Insolvency, or the state of being insolvent, is 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 an individual debtor or a juridical debtor. This article covers only juridical debtors (there are separate rules for voluntary and involuntary liquidation of individual debtors).
The liquidation of insolvent juridical debtors may be voluntary or involuntary. Voluntary liquidation proceedings are initiated by the debtor itself, while involuntary insolvency proceedings are initiated by three or more creditors. The procedure and requirements, discussed below, are provided in the Financial Liquidation and Suspension of Payments Rules of Procedure for Insolvent Debtors (2015) or “FLSP Rules“, issued pursuant to the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 (Republic Act No. 10142).
|Other options – Corporations:||Options – Individuals:|
|* Court-supervised rehabilitation|
* Pre-negotiated rehabilitation
* Informal restructuring
|* Suspension of payments|
* Voluntary insolvency
* Involuntary insolvency
1. VOLUNTARY LIQUIDATION
An insolvent debtor may apply for liquidation by filing a petition for liquidation with the court (see Jurisdiction). The petition, which must be verified, must indicate the names of at least 3 nominees to the position of liquidator and must include, as minimum attachments, the following:
- (a) a certificate attesting to the holding of a meeting of the Board of Directors of a stock corporation or the Board of Trustees of a non-stock corporation, as the case may be, called for the purpose and the approval during the meeting of a resolution to file the petition, signed by the secretary of the meeting and at least a majority of the members of the Board present during the meeting;
- (b) a certificate attesting to the holding of a meeting of the stockholders, members or partners comprising the debtor, as the case may be, called for the purpose and the approval during the meeting of a resolution to file the petition by the stockholders holding at least 2/3 of the outstanding capital stock of the stock corporation, or 2/3 of the members or partners in case of a non-stock corporation, association or partnership, as the case may be, signed by the chairman and the secretary of the meeting;
- (c) a schedule of debts and liabilities, which lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due 30 days prior to the date of filing; the nature of the claim; and any pledge, lien, mortgage, judgment or other security given for the payment thereof;
- (d) an inventory of assets, which must list with reasonable particularity all the assets of the debtor, whether in the possession of the debtor or third parties, stating the nature of each asset; the location and condition thereof; the book value and market value of the asset, attaching the corresponding certified copy of the certificate of title thereof in case of real property, or the evidence of title or ownership in case of movable property; the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lien holders and claimants;
- (e) a schedule of current income and expenditures within 3 months prior to the filing of the petition;
- (f) a list of all properties acquired by the debtor in the immediately preceding 2 years;
- (g) a list of all properties sold, disposed of, or donated by the debtor in the immediately preceding 2 years;
- (h) a schedule of the debtor’s executory contracts and unexpired leases;
- (i) the audited financial statements of the debtor for the immediately preceding 3 years; and
- (j) the income tax return of the debtor for the immediately preceding year.
Motion to convert proceedings
When there is a pending court-supervised or pre-negotiated rehabilitation proceeding, the debtor may file a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion must be verified and must contain or set forth the same matters mentioned in the preceding section and the grounds relied upon as provided under the FRIA.
Action of court
If the petition is sufficient in form and substance, the court shall issue a Liquidation Order. Otherwise, the court must dismiss the petition or deny the motion. The court may take any action necessary for the foregoing purposes but it must have a maximum period of 10 working days from the date of the filing of the petition or motion to: (a) issue the Liquidation Order; or (b) dismiss the petition or deny the motion.
2. INVOLUNTARY LIQUIDATION
Three or more creditors the aggregate of whose claims is at least either P1,000,000 or at least 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, which must be verified, must indicate the names of at least 3 nominees to the position of liquidator, and must 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 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.
The petition must also include information to the best knowledge of the petitioners on: (i) the schedule of debts and liabilities, including a list of its known creditors with their addresses, amounts of claims and collaterals, or securities, if any; (ii) the debtor’s assets, including receivables and claims against third parties; and (iii) the audited financial statements of the debtor for the immediately preceding 3 years.
Posting of bond
The petitioners must post a bond in an amount at least equal in value to the aggregate of their claims, conditioned upon payment to the debtor of all expenses and damages it may incur by reason of the filing of the petition if the same is later denied or dismissed by the court, or withdrawn by the petitioners without the consent of the debtor.
Motion to convert proceedings
At any time during the pendency of or after a court-supervised rehabilitation proceedings or pre-negotiated rehabilitation proceedings, three or more creditors whose claims is at least either P1,000,000 or at 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.
Action of court
If the court finds the petition or motion sufficient in form and substance, it must issue an order:
- (a) directing the publication of the petition or motion in a newspaper of general circulation in the Philippines once a week for 2 consecutive weeks;
- (b) directing the debtor, all known creditors, and any other interested party, to file their comment on the petition or motion within 15 days from notice of the order; and
- (c) directing that a copy of the petition or motion be served on the debtor and on all known creditors, unless they exceed 20 in number, in which case, service must be made on at least the first 20 largest known creditors of the debtor in terms of credits held. However, if there are more than 20 known creditors (who are not petitioners) and one or more of them acquired their credit/s within the 6-month period immediately preceding the filing of the petition, the number of creditors to be served copies of the petition must be increased by the same number.
The court must conduct a hearing if the petition or motion, as well as the comments thereto raise issues of facts. On the basis of the pleadings and the hearing conducted, if any, the court must determine whether the evidence is sufficient to warrant the issuance of a Liquidation Order. Otherwise, the court must dismiss the petition or deny the motion.
3. CONVERSION BY THE COURT INTO LIQUIDATION PROCEEDINGS
Rehabilitation proceedings may be converted into liquidation proceedings in any of the following instances:
- 1. At any other time upon the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible.
- 2. After the receipt of the report of the rehabilitation receiver in court-supervised rehabilitation proceedings, the court finds that: (1) the debtor is insolvent; and (2) there is no substantial likelihood for the debtor to be successfully rehabilitated.
- 3. In court-supervised rehabilitation proceedings, if no Rehabilitation Plan is confirmed within the prescribed period, the proceedings may, upon motion or motu proprio, be converted into one for the liquidation of the debtor.
- 4. In court-supervised rehabilitation proceedings, 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.
- 5. At any time during the pendency of court-supervised 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 motion, as the case may be, is sufficient in form and substance, the court shall issue a Liquidation Order.
Thereupon, the court shall issue the Liquidation Order. [See The Liquidation Order: Common Provisions in Insolvency Proceedings for Individual and Juridical Debtors; See also Cross-Border Rehabilitation and Insolvency: Actions of Foreign Creditors and Enforcement Framework of Foreign Proceedings in the Philippines]