RA 10142 - "Financial Rehabilitation and Insolvency Act (FRIA) of2010

1. Define Rehabilitation

Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is
shown that its continuance of operation is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan, more if the dehtor continues as a going concern than if it is immediately
liquidated.

2. Explain nature of rehabilitation/ liquidation/ suspension

The proceedings under this Act shall be in rem. Jurisdiction over all persons affected by the proceedings shall be
considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of
general circulation in the Philippines in the manner prescribed by the rules of procedure to be p.romulgated by the
Supreme Court.

The proceedings shall be conducted in a summary and non-adversarial manner consistent with the declared policies of
this Act and in accordance with the rules of procedure that the Supreme Court may promulgate.

3. two fold purpose of corporate rehabilitation

to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve an4
adjust competing claims and property rights.

The rehabilitation or liquidation shall be made with a view to ensure or maintain certainty and predictability in
commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect
priority of claims, and ensure equitable treatment of creditors who are similarly situated.

4. Doctrine of Equality

All creditors stand on equal footing; no preference

The Rehabilitation Plan shall provide for equal treatment of all claims within the same class or subclass, unless a
particular creditor voluntarily agrees to less favorable treatment;

5. a. Distinguish liquidation vs rehab

Liquidation is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the
process of reducing assets to cash, discharging liabilities and dividing surplus or loss.

On the other hand, rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. Both cannot be undertaken at the
same time.

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b. Can you file rehab after liquid? vice versa?

6. Exceptions to stay or suspension order

The Stay or Suspension Order shall not apply:

(a) to cases already pending appeal in the Supreme Courtas of commencement date: Provided, That any final and
executory judgment arising from such appeal shall be referred to the court for appropriate action;

(b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which,
upon determination by the court, is capable of resolving the claim more quickly, fairly and efficiently than the court:
Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be
treated as a non-disputed claim;

(c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or
accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;

(d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys
and securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such
securities market participant or the appropriate regulatory agency or self-regulatory organization to payor settle such
claims or liabilities;

(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or
margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities
Regnlation Code and its implementing rules and regulations;

(f) the clearing and settlement offinancial transactions through the facilities of a clearing agency or similar entities duly
authorized, registered andJor recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP)
and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions
settled for the debtor; and

(g) any criminal action against the individual debtor or owner, partner, director or officer of a debtor shall not be
affected by any proceeding commenced under this Act.

7. How to convert rehabilitation proceedings to liquidation proceedings

At any time during the pendency of or after a rehabilitation Gourt-supervised or pre-negotiated rehabilitation
proceedings, three (3) or more creditors whose claims is at least either One million pesos Php 1,000,000.00) or at least
twenty-five percent (25%) of the subscribed capital or partner's contributions of the debtor, whichever is higher, may
also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into liquidation proceedings.' The motion shall be verified. shall
contain or set forth the same matters required in the preceding paragraph, and state that the movants are seeking the
immediate liquidation of the debtor.
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During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the court may order the
conversion of rehabilitation proceedings to liquidation proceedings

8. Court supervised rehab voting requirement

When approved by the owner in case of a sole proprietorship, or by a majority of the partners in case of a partnership,
or, in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation,
by the vote of at least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the
purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with
the court and on the grounds hereinafter specifically provided

9. Pre negotiated rehab voting requirement

An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the
approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-
thirds (2/3) of the totalli!tbilities of the debtor, including secured creditors holding more than fifty percent (50%) of the
total secured claims ofthe debtor and unsecured creditors holding more than fifty percent (50%) ofthe total unsecured
claims of the debtor.

10. Out of court rehab voting requirement

CORPO LAW

1. Narra nickel case

Redmont is a domestic corporation interested in the mining and exploration of some areas in Palawan. Upon
learning that those areas were covered by MPSA applications of other three (allegedly Filipino) corporations – Narra,
Tesoro, and MacArthur, it filed a petition before the Panel of Arbitrators of DENR seeking to deny their permits on the
ground that these corporations are in reality foreign-owned. MBMI, a 100% Canadian corporation, owns 40% of the
shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997 shares of McArthur)
and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro).

Aside from the MPSA, the three corporations also applied for FTAA with the Office of the President. In their answer,
they countered that (1) the liberal Control Test must be used in determining the nationality of a corporation as based on
Sec 3 of the Foreign Investment Act – which as they claimed admits of corporate layering schemes, and that (2) the
nationality question is no longer material because of their subsequent application for FTAA.

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ISSUE: W/N the Grandfather rule must be applied in this case

RULING: Grandfather Rule may be Applied Cumulatively with the Control Test in Determining the Ownership of
Corporations Engaged in Nationalized Activities

2. Liability of Director/ Officers/ Trustees

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so
validly attach, as a rule, only when:

i. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its
affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

ii. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;

iii. He agrees to hold himself personally and solidarily liable with the corporation; or

iv. He is made, by a specific provision of law, to personally answer for his corporate action

3. a. Doctrine of Apparent Authority

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts; the corporation will, as against anyone
who has in good faith dealt with it through such agent, be estopped from denying the agent‘s authority.

b. Business Judgement rule

GR: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in
good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the
corporation & courts will not interfere.

XPN: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the
minority or if they violate their duties under Sections 31 & 34.

* CONSEQUENCES OF THE BUSINESS JUDGMENT RULE:

 Resolutions and transactions entered into by the Board within the powers of the corporation cannot be
reversed by the court not even on the behest of the stockholders.

 Directors and officers acting within such business judgment cannot be held personally liable for such
acts. (Philippine Corporate Law, Cesar Villanueva, 2009 ed. P.328)

c. Doctrine of Corporate opportunity

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Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity
which:

 corporation is financially able to undertake

 from its nature, is in line with corporations business and is of practical advantage to it; and

 one in which the corporation has an interest or a reasonable expectancy.

The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture. (Sec. 34)

By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his
corporation. Hence, the law does not permit him to seize the opportunity even if he will use his own funds in the
venture. (SUNDIANG AND AQUINO)

4. Ultra vires requisites for ratification

An ultra vires act is distinguished from illegal act, the former being voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.

5. Trust Fund Doctrine

Trust Fund Doctrine means that the capital stock, properties and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. Stated simply, the trust fund doctrine states that all funds received by the
corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of
the corporation. Under such doctrine no fund shall be used to buy back the issued shares of stock except only in
instances specifically allowed by the Corporation Code.

6. Merger

a corporation absorbs the other and remains in existence while the others are dissolved.

One of the constituent corporations remains as an existing juridical person, whereas the other corporation shall cease to
exist. Merger is the disappearance of one of the corporations with the other corporation acquiring all the assets, rights
of action, and assuming all the liabilities of the disappearing corporation.

7. Moral Damages Corp

Moral Damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They
may not even claim moral damages for besmirched reputation (NAPOCOR v. Philipp Brothers Oceanic, 2001).

However, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation (Pilipinas
Broadcasting Network v. Ago Medical and Educational Center 2005).

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8. Piercing the veil

Piercing the veil of corporate entity is merely an equitable remedy, and may be granted only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime (Yutivo Sons v CTA
1961) or where the corporation is a mere alter ego or business conduit of a person. (Koppel Phil v Yatco)

Grounds:

i. If done to defraud the government of taxes due it.

ii. If done to evade payment of civil liability.

iii. If done by a corporation which is merely a conduit or alter ego of another corporation.

iv. If done to evade compliance with contractual obligations.

v. If done to evade financial obligation to its employees.

9. Voting requirements

QUORUM:

GR: Majority of the number of directors or trustees as fixed in the articles of incorporation.

XPN: Unless the articles of incorporation or the by-laws provide for a greater majority, or in case of election
of officers where a vote of a majority of all the members of the board is needed.

Straight Voting = Every stockholder may vote such number of shares for as many persons as there are
directors to be elected.

Cumulative voting for one candidate = A stockholder is allowed to concentrate his votes and give one
candidate as many votes as the number of directors to be elected multiplied by the number of his shares
shall equal.

Cumulative voting = by distribution A stockholder may cumulate his shares by multiplying the number of
his shares by the number of directors to be elected and distribute the same among as many candidates
as he shall see fit.

10. Pre emptive right instances

All SH of a Stock Corporation have preemptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings

Pre-emptive right shall not extend to:

a) shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public

b) shares to be issued in good faith with the approval of 2/3 of the stockholders representing outstanding capital stock,
in exchange for property needed for corporate purposes or in payment of a previously contracted debt
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The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of
treasury shares, whether for money, property or personal services, or in payment of corporate debts, UNLESS the
articles of incorporation provide otherwise (Sec. 102).

11. Derivative Suit

A suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit, and the
relief which is granted is a judgment against a third person in favour of the corporation (Chua v. CA, 2004)

Suits of stockholders based on wrongful or fraudulentacts of directors or other persons.

Requisites of Derivative Actions

1) That the person instituting the action stockholder or member at the time the acts or

transactions subject of the action occurred and the time the action was filed;

2) That the stockholder exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the AOI, by-laws, laws or rules governing the corporation or partnership to obtain
the relief he desires.

3) That there is no appraisal right available for the act(s) complained of; and

4) That the suit is not a nuisance or harassment suit. (Rule 8, Interim Rules of Procedure for

Intra-Corporate Controversies)

Requisites based on jurisprudence

1) The cause of action actually devolves on the corporation, the wrong or harm having been, or being caused to it and
not the shareholder filing the suit. (Evangelista vs. Santos, 1950; SMC v. Kahn, 1989).

2) The reliefs sought pertain to the corporation. (Symaco Trading Corp. v. Santos, 2005).

Jurisdiction over derivative suits lies with the RTC (Sec. 5.2, Securities Regulation Code)

12. Close corp/ going private corp

Close corporations are those whose AOI provide the following:

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a) all of the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more that
a specified number of persons, not exceeding 20

b) all of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by the
Code

c) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class

d) at least 2/3 of its voting stock must not be owned or controlled by another corporation which is not a close

e) must not be a mining or oil company, stock exchange, bank, insurance company, public utility, educational institution
or corporation vested with public interest

The stocks cannot be listed in the stock exchange nor be publicly offered.

At least 2/3 of its voting stock or voting rights must NOT be owned or controlled by another corporation which is not a
close corporation.

The stockholders themselves can directly manage the corporation and perform the functions of directors without need
of election (Sec. 97):

i. When they manage, stockholders are liable as directors;

ii. There is no need to call a meeting to elect directors;

iii. The stockholders are liable for tort.

13. Modes of Corp dissolution - voluntary/ involuntary

a. Voluntary

a.1 Where no creditors are affected

Notice of the meeting should be given to the stockholders or members by personal delivery or registered
mail at least 30 days prior to the meeting.

The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the
place, where the principal office of said corporation is located. If no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines.

The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the
stockholders representing at least 2/3s of the OCS or 2/3 of members.

A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by
the secretary.
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 The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of
dissolution.

a.2 Where Creditors are Affected

A petition shall be signed by a majority of its board of directors or trustees or other officers having
management of its affairs.

The petition must be verified by its president, or secretary or one of its director or trustees.

Approval of the stockholders representing at least 2/3 of the OCS or 2/3 of members in a meeting called
for that purpose.

Filing of a petition with the SEC signed by majority of directors or trustees or other officers having the
management of its affairs verified by the President or Secretary or Director. Claims and demands must be stated in the
petition.

If the petition is sufficient in form and substance, the SEC shall issue an order fixing a hearing date for
objections.

A copy of the order shall be published at least once aweek for 3 consecutive weeks in a newspaper of
general circulation, or if there is no newspaper in the city or municipality of the principal office, posting for 3
consecutive weeks in 3 public places is sufficient.

Objections must be filed no less than 30 days nor more than 60 days after the entry of the Order.

After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to
hear the objections.

Judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment
may include appointment of a receiver.

a.3. By Shortening of Corporate Term (Sec. 120)

A voluntary dissolution may be effected by amending the AOI. Upon approval of the amended AOI or the
expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any
further proceedings

b. Involuntary

a.1. By Expiration of Corporate Term

Once the period expires, the corporation is automatically dissolved without any other proceeding and it cannot
thereafter be considered a de facto corporation.

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 a.2. Failure to Organize and Commence Business within Two Years from Incorporation (Sec. 22)

Failure to formally organize and commence the transaction of its business or construction of its works within
two years - its corporate powers shall cease and the corporation shall be deemed dissolved

Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for
which the corporation was formed (Mentholatum v. Mangaliman, 1946)

Formal organization includes not only the adoption of the by-laws but also the establishment of the body
which will administer the affairs of the corporation and exercise its powers

Failure to operate for at least 5 consecutive years after commencement of business - ground for
suspension or revocation of its corporate franchise or certificate of incorporation.

a.3. Legislative Dissolution

The inherent power of Congress to make laws carries with it the power to amend or repeal them.
Involuntary corporate dissolution may be effected through the amendment or repeal of the Corporation Code.

a.4. Dissolution by the SEC on Grounds Under Existing Laws (Sec. 121)

A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and hearing, on
the following grounds (Sec. 6, par i, PD 902-A):

  Fraud in procuring its certificate of registration

  Serious misrepresentation as to what the corporation can or is doing to the great prejudice of or damage
to the general public

  Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts
which would amount to a grave violation of its franchise

  Continuous inoperation for a period of at least five years

  Failure to file by-laws within the required period

  Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period

  Other grounds:

-Violation by the corporation of any provision of the Corporation Code (Sec. 144 BP 68)

- In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the
corporation as the only practical solution to the dispute (Sec. 104 BP 68)

14. "doing business"

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Tests of ―Doing Business in the Philippines (Asked in 98 and 02)

Twin Characterization Test

- Under the Continuity Test, doing business implies a continuity of commercial dealings and arrangements, or
performance of acts normally incidental to the purpose and object of the organization.

- Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or
substance of the enterprise of business for which it was organized (Mentholatum v. Mangaliman, 1941)

Contract test

A foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by
an agent acting under the control and direction of the foreign corporation are consummated in the Philippines (Pacific
Vegetable Oil v. Singson, 1955).

Doing Business Under the Foreign investment Act of 1991

Soliciting orders, service contracts, or opening

offices;

 Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180
days or more;

 Participating in the management, supervision, or control of any domestic business, firm, entity, or corporation in the
Philippines;

 Any act or acts that imply a continuity of commercial dealings or arrangements, and

contemplate to some extent the performance of acts or works or the exercise of some functions, normally incident to
and in progressive prosecution of the purpose and object of its organization.

NEGOTIABLE INSTRUMENTS

1. Forgery

Counterfeit making or fraudulent alteration of any writing, which may consist of:

a. Signing of another‘s name with intent to defraud; or

b. Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.

2. electronic messages are not negotiable

3. 24 hr clearing x apply materially altered

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4. Fictitious payee

It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the
instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he
is still fictitious or nonexistent under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay
thespecified persons.

A check drawn payable to the order of cash is a check payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement. (Ang Tek Lian vs. CA, 1950)

5. sec 14

6. sec 1

7. sec 52

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