibilities of the liquidator shall include, but not be limited to:

(a) to sue and recover all the assets, debts and claims, belonging or due to the debtor;

(b) to take possession of all the property of the debtor except property exempt by law from execution;

(c) to sell, with the approval of the court, any property of the debtor which has come into his possession or control;

(d) to redeem all mortgages and pledges, and to satisfy any judgment which may be an encumbrance on any property sold by him;

(e) to settle all accounts between the debtor and his creditors, subject to the approval of the court;

(f) to recover any property or its value, fraudulently conveyed by the debtor;

(g) to recommend to the court the creation of a creditors’ committee which will assist him in the discharge of his functions and which shall have powers as the court deems just, reasonable and necessary; and

(h) upon approval of the court, to engage such professionals as may be necessary and reasonable to assist him in the discharge of his duties.

In addition to the rights and duties of a rehabilitation receiver, the liquidator shall have the right and duty to take all reasonable steps to manage and dispose of the debtor’s assets with a view towards maximizing the proceedings therefrom, to pay creditors and stockholders, and to terminate the debtor’s legal existence. Other duties of the liquidator in accordance with this section may be established by procedural rules.

A liquidator shall be subject to removal pursuant to procedures for removing a rehabilitation receiver.

SEC. 120. Compensation of the Liquidator. — The liquidator and the persons and entities engaged or employed by him to assist in the discharge of his powers and duties shall be entitled to such reasonable compensation as may be determined by the liquidation court, which shall not exceed the maximum amount as may be prescribed by the Supreme Court.

SEC. 121. Reporting Requirements. — The liquidator shall make and keep a record of all moneys received and all disbursements made by him or under his authority as liquidator. He shall render a quarterly report thereof to the court, which report shall be made available to all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final report at the end of the liquidation proceedings.

SEC. 122. Discharge of Liquidator. — In preparation for the final settlement of all the claims against the debtor, the liquidator will notify all the creditors, either by publication in a newspaper of general circulation or such other mode as the court may direct or allow, that he will apply with the court for the settlement of his account and his discharge from liability as liquidator. The liquidator will file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator.

(C) Determination of Claims.

SEC. 123. 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.

SEC. 124. Right of Set-off. — If the debtor and a 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.

SEC. 125. 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 a 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 thirty (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 filing of the register and may be subsequently set aside only on grounds of fraud, accident, mistake or inexcusable neglect.

SEC. 126. Submission of Disputed Claims to Court. — The liquidator shall resolve disputed claims and submit his findings thereon to the court for final approval. The liquidator may disallow claims.

(D) Avoidance Proceedings.

SEC. 127. Rescission or Nullity of Certain Transactions. — Any transaction occurring prior to the issuance of the Liquidation Order or, in case of the conversion of the rehabilitation proceedings to liquidation 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. The presumptions set forth in Section 58 hereof shall apply.

SEC. 128. Actions for Rescission or Nullity. — (a) 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 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) hereof, 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.

(c) Any benefit derived from a proceeding taken pursuant to subsection (a) hereof, 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) hereof, the 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 proceedings, if instituted within the time limits so fixed, belongs to the estate.

(E) The Liquidation Plan.

SEC. 129. The Liquidation Plan. — Within three (3) months from his assumption into office, the Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a minimum, enumerate all the assets of the debtor, all the claims against the debtor and a schedule of liquidation of the assets and payment of the claims.

SEC. 130. Exempt Property to be Set Apart. — It shall be the duty of the court, upon petition and after hearing, to exempt and set apart, for the use and benefit of the said insolvent, such real and personal property as is by law exempt from execution, and also a homestead; but no such petition shall be heard as aforesaid until it is first proved that notice of the hearing of the application therefor has been duly given by the clerk, by causing such notice to be posted in at least three (3) public places in the province or city at least ten (10) days prior to the time of such hearing, which notice shall set forth the name of the said insolvent debtor, and the time and place appointed for the hearing of such application, and shall briefly indicate the homestead sought to be exempted or the property sought to be set aside; and the decree must show that such proof was made to the satisfaction of the court, and shall be conclusive evidence of that fact.

SEC. 131. Sale of Assets in Liquidation. — The liquidator may sell the unencumbered assets of the debtor and convert the same into money. The sale shall be made at public auction. However, a private sale may be allowed with the approval of the court if: (a) the goods to be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or maintain; or (b) the private sale is for the best interest of the debtor and his creditors.

With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his claim or part thereof.

SEC. 132. Manner of Implementing the Liquidation Plan. — The liquidator shall implement the Liquidation Plan as approved by the court. Payments shall be made to the creditors only in accordance with the provisions of the Plan.

SEC. 133. Concurrence and Preference of Credits.  — The Liquidation Plan and its implementation shall ensure that the concurrence and preference of credits as enumerated in the Civil Code of the Philippines and other relevant laws shall be observed, unless a preferred creditor voluntarily waives his preferred right. For purposes of this chapter, credits for services rendered by employees or laborers to the debtor shall enjoy first preference under Article 2244 of the Civil Code, unless the claims constitute legal liens under Articles 2241 and 2242 thereof.

SEC. 134. Order Removing the Debtor from the List of Registered Entities at the Securities and Exchange Commission. — Upon determining that the liquidation has been completed according to this Act and applicable law, the court shall issue an Order approving the report and ordering the SEC to remove the debtor from the registry of legal entities.

SEC. 135. Termination of Proceedings. — Upon receipt of evidence showing that the debtor has been removed from the registry of legal entities at the SEC, the court shall issue an Order terminating the proceedings.

(F) Liquidation of a Securities Market Participant.

SEC. 136. Liquidation of a Securities Market Participant. — The foregoing provisions of this chapter shall be without prejudice to the power of a regulatory agency or self-regulatory organization to liquidate trade-related claims of clients or customers of a securities market participant which, for purposes of investor protection, are hereby deemed to have absolute priority over all other claims of whatever nature or kind insofar as trade-related assets are concerned.

For purposes of this section, trade-related assets include cash, securities, trading right and other assets owned and used by the securities market participant in the ordinary course of its business.