Involuntary liquidation, as opposed to voluntary liquidation, refers to a proceeding initiated by creditors. Creditors of insolvent individual debtors may file an action for involuntary liquidation of the insolvent debtor. This discussion covers only involuntary liquidation in insolvency under Republic Act No. 10142, also known as the “Financial Rehabilitation and Insolvency Act (FRIA) of 2010“, as threshed out in the FLSP Rules. Moreover, the discussion below on insolvency proceedings applies only to individual debtors.
|Options – Corporations:||Other options – Individuals:|
|* Court-supervised rehabilitation|
* Pre-negotiated rehabilitation
* Informal restructuring
|* Suspension of payments|
* Voluntary insolvency
WHO MAY FILE PETITION
Any creditor or group of creditors with a claim of, or with claims aggregating at least P500,000 may file a verified petition for liquidation with the court of the province or city in which the individual debtor resides. [See Jurisdiction]
CONTENTS OF PETITION
The petition shall state the particulars of at least one of the following acts of insolvency of the debtor:
- (a) that the debtor is about to depart or has departed from the Philippines, with intent to defraud his creditors;
- (b) that being absent from the Philippines, with intent to defraud his creditors, he remains absent;
- (c) that the debtor 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 the debtor conceals, or is removing, any of his property to avoid its being attached or taken on legal process;
- (e) that the debtor has allowed his property to remain under attachment or legal process for 3 days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
- (f) that the debtor has confessed or offered to allow judgment in favor of any creditor for the purpose of hindering or delaying the liquidation or of defrauding any creditor;
- (g) that the debtor has willfully allowed judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors;
- (h) that the debtor 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 the debtor 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 the debtor 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, the debtor has generally defaulted in the payment of his current obligations for a period of 30 days;
- (l) that for a period of 30 days, the debtor has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; or
- (m) that an execution having been issued against him on final judgment for money, the debtor shall have been found to be without sufficient property subject to execution to satisfy the judgment.
BOND FOR FILING OF PETITION
The petitioner/s shall post a bond in an amount at least equal in value to the aggregate of his/their claims, conditioned upon payment to the debtor of all expenses and damages the debtor may incur by reason of the filing of the petition if the petition is later dismissed or withdrawn by the petitioner/s without the consent of the debtor, or if it is finally determined that the debtor is not insolvent.
ORDER TO SHOW CAUSE
If the petition is sufficient in form and substance, the court, within five 5 days from the filing of the petition, shall issue summons to the debtor requiring him, by way of comment on or opposition to the petition within an inextendible period of fifteen 15 days from service of the summons, to show cause why he should not be declared insolvent.
ORDER FOR DEBTOR TO REFRAIN FROM PAYING DEBTS OR TRANSFERRING PROPERTY
Upon motion of any creditor and after hearing, the court may, upon good cause shown, issue an order prohibiting the debtor from paying any of his debts, or from transferring any property belonging to him, until the court issues a Liquidation Order or dismisses the petition, whichever is earlier. However, nothing contained in the FLSP Rules shall affect or impair the rights of a secured creditor to enforce his lien in accordance with its terms.
HEARING ON THE PETITION
After the issues are joined, the court shall set the petition for hearing in order to determine whether the evidence is sufficient to warrant the issuance of a Liquidation Order.
ISSUANCE OF THE LIQUIDATION ORDER
If the debtor on whom summons is properly served fails to file a comment on or opposition to the petition within the period given by the court, or if the evidence given during the hearing mentioned in the preceding section warrant it, the court shall issue the Liquidation Order.
The remedies provided below may be resorted to by the petitioning creditors, upon motion, when:
- (a) the debtor resides out of the Philippines, or
- (b) the debtor’s residence is unknown, or
- (c) the debtor has departed from the Philippines with intent to defraud his creditors, or
- (d) the debtor cannot, after due diligence, be found therein, or
- (e) the debtor conceals himself to avoid service of summons, or any other related preliminary process or orders,
The motion must be supported by an affidavit or affidavit/s narrating and substantiating any of the foregoing allegations. The court, upon posting of bond approved by the court in double the amount of the aggregate sum of their claims against the debtor, shall issue an order directing:
- (a) the sheriff of the province or city in which the matter is pending to take into custody, within 30 days from the date of the order, a sufficient amount of property of the debtor, not exempt from execution and not subject of a secured creditor’s lien, to satisfy the claims of the petitioning creditors and the costs of the proceedings;
- (b) the publication of the summons and the said order in a newspaper of general circulation in the Philippines once a week for 2 consecutive weeks;
- (c) the mailing of the petition, the summons and the order to the debtor’s last known address;
- (d) the sending of an electronic mail to the debtor’s last known electronic mail address, if any, attaching thereto copies of the petition, the summons and the order; and
- (e) the posting of copies of the petition and the summons on at least 3 conspicuous places on any real property owned by the debtor.
If the debtor fails to file a comment, opposition or other responsive pleading to the petition or order within 15 days after the last publication of the summons and order, or within any other period given by the court, then the court shall issue a Liquidation Order.
DUTY OF SHERIFF
Upon receiving the order for him to take into custody property of the debtor, the sheriff shall take custody of such property of the debtor not exempt from execution and not subject of any secured creditor’s lien sufficient to cover the amount provided for.
He shall make a return to the court within 2 days every time he takes property of the debtor pursuant to the order. As soon as he has taken sufficient amount of the debtor’s property to cover the amount provided for in the order, he shall make a return to the court of an inventory of all the property taken within 3 days from the time of the last taking.
Upon motion and for good cause shown, the time for making an inventory, or any return may be extended.
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.
ALL PROPERTY TAKEN TO BE HELD FOR ALL CREDITORS; APPEAL BONDS; EXEMPTIONS TO SURETIES
If after the taking mentioned in the preceding section, there still remains property of the debtor not exempt from execution and not subject of a secured creditor’s lien, any other creditor or creditors, upon giving bond approved by the court in double the amount of his/their claim/s, singly or jointly, shall be entitled to similar orders and to like action, by the sheriff, until all claims are provided for, and as long as the debtor has sufficient property. All such property taken into custody by the sheriff shall be held by him for the benefit of all creditors whose claims shall be duly established in the proceedings.
BONDS FOR CUSTODY OF PROPERTY AND APPEAL
The bonds, provided above, to procure the order for custody of the property and effects of the debtor shall be conditioned upon payment to the debtor, his heirs, administrators, executors or assigns of all damages he may sustain by reason of the order for which the bonds were procured if, after hearing of the petition, the court shall find in favor of the debtor and the petition is dismissed.
Such damages, which shall not exceed the amount of the bond, shall be determined and fixed 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 object to the sufficiency of the surety or sureties on such bond or bonds. The court shall direct the surety or sureties to justify their sufficiency. If the court finds that the sureties or any of them are insufficient, the court shall issue an order dismissing the petition or vacating the order to take into the custody of the sheriff the property of the individual debtor, or denying the appeal, as the case may be.
SALE OF DEBTOR’S PROPERTY UNDER SHERIFF’S CUSTODY
Any creditor may move for the sale of the debtor’s property taken into custody by the sheriff in the following instances:
- (1) the property is perishable;
- (2) the property is costly to maintain;
- (3) the property is subject to or in danger of rapid obsolescence, depreciation, or diminution in value; or
- (4) when the interests of the debtor and the creditors will be better served by the sale thereof
The motion shall be supported by affidavit/s narrating facts supporting the application and a bond equivalent to the estimated value of the property approved. In such instances, the court may shall issue an order directing:
- (a) the sale of the property in the same manner as property is sold under execution, the proceeds to be deposited in the court to abide by the result of the proceedings; and
- (b) the publication of the order once a week for two consecutive weeks in a newspaper of general circulation in the city or province where the court exercises jurisdiction.
|Common provisions in insolvency liquidation:|
|* Liquidation order|
* The Liquidator
* Liquidation Plan
|* Determination of claims|
* Avoidance proceedings