Corporate Rehabilitation Applications under the Financial Rehabilitation and Insolvency Act of 2010 (FRIA, R.A. 10142)
Philippine Perspective – Comprehensive Legal Guide

1. Legislative Framework & Policy Objectives

Republic Act No. 10142 (FRIA) took effect 9 August 2010.
Supersedes the century-old Insolvency Law (Act 195), absorbing all rehabilitation jurisprudence (e.g., Asia Brewery, Rubberworld), codifying best rescue practices, and aligning with UNCITRAL standards.
Declared policy: “encourage and promote the rehabilitation of distressed enterprises” to preserve jobs, maximize asset values, and maintain economic stability (Sec. 2).

2. When Can a Corporation Apply?

Test	Insolvent	Financially Distressed but Viable
Balance-Sheet Test	Liabilities > Assets	–
Cash-Flow Test	Unable to pay debts as they fall due within 90 days	Imminent inability within 5 years

Either situation suffices. The applicant need not be permanently insolvent; rehabilitation is premised on viability through a plan.

3. Three Statutory Modes of Rehabilitation

Mode	How Initiated	Threshold Votes BEFORE filing	Key Timelines	Court Intervention
Court-Supervised (CSR) (Secs. 12-81)	Petition by debtor (voluntary) or creditor(s) holding ≥ P1 million or 25 % of total liabilities (involuntary)	None	Commencement Order (“CO”) within 5 working days; Rehab Receiver (RR) appointed within 5 days; RR’s Report within 40 days; Plan confirmed or case dismissed within 120 days of CO	Full
Pre-Negotiated CSR (Secs. 82-90)	Petition carries already-approved Plan	✔ 67 % of total liabilities; ✔ 75 % secured + 75 % unsecured	Court acts within 10 days; may confirm within 60 days	Limited to confirming the plan
Out-of-Court Rehabilitation (OCRA, “Informal Workout”) (Secs. 91-101)	Stand-still Agreement among creditors	✔ 85 % total liabilities and 67 % secured and 75 % unsecured	Stand-still max 120 days (extendible); Plan becomes binding once thresholds met and registered with SEC	None, unless enforcement needed

4. Jurisdiction & Venue

Special Commercial Courts (SCCs)—designated RTC branches in the principal place of business or corporate residence.
SCC orders are immediately executory; appeals go to the CA but do not stay proceedings (Sec. 48).

5. Commencement Order & Automatic Stay (CSR and Pre-negotiated)

Effect	Statutory Basis	Practical Impact
Suspends all actions or claims against the debtor	Sec. 16(a)	No collection suits or foreclosure (even of real estate mortgages) proceed without SCC leave.
Prohibits termination of essential contracts solely by reason of insolvency (“ipso facto clause”)	Sec. 18	Keeps supply, lease, utilities alive.
Freezes prescription & interest, restricts set-off, halts execution	Secs. 17-20	Preserves going-concern value.
Duration: until dismissal or conversion to liquidation.

6. The Rehabilitation Receiver (RR)

Appointment	Qualifications	Powers
Named by the court (single/management committee) within 5 days of CO.	Independence, expertise in finance/management.	Take custody of assets, evaluate viability, recommend acceptance/rejection of Plan, review transactions for avoidance, sue in behalf of estate.

The RR’s Initial Evaluation Report (IER) is due within 40 days of CO. The RR may recommend:

Approve or modify the Plan,
Convert to liquidation,
Dismiss the petition.

7. The Rehabilitation Plan

Filing	Contents	Creditor Approval	Cram-Down
Voluntary CSR: Plan is annexed to the petition
Involuntary: Debtor files within 120 days of CO.	Financial projections (5 years), treatment of claims per class, asset sales, infusion of new money, governance changes.	Acceptance by > 50 % of total claims of each class present & voting (Sec. 63).	Court may confirm over dissent if: (i) creditors are not worse off, (ii) Plan feasible, (iii) Plan treats classes fairly (Sec. 64).

Once confirmed, the Plan binds all including dissenters and unknown creditors. The RR transitions to Plan Administrator.

8. Conversion to Liquidation (Chapter V)

Grounds:

Plan rejected and no feasible alternative (Sec. 75)
Failure of implementation: material default not cured within 90 days (Sec. 76)
Fraud/ unauthorized disposition of assets.

Liquidation follows a creditor-protectionist waterfall (Sec. 109 et seq.) with a separate Liquidator.

9. Avoidance Proceedings & Claw-backs

Undue Preference: transactions within 90 days before petition that prefer a creditor of the same class.
Undervalued/ Fraudulent conveyances: up to 3 years look-back if intent to defraud.
Post-commencement lending with court approval enjoys super-priority over unsecured claims (Sec. 60).

10. Cross-Border Insolvency (Chapter VII)

FRIA incorporates the UNCITRAL Model Law: foreign representative may apply for “recognition” of a foreign main or non-main proceeding.
SCC may lend assistance, coordinate with foreign courts, and grant relief akin to a local stay order.

11. Special Situations & Jurisprudential Highlights

Case	Gist	Take-away
Banco de Oro v. Rural Bank of San Miguel (G.R. No. 195674, 23 Jan 2013)	Stay order covers even extrajudicial foreclosure of real estate.	Confirms broad scope of Sec. 16 automatic stay.
Rubberworld v. NLRC (G.R. No. 129094, 28 Feb 2005, pre-FRIA, but still persuasive)	Labor cases vs. debtor suspended during rehabilitation.	Labor claims must route through rehabilitation forum.
Pacific Plans “Educational Plans” cases	Rehabilitation approved with investor bailout.	Demonstrates viability-focused rescue despite public outcry.

12. Practical Drafting Tips for a CSR Petition

Use SCC-prescribed form (OCA Circular 13-2011).
Attach ―
- Audited FS (last 3 years) & interim FS (≤ 30 days old).
- Schedule of debts (secured/unsecured, current/long-term).
- Inventory of assets with liens.
- Detailed Rehabilitation Plan & liquidity forecast.
- Board Resolution approving filing.
Verification & Certification of Non-Forum Shopping required.
Pay docket and sheriff’s fees (compute ad valorem on total liabilities).

13. Creditor Dynamics & Class Voting

Class	Typical Members	Strategy Considerations
Secured	Banks, asset-based lenders, bondholders with collateral	May demand adequate protection (Sec. 16(j)) or new collateral.
Unsecured Financial	Notes, supplier credit beyond 360 days	Often form the swing vote.
Trade	Ordinary suppliers on current terms	Usually favor quick confirmation to keep business.
Employees & Government	SSS, BIR, LGUs	Statutory priorities remain under Art. 110 Labor Code & NIRC.

14. Comparison with Other Philippine Rescue Regimes

Feature	FRIA CSR	BSP Prompt Corrective Action (Banks)	IC Conservatorship (Insurers)
Governing Agency	Judiciary (SCCs)	Bangko Sentral ng Pilipinas	Insurance Commission
Moratorium	Automatic upon CO	BSP may declare bank holiday	Commissioner’s stay order
Applicability	All corporations (except banks, QSOs, insurers unless specially allowed)	Banks, quasi-banks	Domestic insurers
Outcome	Rehabilitation or liquidation	Forced merger, receivership, PDIC takeover	Rehabilitation, receivership, liquidation

15. Common Pitfalls

Late Filing – waiting until assets are depleted prejudices rehabilitation.
Incomplete Financials – SCC may summarily dismiss.
Lack of Stakeholder Buy-in – crucial to negotiate with major creditors before filing.
Plan Over-optimism – courts scrutinize financial projections; sensitivity analyses are expected.
Post-Commencement Compliance – failure to remit taxes or SSS contributions during stay is ground for conversion to liquidation.

16. Strategic Insights for Counsel & CFOs

File pre-negotiated where feasible; speed and certainty outweigh thresholds.
DIP Financing: Build lender comfort by offering senior lien on unencumbered assets.
Anticipate shareholder dilution—conversion of debt to equity is common.
Use FRIA’s cram-down power to override holdouts but document fair and equitable treatment.
Coordinate with cross-border creditors early; obtain provisional relief under Chapter VII to shield Philippine assets.

17. Post-Rehabilitation Monitoring

The Plan Administrator files quarterly status reports; SCC retains jurisdiction to enforce or modify the plan for two years post-confirmation (Sec. 73).
Successful exit occurs through a court order declaring substantial compliance, dissolving the stay.

18. Future Developments

Bills are pending to create a “Business Recovery Court” for micro- and small-enterprise debt relief with simplified procedures.
Digital filing and virtual creditor meetings are being pilot-tested by the OCA.

Conclusion

The FRIA framework equips Philippine corporations with a multi-track rehabilitation toolkit—from court-supervised proceedings to informal workouts. Mastery of its procedural nuances, voting thresholds, and stakeholder psychology is indispensable for lawyers and business leaders seeking to rescue value, preserve employment, and contribute to broader economic resilience.