Suspension of payments for financially distressed debtors
(Third Part)
The Financial Rehabilitation and Insolvency Act (FRIA) offers relief to individual debtors who are having problems with meeting their currently maturing obligations. As mentioned in the previous issue, a suspension of payment proceeding may be used by covered debtors to prevent a hemorrhage of an individual debtor’s financial resources.
Under the Financial Liquidation and Suspension of Payments Rules (A.M. No. 15-04-06-SC), an individual who has assets that exceed his liabilities but foresees the impossibility of paying his debts when they respectively fall due may file a verified petition for suspension of payments in the court having jurisdiction over the province or city where he has resided for six (6) months prior to the filing of the petition. The petition shall indicate the names of at least three (3) nominees to the position of commissioner and shall include the required attachments mentioned in the previous issue.
If the petition is sufficient in form and substance, the court will issue a Suspension of Payments Order. The order prohibits creditors from suing or instituting proceedings for collection against the debtor while it prohibits also the debtor from selling, transferring, encumbering or disposing his property except those used in the ordinary course of commerce or of industry in which the petitioner is engaged as long as the proceedings are pending. The debtor is likewise prohibited from making any payment outside of the necessary or legitimate expenses of his business or industry, as long as the proceedings are pending. There are creditors, however, who are not prohibited from asserting their claims against the debtor even with the issuance of the suspension order and these include (i) creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred within sixty (60) days immediately prior to the filing of the petition, and (ii) secured creditors.
The suspension order also calls for a meeting at a designated date, time, and place of all the creditors named in the schedule of debts and liabilities at a time not less than fifteen (15) days nor more than forty (40) days from the date of such order. Since the proceeding is in rem, there is a necessity of publication of the order. In suspension of payments proceedings, jurisdiction over all persons affected by the proceedings is acquired upon publication of the order.
A debtor who is facing a pending execution of judgment against him may file a motion to suspend any pending execution. Note, however, that property held as security by secured creditors shall not be subject to such suspension order. The order suspending execution only has a lifespan of three (3) months and shall lapse without a proposed agreement being accepted by the creditors or as soon as such proposed agreement is rejected.
Secured creditors and creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred within sixty (6) days immediately prior to the filing of the petition may refrain from attending the creditors’ meeting and from voting thereon.
The meeting of the creditors shall be presided over by a commissioner who shall be a natural person and must be a citizen of the Philippines or a resident thereof for six (6) months immediately preceding his appointment; must be of good moral character and with acknowledged integrity, impartiality and independence; must have the requisite knowledge of insolvency laws, rules and procedures; and must have no conflict of interest.
The required quorum for the creditors’ meeting is at least three-fifths (3/5) of the liabilities of the debtor. During this meeting, the commissioner will examine the written evidence of the claims. The creditors and the debtor will discuss the proposed agreement and put it to a vote. The decision is based on the majority and to form a majority, it is necessary (1) that two-thirds (2/3) of the creditors voting unite upon the matter on the table; and (2) that the claims represented by said majority vote amount to at least three-fifths (3/5) of the total liabilities of the debtor. The commissioner shall prepare a report of the proceedings not later than three (3) days after the last creditors’ meeting.
Despite the approval by the required majority of debtor’s proposal, any creditor who attended the meeting and who dissented from and protested against the vote of the majority may file an objection with the court ten (10) days from the date of the meeting on any of the following grounds: (a) defects in the call for the meeting, in the holding thereof, and in the deliberations had thereat which prejudice the rights of the creditors; (b) fraudulent connivance between one or more creditors and the individual debtor to vote in favor of the proposed agreement, or any amendment thereto; or (c) fraudulent conveyance of claims for the purpose of obtaining a majority. The court shall hear and pass upon such objection. If the decision of the majority of creditors to approve the debtor’s proposal, or any amendment thereto, is annulled by the court, the petition shall be dismissed.
If the agreement is upheld by the court, or when no opposition or objection thereto has been presented, the court shall issue an order confirming the approval of the proposed amendment, and directing all parties thereby to comply with its terms.
In the enforcement of the agreement, the court exercises its residual powers. In case of failure of the debtor to perform, wholly or in part, with his obligations, the court shall declare the agreement terminated, and all the rights which the creditors had against the debtor before the agreement shall revest in them.