Provisions Common to Liquidation in Insolvency of Individual and Juridical Debtors (Rule 4)

RULE 1. Coverage and General ProvisionsRULE 3. Insolvency of Individual Debtors 
RULE  2. Liquidation of Insolvent Juridical DebtorsRULE 5. Procedural Remedies



SEC. 1. USE OF TERM DEBTOR. – The term debtor used in this Rule shall refer to an individual debtor and/or a juridical debtor whenever appropriate. 


SEC. 2. 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 Liquidation Order, together with the petition, or motion to convert the rehabilitation proceedings into liquidation proceedings, if any, in a newspaper of general circulation in the Philippines 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 and the transfer of any property by the debtor; 

 (g)  direct all creditors to file their claims with the liquidator not later than five (5) days from the time the liquidator takes his oath of office, furnishing a copy thereof to the court; 

(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. 3. 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 time he takes his oath of office, declares otherwise and the contract counter-party agrees; 

(d) no separate action for the collection of an unsecured claim shall be allowed. 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 from the date of the order. 


SEC. 4. 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, unless he waives his right. 

SEC. 5. DUTY OF SECURED CREDITORS. – At any time prior to the election of the liquidator, a secured creditor shall manifest in writing to the court whether he is: 

(a) waiving his right under the security or lien in accordance with Section 6 of this Rule; or 

(b) maintaining his right under the security or lien. 

If a secured creditor fails to file such a manifestation, he shall be deemed to have opted to maintain his right under the security or lien. 

SEC. 6. WAIVER OF SECURITY OR LIEN. – A secured creditor shall not be deemed to have waived his right under the security or lien unless the waiver is made in a public document, in unequivocal language, and with full knowledge of the consequences of his action. If a secured creditor waives his right, he shall be entitled to participate in the liquidation proceedings as an unsecured creditor. 

SEC. 7. WHEN A SECURED CREDITOR MAINTAINS HIS SECURITY OR LIEN. – If a secured creditor elects to enforce or maintain his right under the security or lien, at his option: 

(a)  the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator, and approved by the court. 

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 an unsecured creditor for the balance. If the value of the property exceeds the claim secured, the liquidator may convey the property to the secured creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor. In any case, any other creditor or interested party may, upon a prima facie showing that the valuation is too low, contest the valuation and propose another mode by which to dispose of the property, or to otherwise convert it to cash or its equivalent, to ensure that the true maximum value of the property under the circumstances is obtained. A dissenting creditor or any other creditor or interested party may also offer to purchase the property at the price it is valued by the secured creditor and the liquidator, as approved by the court. At all times, it shall be the duty of the court to ensure that the property is valued at its maximum under the circumstances. In case there is conflict on the valuation of the property, the court may appoint an independent third party appraiser to assist in determining the proper valuation of the property; 

(b)  the liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale. The sale shall be made under such terms and conditions as the liquidator and the secured creditor may agree upon, as approved by the court, provided, that the costs of the sale, if any, shall be for the account of the secured creditor; or 

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


SEC. 8. QUALIFICATIONS OF THE LIQUIDATOR. – The liquidator shall: 

(a) be a citizen of the Philippines or a resident thereof for six (6) months immediately preceding his nomination; 

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

(c) have 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 liquidator; and 

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

An individual shall be deemed to have a conflict of interest if he is so situated as to be 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 a creditor, owner, partner or stockholder of a creditor of the debtor; 

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

(d)  he is, or was, within five (5) years from the filing of the petition or motion for conversion, a director, officer, owner, partner or employee of the debtor or any of the creditors, or acted as legal counsel or auditor or accountant of the debtor or any of the creditors; 

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

(f)  he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owner of a sole proprietorship-debtor, partner in a partnership-debtor or stockholder, director, officer, employee or underwriter of a corporate-debtor; 

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

(h) he was the receiver or member of the management committee, the counsel or an employee of either, when there is a showing that the financial distress of the debtor was not arrested or its fiscal condition deteriorated and resulted in its liquidation by reason of his lack of diligence or foresight. 

A nominee or an elected or appointed liquidator and their personnel shall immediately disclose to the court any ground that may give rise to an actual or potential conflict of interest, regardless of his personal assessment of its sufficiency, as soon as he becomes aware of it. 

If the liquidator is a juridical entity, it must designate a natural person who possesses all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative are solidarily liable for all obligations and responsibilities of the liquidator. 

SEC. 9. ELECTION OF LIQUIDATOR. – The creditors entitled to vote will elect the liquidator in open court. To constitute a quorum for the election of the liquidator, creditors representing or holding at least a majority of the total claims entitled to vote must be present either in person or by proxy. Only creditors who were included in the schedule of debts and liabilities or registry of claims, or have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, are entitled to vote. A secured creditor shall not be entitled to vote, unless: (a) he waives his right under the security or lien; and (b) has the value of the property subject of his security or lien fixed and approved by the court, and is admitted for the balance of his claim. The nominee receiving the highest number of votes cast in terms of the amount of claim held or represented, and who is qualified pursuant to Section 8 of this Rule, shall be appointed as the liquidator. 

SEC. 10. COURT-APPOINTED LIQUIDATOR. – The court may appoint the liquidator if: 

(a) on the date set for the election of the liquidator, there is no quorum; (b) the creditors who attend either 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 these cases, the court, upon motion or motu proprio, and for good cause shown, may set another date or hearing for the election of the liquidator. Any person appointed by the court to administer the debtor as a rehabilitation receiver prior to the commencement of the liquidation may subsequently be appointed as its liquidator. 

SEC. 11. OATH AND BOND OF THE LIQUIDATOR. – Prior to assuming his office, 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. 12. 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 in view 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, the following: 

(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 under his possession or control; 

(d)  to redeem all mortgages and pledges, and satisfy any judgment which may constitute 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 be vested with powers as the court deems just, reasonable and necessary; and 

(h)  upon approval of the court, to engage the services of persons with specialized skills or training as may be necessary and reasonable to assist him in the discharge of his duties. Such persons or professionals shall be deemed employees or independent contractors of the liquidator and shall possess the same qualifications as the liquidator. 

In addition to the rights and duties of a rehabilitation receiver under Section 31, Chapter II (C) of the FRIA, insofar as they are applicable to liquidation proceedings, 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 proceeds therefrom, to pay creditors and stockholders, and to terminate the debtor’s legal existence. 

SEC. 13. REMOVAL OF THE LIQUIDATOR. – The liquidator may be removed at any time by the court either motu proprio or upon motion by the debtor or any creditor or creditors on any of the following grounds: 

(a)  he did not actually receive the highest number of votes during the election for liquidator; 

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

(c)  lack of a particular or specialized competency required by the specific case; 

(d)  illegal acts or conduct in the performance of his duties and powers; 

(e)  lack of any of the qualifications stated under Section 8 of this Rule or presence of any disqualification; 

(f)  conflict of interest, unless, waived, expressly or impliedly, by a party who may be prejudiced thereby; 

(g)  partiality or lack of independence; or 

(h)  any other ground analogous to the foregoing. 

SEC. 14. COMPENSATION OF THE LIQUIDATOR. – The liquidator and the persons 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 court, after consultation with the creditors. 

SEC. 15. REPORTING REQUIREMENTS. – The liquidator shall make and keep a record of all property 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. 16. DISCHARGE OF LIQUIDATOR. – Upon the filing of his final report, and 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. 

SEC. 17. REGISTRY OF CLAIMS. – Within twenty (20) days from his assumption into office, the liquidator shall submit to the court a preliminary registry of claims of secured and unsecured creditors indicating, among others, the amount and nature of each claim, the documentary or other basis for each claim, and a description of the nature and location of every security or lien, if any. Secured creditors who have waived their rights under their security or lien, or have fixed the value of the property subject of their security or lien by agreement with the liquidator and are admitted as creditors for the balance, shall be considered as unsecured creditors. The liquidator shall make the registry available for public inspection, give notice to all the creditors and other interested parties that the registry is available for inspection and copying, and publish said notice in a newspaper of general circulation in the province or city where the debtor’s principal office is located. 


SEC. 18. RIGHT OF SET-OFF. – If the debtor and creditor are mutually debtor and creditor of each other, one debt shall be set off against the other and only the balance, if any, shall be allowed in the liquidation proceedings. 

SEC. 19. OPPOSITION OR CHALLENGE TO CLAIMS. – Within thirty (30) days from the expiration of the period for the filing of claims, a creditor, debtor, or other interested party may submit to the court an opposition or challenge to any claim or claims, serving a certified copy on the liquidator and the creditor holding the challenged claim. Upon the expiration of the period, the liquidator 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 excusable neglect. 

SEC. 20. SUBMISSION OF DISPUTED CLAIMS TO THE COURT. – The liquidator shall resolve disputed claims and submit his findings thereon to the court for final approval. The liquidator may disallow claims, subject to final approval of the court. 


SEC. 21. RESCISSION OR NULLITY OF CERTAIN TRANSACTIONS. – Any transaction occurring prior to the issuance of the Liquidation Order or, in the case of conversion of 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 constitutes an undue preference of creditors. The presumptions set forth in Section 58, Chapter II of the FRIA shall apply. 


(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 and prosecute said action. 

The court shall have five working (5) days to act on the motion for leave to commence or prosecute an 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 shall belong exclusively to the creditor instituting the proceeding to the extent of his claim and the costs, and the surplus, if any, shall belong 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, shall belong to the estate. 

In any case, the liquidator shall make provisions for any action for rescission or nullity in the Liquidation Plan. 


SEC. 23. 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 not exempt from execution, a list of all creditors and their claims which have been duly proved as shown in the final registry of claims, and a proposed mode and schedule of liquidation of the assets and payment of the claims. The Liquidation Plan shall make provisions for, among others, disputed claims and any action for rescission or nullity of certain transactions. 

SEC. 24. EXEMPT PROPERTY TO BE SET APART. – Upon motion, and after notice and hearing, the court shall set apart property of the individual debtor exempt from execution. The motion shall be heard and granted only after it is shown that the clerk of court has posted or caused notice of the motion and hearing in at least three (3) public places in the province or city where the court exercises jurisdiction at least ten (10) days prior to the time of such hearing, which notice shall set forth the name of the debtor, and the time and place appointed for the hearing of such motion, and shall briefly indicate the homestead sought to be exempted or the property sought to be set aside. 

SEC. 25. 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 Rule, 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. 26. SALE OF ASSETS IN LIQUIDATION. – With the approval of the court, the liquidator may sell, transfer or otherwise dispose of the unencumbered assets of the debtor and convert the same into money. The sale, transfer or disposition shall be made at public auction. However, a private sale, transfer or disposition 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, transfer or disposition 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. In all cases, the liquidator and the court shall ensure that the manner of sale, transfer or disposition is in the best interest of the debtor and his creditors. 

SEC. 27. MANNER OF IMPLEMENTING THE LIQUIDATION PLAN. – The liquidator shall implement the Liquidation Plan as approved by the court in an order duly issued therefor. Payments shall be made to creditors only in accordance with the provisions of the Plan. 

SEC. 28. FINAL REPORT OF THE LIQUIDATOR. – When all the property of the debtor not exempt from execution have been realized and their proceeds distributed to the creditors in accordance with the Liquidation Plan, the liquidator shall submit his final report to the court, together with the final accounting of his administration and a recommendation for the termination of the proceedings, furnishing all the creditors and other interested parties with copies thereof. 

SEC. 29. TERMINATION OF PROCEEDINGS. – If, after notice and hearing, the court is satisfied with the final report, it shall issue an order approving the same and directing the removal of the name of the juridical debtor from the register of legal entities of the SEC and other government agencies, or discharging the individual debtor from his liabilities included in the Liquidation Plan, as the case may be. 

In the same order discharging the individual debtor from his liabilities, the court shall state that the proceedings are terminated. However, in the case of a juridical debtor registered with the SEC, the court shall issue an order terminating the proceedings only upon receipt of evidence showing that the debtor has been removed from the registry of legal entities at the SEC. 

SEC. 30. LIQUIDATION OF A SECURITIES MARKET PARTICIPANT. – The foregoing provisions 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 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. 

P&L Law

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