R.A. No. 10142: Financial Rehabilitation and Insolvency Act (FRIA)

The Financial Rehabilitation and Insolvency Act of 2010, or Republic Act No. 10142, is a landmark law in the Philippines that governs the process of financial rehabilitation and liquidation for both individuals and juridical entities. The law's objective is to encourage financial recovery for financially distressed debtors by providing a system to facilitate the restructuring or liquidation of their assets.

Key Concepts in Rehabilitation under FRIA

1. Rehabilitation

Rehabilitation is the judicial process of restructuring a financially distressed debtor's debt and assets to enable its business to continue as a going concern. Under FRIA, rehabilitation is designed to preserve viable businesses, maximize assets, and facilitate the fair resolution of creditors' claims. Rehabilitation proceedings can either be voluntary (initiated by the debtor) or involuntary (initiated by creditors).

2. Modes of Rehabilitation

Court-Supervised Rehabilitation
A process where the debtor or creditors file a petition before a court to approve a rehabilitation plan. The court oversees the process, and a rehabilitation receiver is appointed to manage the proceedings.
Pre-Negotiated Rehabilitation
A process where a debtor negotiates a rehabilitation plan with creditors before filing it with the court. The plan is filed with evidence of creditor approval, typically needing the consent of creditors representing at least two-thirds of secured and unsecured liabilities. If the court finds the plan meets the FRIA requirements, it approves it without further delays.
Out-of-Court Rehabilitation or Informal Restructuring Agreements
This involves an out-of-court or informal agreement between the debtor and its creditors, requiring approval by certain majorities:
- At least 67% of secured creditors,
- 75% of unsecured creditors, and
- 85% of total liabilities (secured and unsecured). Once this consensus is reached, the plan becomes binding on dissenting creditors.

3. Rehabilitation Receiver

A rehabilitation receiver is an individual or entity appointed by the court to oversee the rehabilitation process. Their duties include taking control of and preserving the debtor's assets, evaluating the rehabilitation plan, and ensuring compliance with the plan's provisions. The receiver is crucial to maintaining the neutrality and effectiveness of the process.
Powers and Duties of the Rehabilitation Receiver
- To verify the viability of the debtor’s business.
- To ensure creditors' rights are protected.
- To submit periodic reports to the court.
- To formulate and oversee the implementation of the rehabilitation plan.

4. Stay or Suspension Order

Upon the court's issuance of a Commencement Order in a rehabilitation case, an automatic stay or suspension order is also issued. This order halts all collection and foreclosure proceedings against the debtor's assets to maintain the status quo, prevent asset dissipation, and allow the debtor to focus on rehabilitation.
Scope of the Stay Order
- Suspension of all actions or proceedings to enforce claims against the debtor.
- Suspension of foreclosure actions against the debtor’s property.
- Suspension of any enforcement of judgments against the debtor.
Exceptions to the Stay Order
Some obligations, such as those involving claims of workers for wages, may be exempt from the stay order under specific circumstances to protect employees' rights.

5. Rehabilitation Plan

The rehabilitation plan is a comprehensive proposal submitted to the court, detailing the measures and strategies for restructuring the debtor’s obligations. This plan should be feasible, realistic, and beneficial to both the debtor and creditors, proposing ways to preserve the debtor's operations while gradually repaying obligations.
Contents of a Rehabilitation Plan
- Description of the debtor's assets and liabilities.
- A business plan detailing strategies for recovery.
- Proposed payments or adjustments to debt.
- Cash flow projections.
- Management changes, if necessary.
Approval of the Rehabilitation Plan
- Once a rehabilitation plan is submitted, creditors can review it, and a vote may be taken among creditors with voting interests. For approval, it generally requires:
  - The affirmative vote of creditors holding at least 50% of the debtor’s total liabilities.
- Once approved, the court issues a confirmation order, making the plan binding on all creditors.

6. Commencement Order

The Commencement Order initiates the rehabilitation proceedings and sets a cut-off date for all claims against the debtor. This order includes the automatic stay provision, effectively putting the rehabilitation process in motion.

7. Cram-Down Power

If a majority of creditors approve a rehabilitation plan but a minority oppose it, the court can impose the plan on dissenting creditors. This “cram-down” power is a vital tool under FRIA, helping prevent a minority of creditors from stalling the rehabilitation plan.

8. Termination of Rehabilitation Proceedings

Rehabilitation proceedings can be terminated under the following circumstances:
- Successful rehabilitation or approval of a termination plan.
- Impossibility of rehabilitation as determined by the court.
- Failure to submit a feasible rehabilitation plan.
- Conversion to liquidation upon request or court's initiative if the rehabilitation process proves unviable.

Key Legal Provisions in Rehabilitation under FRIA

1. Section 16 - Filing and Contents of Petition

Details the requirements for filing a petition for rehabilitation, whether by the debtor or creditors. The petition must include comprehensive financial information and be accompanied by a rehabilitation plan or affidavit of intent to file one within a specified timeframe.

2. Section 19 - Effects of the Commencement Order

Outlines the legal consequences of the commencement of rehabilitation proceedings, including the issuance of a stay order, freezing of claims, and prohibition on creditors from enforcing liens or foreclosing on the debtor's assets.

3. Section 23 - Avoidance Proceedings

Empowers the court to void certain transactions deemed to be unfair, fraudulent, or preferential to specific creditors, particularly if conducted within the suspicious period prior to filing.

4. Section 63 - Pre-Negotiated Rehabilitation**

Establishes the process for pre-negotiated rehabilitation, allowing a streamlined approval if creditors with substantial claims have already agreed to the plan.

5. Section 84 - Out-of-Court or Informal Restructuring Agreements

Details the requirements and binding nature of informal restructuring agreements once creditors representing the required percentage of the debtor's liabilities consent to the plan.

Summary of Rehabilitation Process Under FRIA

Filing of Petition
- The debtor or creditor files a petition in court for rehabilitation. The petition includes a preliminary rehabilitation plan and a financial overview of the debtor.
Issuance of Commencement Order
- The court issues a Commencement Order, triggering a stay on all collection activities and appointing a rehabilitation receiver to oversee the process.
Submission and Approval of the Rehabilitation Plan
- A detailed rehabilitation plan is prepared, presented to creditors, and submitted to the court for approval.
Implementation and Monitoring
- If approved, the plan is implemented under the supervision of the rehabilitation receiver, who periodically reports to the court on progress and compliance.
Conclusion of Proceedings
- Rehabilitation ends either in successful restructuring, a shift to liquidation if rehabilitation fails, or court approval of a termination order.

Conclusion

The Financial Rehabilitation and Insolvency Act provides structured, debtor-friendly options for the rehabilitation of financially troubled entities. The key principles of FRIA aim to strike a balance between the rights of creditors and the opportunity for debtors to restructure their obligations, preserving economic value and jobs. The law’s various modes of rehabilitation cater to different debtor situations, emphasizing transparency, fairness, and efficiency in resolving financial distress.