In the Philippines, the process for a debtor to seek relief from overwhelming financial obligations is governed primarily by Republic Act No. 10142, also known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010.
Voluntary insolvency occurs when a debtor, recognizing their inability to pay debts as they fall due, initiates a judicial proceeding to either rehabilitate the business or orderly liquidate assets to satisfy creditors.
1. Governing Law and Jurisdiction
The FRIA of 2010 replaced the old Insolvency Law of 1909. It emphasizes the "restoration of the debtor to a condition of successful operation," but also provides a clear roadmap for liquidation if rehabilitation is no longer feasible.
Petitions for voluntary insolvency are filed with the Regional Trial Court (RTC) designated as a Special Commercial Court in the locality where the debtor has resided or had its principal office for six months prior to filing.
2. Types of Debtors
Under the FRIA, debtors are classified into two categories:
- Individual Debtors: Natural persons who are residents of the Philippines.
- Juridical Debtors: Corporations, partnerships, or sole proprietorships duly organized and existing under Philippine law.
3. Two Main Paths: Rehabilitation vs. Liquidation
A. Voluntary Rehabilitation
If there is a substantial likelihood that the debtor can continue as a "going concern," they may file for rehabilitation.
- The Goal: To suspend all actions against the debtor while a Rehabilitation Plan is drafted to restructure debts and improve operations.
- The Commencement Order: Once the court finds the petition sufficient, it issues an order that includes a Stay or Suspension Order. This prevents creditors from enforcing judgments or foreclosing on collateral during the process.
B. Voluntary Liquidation
If the debtor is "insolvent" (liabilities exceed assets) and rehabilitation is not viable, they may file for liquidation.
- Individual Debtors: An individual whose debts exceed Php 500,000.00 may apply to be adjudged insolvent.
- Juridical Debtors: An insolvent corporation may petition for liquidation to have its assets sold and the proceeds distributed to creditors according to the hierarchy of claims.
4. Essential Requirements for the Petition
A petition for voluntary insolvency must be verified and include the following:
- Schedule of Debts and Liabilities: A complete list of creditors, the amounts owed, and the nature of the debt (secured vs. unsecured).
- Inventory of Assets: A detailed list of all properties (real and personal) and their estimated values.
- Liquidation or Rehabilitation Plan: A proposal on how the debtor intends to settle obligations or wind down operations.
- Financial Statements: Usually covering the last three years to prove the state of insolvency.
5. The Liquidation Process (Step-by-Step)
| Phase | Action |
|---|---|
| Filing | Debtor files a verified petition in the appropriate Special Commercial Court. |
| Order of Liquidation | If the court finds the petition meritorious, it issues a Liquidation Order, declaring the debtor insolvent. |
| Appointment of Liquidator | The court appoints a Liquidator (often a lawyer or accountant) to take over the debtor’s assets. |
| Stripping of Authority | The debtor loses the right to manage or dispose of their property; all assets are now in custodia legis. |
| Claims Period | Creditors are given a period (usually 5 to 20 days from notice) to file their formal claims. |
| Distribution | The Liquidator sells assets and distributes the proceeds based on the Concurrence and Preference of Credits under the Civil Code. |
6. Suspension of Payments (For Individuals Only)
A unique remedy for individuals is the Petition for Suspension of Payments. This is applicable when the debtor has enough assets to cover all debts but foresees an impossibility of paying them on their scheduled due dates (a liquidity crisis rather than total insolvency).
- The debtor asks the court for a "grace period" or a stay on payments while they renegotiate the timeline with creditors.
- Unlike liquidation, this does not involve selling off all assets.
7. Legal Consequences and Effects
- Vesting of Assets: Upon the issuance of a Liquidation Order, the legal title to all of the debtor's non-exempt assets vests in the Liquidator.
- Contracts: The Liquidator has the power to rescind or continue existing contracts, depending on what benefits the estate.
- Discharge: For individual debtors, the end goal is a Discharge, which releases the debtor from the legal obligation to pay the remaining unpaid balance of the debts involved in the proceedings (subject to certain exceptions like taxes or support).
8. Exempt Property
Not all property is taken during insolvency. Under Philippine law, certain items are exempt from execution, including:
- The family home (up to a certain value).
- Ordinary tools of trade or profession.
- Necessary clothing and household furniture for family use.
- Professional libraries (up to a limit).