Laws on Insolvency Notes

8/4/2019 Laws on Insolvency Notes

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SIGNIFICANT NOTES ON THE LAWS ONINSOLVENCY

Act No. 1956, As amended

Prepared by Atty. Janet Grace B. Dalisay-Fabrero

ADDU- CPA Board Review Center

I. Governing Law

Insolvency is governed by special lawsinsofar as said laws are not inconsistent with theCivil Code (Article 2237). Said provision of theCivil Code provides that Insolvency shall begoverned by Special Laws insofar as they are notinconsistent with the Civil Code. The basicspecial law on Insolvency is Act. No 1956;supplementary to it are the New Central BankAct ( Republic Act 7653) in case of banks, theInsurance Code as amended by PresidentialDecree 1141 , in case of insurance companies,and the Presidential Decree No. 902-A asamended Republic Act No. 8799 on corporation

and partnership in suspension of payments.

II. Concept

Insolvency, in general, is the state ofinability of a person to pay his debts at maturity.Under the Philippine law, insolvency andbankruptcy are synonymous terms and usedinterchangeably. In common law, however,bankruptcy is used for traders and merchants,the law on which may permit a discharge similarto the Philippine Law in insolvency; whereas, theterm insolvency refers to non-traders and non-merchants, the law on which generally will notwarrant the exoneration of the insolvent fromfurther liability. Insolvency is a condition of aperson who is insolvent; inability to pay onesdebts; the term insolvency is broader thanbankruptcy and historically bankruptcy wasincluded within its scope.

Insolvency has two (2) distinct and well-defined significations. In its general and popularmeaning, insolvency denotes the state of onewhose entire property and assets, whereconverted into money without unreasonablehaste or sacrifice, are insufficient to pay hisdebts, or his general inability to pay his debts.However, the turn is frequently used in the more

restricted sense to express the inability of theperson to pay his debts as they become due inthe ordinary course of business and it isgenerally so used when applied to persons incommercial pursuits. (44 C.J.S. 337-338)

II. Purpose and scheme of Law on Insolvency

A. Purpose:

The main purpose of theinsolvency law is to convert assets of thebankrupt into money for distribution amongcreditors, then to relieve the honest debtor fromthe weight or oppressive indebtedness and

permit him to start anew free from theobligations and responsibilities consequent uponbusiness misfortunes. (Williams v. U.S. & G Co.,236 U.S. 549)

The law is aimed at affording thedebtor who needs time, the opportunity to settlein full his obligations as and when they fall due,and the creditors the opportunity of getting themtogether to restructure debt maturities or atbringing about an equitable distribution to themof the assets of an insolvent, as well as

permitting the debtor to start afresh in hiseconomic standing by discharging him fromfurther liability on his previously contracted andimposed obligations.

B. Schemes

The following methods areemployed in order to achieve the basicobjectives of the law, viz:

1. Suspension of Payment

Suspension of payments is thepostponement, by court order, of the payment ofdebts of one who, while possessing sufficientproperty to cover his debts, foresees theimpossibility of meeting them when theyrespectively fall due. ( Sec. 2, paragraph 1)

The purpose of a suspension ofpayments is to suspend or delay the payment ofdebts the amount of which is not affected

although a postponement is declared. The basisis the probability of the debtors inability to meethis obligations when they respectively fall due,despite the fact that he has sufficient assets tocover all his liabilities.

SECTION 2. Petition. The debtor who,possessing sufficient property to coverall his debts, be it an individual person,be it a sociedad or corporation,foresees the impossibility of meetingthem when they respectively fall due,may petition that he be declared in thestate of suspension of payments by thecourt, or the judge thereof in vacation,of the province or of the city in whichhe has resided for six months nextpreceding the filing of his petition.He shall necessarily annex to hispetition a schedule and inventory in theform provided in sections fifteen,sixteen, and seventeen of this Act, inaddition to the statement of his assetsand liabilities and the proposedagreement he requests of his creditors.SECTION 3. Meeting of Creditors;Injunction. Upon receiving and filingthe petition with the schedule anddocuments mentioned in the next

preceding section, the court, or thejudge thereof in vacation, shall make anorder calling a meeting of creditors totake place in not less than two weeksnor more than eight weeks from thedate of such order. Said order shalldesignate the day, hour, and place ofmeeting of said creditors as well as anewspaper of general circulationpublished in the province or city inwhich the petition is filed, if there beone, and if there be none, in anewspaper which, in the judgment ofthe judge, will best give notice to thecreditors of the said debtor, and in the

newspaper so designated said ordershall be published as often as may beprescribed by the court or the judgethereof.Said order shall further contain anabsolute injunction forbidding thepetitioning debtor from disposing in anymanner of his property, except in so faras concerns the ordinary operations ofcommerce or of industry in which thepetitioner is engaged, and,

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furthermore, from making anypayments outside of the necessary orlegitimate expenses of his business orindustry, so long as the proceedingsrelative to the suspension of paymentsare pending, and said proceedings forthe purposes of this Act shall beconsidered to have been instituted fromthe date of the filing of the petition.

* * *SECTION 5. Creditors cited to appear. Only creditors included in the schedulefiled by the debtor shall be cited toappear and take part in the meetingmentioned in section three, and theyshall be notified upon delivery ortransmission to them of a copy of theorder calling the meeting to appear atsame with the written evidences oftheir respective claims, without whichthey shall not be admitted.SECTION 6. Pending Execution. If anyexecution be pending against the

debtor it shall not be consolidated withthis proceeding, but the course thereofshall be suspended before sale ofproperty is made thereunder, providedthe debtor makes a request therefor tothe court before which the proceedingfor suspension of payments is pending,unless the execution be againstproperty especially mortgaged which ishereby exempted from the least theprovisions of this section. Thesuspension ordered by virtue of thissection shall lapse when three monthsshall have passed without the proposedagreement being accepted by thecreditors or as soon as it is denied. Nocreditor and the other than thosementioned in section nine shall sue orinstitute proceedings to collect hisclaim from the debtor from the momentthat suspension of payments is appliedfor and while the proceedings arepending.SECTION 7. Creditors may berepresented at the meeting by one ormore lawyers or by any personauthorized by power of attorney, whichdocument shall be presented and beattached to the record.

Persons appearing for more than onecreditor shall have only one personalvote, but the claims presented by themshall be taken into consideration for thepurpose of arriving at the majority ofthe amount represented.SECTION 8. Creditors necessary to holda meeting; Meeting; Minutes of themeeting. The presence of thecreditors representing at least three-fifths the liabilities shall be necessaryfor holding a meeting. The meetingshall be held on the day and at the hourand place designated, the judge, orcommissioner deputized by him when

he is absent from the province wherethe meeting is held, acting as presidentand the clerk as secretary thereof,subject to the following rules:(a) The clerk shall prepare for insertionin the minutes of the meeting astatement of the persons present andtheir claims; the judge, or, in defaultthereof, the commissioner, shallexamine the written evidences of theclaims and the powers of attorney, if

any. If the persons present who havecomplied with the foregoing rulesrepresent at least three-fifths of theliabilities, the judge or commissionershall declare the meeting open forbusiness.(b) The petition of the debtor, theschedule of debts and of property, thestatement of assets and liabilities, andthe proposed agreement filed there-with shall be read forthwith by theclerk, and the discussion shall beopened.(c) The debtor may modify hisproposition or propositions in view ofthe result of the debate, or insist uponthe ones already made, and the judgeor commissioner, without furtherdiscussion, shall clearly and succinctlyplace these several propositions beforethe meeting for a vote thereupon.(d) The vote shall be taken by a call ofnames and shall be inserted in and the

minutes; a majority vote shall rule.(e) To form a majority it is necessary 1. That two-thirds of the creditorsvoting unite upon the same position.2. That the claims represented by saidmajority vote amount to at least three-fifths of the total liabilities of the debtormentioned in the petition.(f) After the result of the voting hasbeen announced, all protests madeagainst the majority vote shall bedrawn up, and there shall be insertedtherein the proposition or propositionsvoted upon, which, after having beenread and approved, shall be signed bythe judge or commissioner togetherwith all persons taking part in thevoting; if any such persons shall beunable to write, any person presentshall sign, at their request, and theclerk shall certify to all of the above.SECTION 9. Persons who may refrainfrom voting. Persons having claimsfor personal labor, maintenance,expenses of last illness and funeral ofthe wife or children of the debtor,incurred in the sixty days immediatelypreceding the filing of the petition, andpersons having legal or contractual

mortgages, may refrain from attendingthe meeting and from voting therein.Such persons shall not be bound by anyagreement determined upon at suchmeeting, but if they should join in thevoting they shall be bound in the samemanner as are the other creditors.SECTION 10. Rejection of agreement. The proposed agreementshall be deemed rejected if the numberof creditors required for holding ameeting do not attend thereat, or if thetwo majorities mentioned in rule (e) ofsection eight are not in favor thereof,even if the negative vote itself does not

receive such majorities.SECTION 11. Termination of proceedings without recourse; Courthearing. If the decision of themeeting be negative as regards theproposed agreement or if no decision ishad in default of such number or ofsuch majorities, the proceeding shall beterminated without recourse and theparties concerned shall be at liberty toenforce the rights which may

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correspond to them. If the decision isfavorable to the debtor it may beobjected to within ten days followingthe date of the meeting by any creditorwho attended the meeting and whodissented from and protested againstthe vote of the majority. The oppositionor objection to the decision of themajority favorable to the debtor shallbe proceeded with as in any otherincidental motion, the debtor and thecreditors who shall appear declaringtheir purpose to sustain the decision ofthe meeting being the defendants. Thecourt shall hear and pass upon suchobjection as soon as possible in asummary manner, and in its order,which shall be final, it shall declarewhether or not the decision of themeeting is valid. In case that thedecision of the meeting is held to benull, the court shall declare theproceeding terminated and the parties

concerned at liberty to exercise therights which may correspond to them;and in case the decision of the meetingis declared valid, or when no oppositionor objection to said decision has beenpresented, the court shall order thatthe agreement be carried out and thepersons concerned shall be bound bythe decision of the meeting. The courtmay also issue all orders which may beproper to enforce the agreement onmotion of any of the parties litigant.The order directing the agreement tobe made effective shall be binding uponall creditors included in the schedule ofthe debtor who may have beenproperly summoned, but not uponcreditors mentioned in section nine whofailed to attend the meeting orrefrained from voting therein, and theirrights shall not be affected by theagreement unless they may haveexpressly or impliedly consentedthereto.SECTION 12. The causes forwhich objection may be made to thedecision of the meeting shall be (a) Defects in the call for the meeting,in the holding thereof, and in the

deliberations had thereat whichprejudice the rights of the creditors;(b) Fraudulent connivance betweenone or more creditors and in debtor tovote in favor of the proposedagreement;(c) Fraudulent conveyance of claimsfor the purpose of obtaining a majority.SECTION 13. Failure of debtor toperform agreement. If the debtorfails wholly or in part to perform theagreement decided upon at themeeting of the creditors, all the rightswhich the creditors had against thedebtor before the agreement shall

revest in them. In such case the debtormay be made subject to the bankruptcyand insolvency proceedings in themanner established by the followingchapters of this Act:

a. Procedures and Effects

A debtor who has sufficientassets but who may be unable to meet hisobligations as and when they fall due, may

petition for suspension of payments, annexingthereto a schedule of his obligations and aninventory of his assets. The debtors proposal, ora modification thereof, will be sustained if it isapproved by at least two-thirds (2/3) of thecreditors representing at least three-fifths (3/5)of the total liabilities of the debtor stated in thepetition.

Creditors not affected by order of suspension ofpayments

Persons (a) having claims forpersonal labor, maintenance expended for thelast illness an funeral of the spouse or children ofthe debtor, incurred within 60 days immediatelypreceding the filing of the petition, or (b) havinglegal or contractual mortgages, may opt toexclude themselves, but if they should join themeeting of creditors and vote, they shall bebound by any agreement therein concluded *SeeSec. 9, Act 1956). The phrase legal orcontractual mortgages would include the

preferred creditors under Article 2241 and 2242of the Civil Code, which by law are consideredmortgages or as pledges within the purview ofthe insolvency laws (Article 2243, Civil Code)

Classification of Credits underthe Civil Code.

ARTICLE 2241. With reference tospecific movable property of thedebtor, the following claims or liensshall be preferred:(1) Duties, taxes and fees duethereon to the State or any subdivisionthereof;(2) Claims arising frommisappropriation, breach of trust, ormalfeasance by public officialscommitted in the performance of theirduties, on the movables, money orsecurities obtained by them;(3) Claims for the unpaid price ofmovables sold, on said movables, solong as they are in the possession ofthe debtor, up to the value of the same;and if the movable has been resold bythe debtor and the price is still unpaid,the lien may be enforced on the price;this right is not lost by the

immobilization of the thing bydestination, provided it has not lost itsform, substance and identity; neither isthe right lost by the sale of the thingtogether with other property for a lumpsum, when the price thereof can bedetermined proportionally;(4) Credits guaranteed with apledge so long as the things pledgedare in the hands of the creditor, orthose guaranteed by a chattelmortgage, upon the things pledged ormortgaged, up to the value thereof;(5) Credits for the making, repair,safekeeping or preservation of personal

property, on the movable thus made,repaired, kept or possessed;(6) Claims for laborers' wages, onthe goods manufactured or the workdone;(7) For expenses of salvage,upon the goods salvaged;(8) Credits between the landlordand the tenant, arising from thecontract of tenancy on shares, on theshare of each in the fruits or harvest;

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(9) Credits for transportation,upon the goods carried, for the price ofthe contract and incidental expenses,until their delivery and for thirty daysthereafter;(10) Credits for lodging andsupplies usually furnished to travellersby hotel keepers, on the movablesbelonging to the guest as long as suchmovables are in the hotel, but not formoney loaned to the guests;(11) Credits for seeds andexpenses for cultivation and harvestadvanced to the debtor, upon the fruitsharvested;(12) Credits for rent for one year,upon the personal property of thelessee existing on the immovableleased and on the fruits of the same,but not on money or instruments ofcredit;(13) Claims in favor of thedepositor if the depositary has

wrongfully sold the thing deposited,upon the price of the sale.In the foregoing cases, if the movablesto which the lien or preference attacheshave been wrongfully taken, thecreditor may demand them from anypossessor, within thirty days from theunlawful seizure. (1922a) cdasiaARTICLE 2242. With reference tospecific immovable property and realrights of the debtor, the followingclaims, mortgages and liens shall bepreferred, and shall constitute anencumbrance on the immovable or realright:(1) Taxes due upon the land orbuilding;(2) For the unpaid price of realproperty sold, upon the immovablesold;(3) Claims of laborers, masons,mechanics and other workmen, as wellas of architects, engineers andcontractors, engaged in theconstruction, reconstruction or repair ofbuildings, canals or other works, uponsaid buildings, canals or other works;(4) Claims of furnishers ofmaterials used in the construction,

reconstruction, or repair of buildings,canals or other works, upon saidbuildings, canals or other works;(5) Mortgage credits recorded inthe Registry of Property, upon the realestate mortgaged;(6) Expenses for the preservationor improvement of real property whenthe law authorizes reimbursement,upon the immovable preserved orimproved;(7) Credits annotated in theRegistry of Property, in virtue of a judicial order, by attachments orexecutions, upon the property affected,

and only as to later credits;(8) Claims of co-heirs forwarranty in the partition of animmovable among them, upon the realproperty thus divided;(9) Claims of donors or realproperty for pecuniary charges or otherconditions imposed upon the donee,upon the immovable donated;

(10) Credits of insurers, upon theproperty insured, for the insurancepremium for two years. (1923a)ARTICLE 2243. The claims or creditsenumerated in the two precedingarticles shall be considered asmortgages or pledges of real orpersonal property, or liens within thepurview of legal provisions governinginsolvency. Taxes mentioned in No. 1,article 2241, and No. 1, article 2242,shall first be satisfied. (n)

Creditors of claims, other thanthose mentioned above, are barred from suingor instituting proceedings thereon from themoment that suspension of payments is appliedfor and while the proceedings are pending.*See Sec 6 in relation to Sec. 9, Act 1956)

b. Injunction

The order of the court, or the

Securities and Exchange Commission in the caseof corporations or partnerships which invoke theinsolvency law rather than their rehabilitation asprescribed by Presidential Decree No. 905-A( now R.A. No 8799), calling a meeting ofcreditors shall contain an injunction forbiddingthe petitioning debtor (1) from disposing in anymanner his property except in the ordinarycourse of business, and (2) from making anypayment except for necessary and legitimatebusiness expenses (Section 3, 1956).

c. Other Effects

(1) Execution against the debtorshall be suspended before the sale of the leviedproperty, but not the foreclosure of mortgagedproperty, upon application therefor with thecourt where the suspension of payment ispending. The suspension order shall lapse three(3) months if no agreement among the creditorsis reached.

(2) Other than by the preferredcreditors under Section 9 of the law, no suits orproceedings shall be initiated against the debtorafter the suspension of payment is applied forand while the proceedings are pending.

(3) If the proposed agreementamong the creditors fails, the proceeding shallbe terminated and the parties may proceedaccordingly on their respective claims. If thedecision is favorable, the court shall allowobjections thereto within 10 days. If the same isheld to be null after hearing, the court shalldeclare the proceedings terminated; otherwise,the agreement shall be carried out.

2. Adjudication of Insolvency

Insolvency may be adjudicatedby the courts at the instance of the debtorhimself (voluntary) or his creditors (involuntary).

VoluntaryInsolvency

SECTION 14. Application. An insolventdebtor, owing debts exceeding in amountthe sum of one thousand pesos, mayapply to be discharged from his debtsand liabilities by petition to the Court ofFirst Instance of province or city in whichhe has resided for six months nextpreceding the filing of such petition. In hispetition he shall set forth his of residence,

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the period of his residence thereinimmediately prior to filing said petition,his inability to pay all his debts in full, hiswillingness to surrender all his property,estate, and effects not exempt fromexecution for the benefit of his creditors,and an application to be adjudged aninsolvent. He shall annex to his petition aschedule and inventory in the formherein-after provided. The filing of suchpetition shall be an act of insolvency.SECTION 15. Statement of debts andliabilities. Said schedule must contain afull and true statement of all his debtsand liabilities, together with a list of allthose to whom, to the best of hisknowledge and belief, said debts orliabilities are due, the place of residenceof his creditors and the sum due each thenature of the indebtedness or liability andwhether founded on written security,obligation, contract or otherwise, the truecause and consideration thereof, the time

and place when and where suchindebtedness or liability accrued, adeclaration of any existing pledge, lien,mortgage, judgment, or other security forthe payment of the debt or liability, andan outline of the facts giving rise or whichmight give rise to a cause of actionagainst such insolvent debtor.SECTION 16. Description of real andpersonal property. Said inventory mustcontain, besides the creditors, anaccurate description of all the real andpersonal property, estate, and effects ofthe petitioner, including his homestead, ifany, together with a statement of thevalue of each item of said property,estate, and effects and its location, and astatement of the incumbrances thereon.All property exempt by law fromexecution 2 shall be set out in saidinventory with a statement of itsvaluation, location, and the incumbrancesthereon, if any. The inventory shallcontain an outline of the facts giving rise,or which might give rise, to a right ofaction in favor of the insolvent debtor.SECTION 17. Verification, form of . Thepetition, schedule, and inventory must beverified by the affidavit of the petitioner,

annexed thereto, and shall be in formsubstantially as follows: "I, _______________., do solemnly swear thatthe schedule and inventory now deliveredby me contain a full, correct, and truediscovery of all my debts and liabilitiesand of all goods, effects, estate, andproperty of whatever kind or class to mein any way belonging. The inventory alsocontains a full, true and correctstatement of all debts owing or due tome, or to any person or persons in trustfor me and of all securities and contractswhereby any money may hereafterbecome due or payable to me or by or

through which any benefit or advantagewhatever may accrue to me or to my use,or to any other person or persons in trustfor me. The schedule contains a clearoutline of the facts giving rise, or whichmight give rise, to a cause of actionagainst me, and the inventory containsan outline of the facts giving rise, orwhich might give rise, to any cause ofaction in my favor. I had no lands, money,stock, or estate, reversion, or expectancy,

or property of any kind, except that setforth in said inventory. I have no instancecreated or acknowledged a debt for agreater sum than I honestly and trulyowe. I have not, directly or indirectly,concealed, fraudulently sold, or otherwisefraudulently disposed of, any part of myreal or personal property, estate, effects,or rights of action, and I have not in anyway compounded with any of mycreditors in order to secure suchcreditors, or to receive or to accept anyprofit or advantage therefrom, or todefraud or deceive in any manner anycreditor to whom I am indebted. So helpme God."SECTION 18. Order of court declaringpetitioner insolvent; Publication notice. Upon receiving and filing said petition,schedule, and inventory, the court, or the judge thereof in vacation, shall make anorder declaring the petitioner insolvent,and directing the sheriff of the province

or city in which the petition is filed to takepossession of, and safely keep, until theappointment of a receiver or assignee, allthe deeds, vouchers, books of account,papers, notes, bonds, bills, and securitiesof the debtor, and all his real andpersonal property, estate, and effects,except such as may be by law exemptfrom execution. 3 Said order shall furtherforbid the payment to the debtor of anydebts due to him and the delivery to thedebtor, or to any person for him, and thetransfer of any property by him, and shallfurther appoint a time and place for ameeting of the creditors to choose anassignee of the estate. Said order shalldesignate a newspaper of generalcirculation published in the province orcity in which the petition is filed, if therebe one, and if there be none, in anewspaper which, in the opinion of the judge, will best give notice to thecreditors of the said insolvent, and in thenewspaper so designated said order shallbe published 4 as often as may beprescribed by the court or the judge Thetime appointed for the election of anassignee shall not be less than two, normore than eight, weeks from the date of

the order of adjudication. Upon thegranting of said order all civil proceedingspending against said insolvent shall bestayed. When a receiver is appointed, oran assignee chosen, as provided in thisAct, the sheriff shall thereupon deliver tosuch receiver or assignee chosen, asprovided in this Act, the sheriff shallthereupon deliver to such receiver orassignee, as the case may be, all theproperty, assets, and belongings of theinsolvent which have come into hispossession, and he shall be allowed andpaid as compensation for his services thesame expenses and fees as would by law

be collectible if the property had beenlevied upon and safely kept underattachment.SECTION 19. Publication of order. Acopy of said order shall immediately bepublished 5 by the clerk of said court, inthe newspaper designated therein, forthe number of times and as prescribed bythe court or the judge thereof, and a copyof said order shall be delivered personallyor sent by the clerk forthwith by

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registered mail, postage prepaid, to allcreditors named in the schedule. Thereshall be deposited, in addition to twenty-four pesos, which shall be received by theclerk on commencing such proceedings, asum of money sufficient to defray theexpense of the publication ordered by thecourt, necessary postage, and tencentavos for each copy, to be deliveredpersonally or mailed to the creditors,which last-named sum is herebyconstituted the legal fee of the clerk forthe personal delivery or mailing requiredby this section.

InvoluntaryInsolvency

SECTION 20. Petition; Acts of insolvency. An adjudication ofinsolvency may be made on the petitionof three or more creditors, residents ofthe Philippine Islands whose credits ordemands accrued in the Philippines, and

the amount of which credits or demandsare in the aggregate not less than onethousand pesos: Provided, That none ofsaid creditors has become a creditor byassignments, however made, within thirtydays prior to the filing of said petition.Such petition must be filed in the Court ofFirst Instance of the province or city inwhich the debtor resides or has hisprincipal place of business, and must beverified by at least three of thepetitioners. The following shall beconsidered acts of insolvency, and thepetition for insolvency shall set forth oneor more of insolvency such acts: (1) Thatsuch person is about to depart or hasdeparted from the Philippine Islands, withintent to defraud his creditors; (2) thatbeing absent from the Philippine Islands,with intent to defraud his creditors, heremains absent; (3) that he concealshimself to avoid the service of legalprocess for purpose of hindering ordelaying or defrauding his creditors; (4)that he conceals, or is removing, any ofhis property to avoid its being attached ortaken on legal process; (5) that he hassuffered his property to remain underattachment or legal process for three

days for the purpose of hindering ordelaying or defrauding his creditors; (6)that he has confessed or offered to allow judgment in favor of any creditor orclaimant for the purpose of hindering ordelaying or defrauding any creditor orclaimant; (7) that he has willfully suffered judgment to be taken against him bydefault for the purpose of hindering ordelaying or defrauding his creditors; (8)that he has suffered or procured hisproperty to be taken on legal processwith intent to give a preference to one ormore of his creditors and thereby hinder,delay, or defraud any one of his creditors;

(9) that he has made any assignment,gift, sale, conveyance, or transfer of hisestate, property, rights, or credits withintent to delay, defraud, or hinder hiscreditors; (10) that he has, incontemplation of insolvency, made anypayment, gift, grant, sale conveyance, ortransfer of his estate, property, rights, orcredits; (11) that being a merchant ortradesman he has generally defaulted inthe payment of his current obligations for

a period of thirty days; (12) that for aperiod of thirty days he has failed, afterdemand, to pay any moneys depositedwith him or received by him in a fiduciarycapacity; and (13) that an executionhaving been issued against him on finaljudgment for money, he shall have beenfound to be without sufficient propertysubject to execution to satisfy thejudgment. The petitioners may, from timeto time, by leave of the court, amend andor amendments to relate back to and bereceived as embraced in the originalpetition. The said petition shall beaccompanied by a bond, 6 approved bythe court, with at least two sureties, insuch penal sum as the court shall direct,conditioned that if the petition ininsolvency be dismissed by the court, orwithdrawn by the petitioner, or if thedebtor shall not be declared an insolvent,the petitioners will pay to the debtoralleged in the petition to be insolvent all

costs, expenses, and damagesoccasioned by the proceedings dent, thein insolvency, together with a reasonablecounsel fee to be fixed by the court. Thecourt may, upon motion, direct the filingof an additional bond, with differentsureties, when deemed necessary.

a. Voluntary and Involuntary Insolvency distinguished.

(1) Voluntary insolvency is initiatedby the debtor whose debts exceed One Thousand Pesos ( P 1,000) which cannot besettled with his existing assets. The debtor shallannex to his petition a schedule of hisobligations and an inventory of his assets.

A creditor whose name isomitted in the schedule and who thus fails toparticipate in the proceedings in unaffected bythe adjudication of insolvency (see MindanaoMotor Line, Inc. vs. Alforque, 57 SCRA 98).

(2) In voluntary insolvency isinitiated by at least three (3) creditors whoseaggregate credit is not less than One ThousandPesos (P1, 000.00). The petitioning creditorsmust be residents whose credits accrued in thePhilippines and none is a creditor by assignment

within thirty (30) days prior to the petition. (thenumber and other particulars required ofcreditors are immaterial in suspension ofpayments and voluntary insolvency.) The debtormust be guilty of, in synthesis, any of thefollowing acts of insolvency:

a. Absconding orattempting to abscond orabsenting himself in fraud ofcreditors;b. Concealing orremoving his property to avoidattachment or suffering hisproperty to avoid attachment or

suffering his property to remainunder attachment for 30 days todefraud his creditors;c. Conveying ortransferring property in fraud ofcreditors;d. Preferring one orsome creditors in fraud of theothers; ande. Defaulting as afiduciary, merchant or trader for

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30 days ; or as a judgment debtor(See Sec. 20, Act 1956)

An involuntary petition for the

adjudication of insolvency of a debtor wouldrequire the existence of an act of insolvency onthe part of the latter. The mere fact that adebtor, engaged in business, sells some of hisproperties would not be enough; the sale couldbe prompted by the need to replace obsoleteequipment or to raise liquid cash in furtheranceof his business venture (Jaca vs. Davao Lumber,113 SCRA 17).

In involuntary, unlike in voluntary,insolvency, incapacitated persons may not bedeclared insolvents against the opposition of theparents or guardians. Being incapacitated, theywould be incapable of committing acts ofinsolvency, which is pre-requisite to a petition forinvoluntary insolvency (at least one of whichmust be set forth in the petition; see Section 20,Act 1956), except in the case of an instance,

where an act of insolvency was committed byhim prior to his incapacity. In this case,however, he must be represented by a guardian.

Distinctions between suspension of paymentsand insolvency.

The distinctions are the following:

(1) In the former, the purpose is tosuspend or delay the payment of debts, while inthe latter, to discharge the debtor form thepayment of debts;

(2) In the former, the debtors hassufficient property to pay his debts, while in thelatter, the debtor does not have sufficientproperty to pay all his debts;

(3) In the former, the amount ofindebtedness is not affected, while in the latter,the creditors receive less than their credits, andin case preferences are proper, some creditors,may not receive any amount at all; and

(4) In the former, the number ofcreditors is immaterial while in the case ofinvoluntary insolvency, three or more creditorsare required.

Steps in voluntary insolvency

The following steps constitute theproceedings for voluntary insolvency:

1. Filing of the petition by the debtorpraying for the declaration ofinsolvency (Sec. 14);

2. Issuance of an order of adjudicationdeclaring the petitioner insolvent;

3. Publication and service of the order(Sec. 19.);

4. Meeting of the creditors to elect theassignee in insolvency (Sec. 30.);

5. Conveyance of the debtorsproperty by the clerk of court to theassignee (Sec. 32.);

6. Liquidation of the debtors assetsand payment of his debts (Sec.33.);

7. Composition, if agreed upon (Sec.63.);

8. Discharge of the debtor on hisapplication (Sec. 64.), except acorporation (Sec. 52.);

9. Objection, if any, to the discharge(Sec. 66.); and

10. Appeal to the Supreme Court incertain cases. (Sec. 62.).

Requisites of petition for voluntary insolvency.

The petition, which must be verified(Sec. 17.), is to be filed by:

1. An insolvent debtor,2. Owing debts exceeding in amount

the sum of P1,000.00.3. In the court of First Instance* of the

province or city in which he hasresided for six months nextpreceding the filing of such petition,and

4. Setting forth in his petition thefollowing:

a. His place of residence;b. The period of his residence

therein immediately prior to

filing said petition;c. His inability to pay all his debts

in full;d. His willingness to surrender all

his property, estate, and effectsnot exempt from execution forthe benefit of his creditors; and

e. An application to be adjudged aninsolvent. (Sec. 14.)

Documents to accompany the petition.

They are the following:

1. A verified schedule which mustcontain

a. A full and true statement of alldebts and liabilities of insolventdebtor, and

b. An outline of the facts giving riseor which might give rise to acourse of action against suchinsolvent debtor Sec. 15.); and

2. A verified inventory which mustcontain

a. An accurate description of the allthe personal and real property ofthe insolvent exempt or not from

execution including a statementas to its value, location andencumbrances thereon. And

b. An outline of the facts giving riseor which might give rise to aright of action in favor of theinsolvent debt or. (Sec. 16.)

Effects of court order declaring debtor insolvent.

Upon the filing of the petition, the court,as a matter of course, shall issue an orderdeclaring the petitioning debtor insolvent. (Sec.18.) The effects of such order are the following:

1. All the assets of the debtor notexempt from execution are takenpossession of by the sheriff untilthe appointment of the receiver orassignee (ibid.);

2. The payment to the debtor of anydebts due to him and the deliveryto the debtor or to any person forhim of any property belonging tohim and the transfer of any

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property by him are forbidden(ibid);

3. All civil proceeding pending againstthe insolvent debtor shall be stayed(ibid) upon due application of thedebtor (Gabatan vs. Fernandez,[C.A.] L-3896); and

4. Mortgages or pledges, attachmentsor execution on property of thedebtor duly recorded and notdissolved are not, however,affected by the order. (Sec 59.)

INVOLUNTARY INSOLVENCY

Nature of involuntary insolvency proceedings.

An involuntary insolvency is not a merepersonal action against the insolvent for thecollection of debts; but its purpose is to impoundall of his non-exempt property, to distribute itequitably among his creditors, and to releasehim from further liability. It is accordingly a

proceeding in rem as well as in personam. (Sec.46) It is in rem in the sense that it determinesthe status of the insolvent.

Who may petition for involuntary insolvency.

Persons, who may validly petition forinvoluntary insolvency, must possess two things,namely;

(1) They have the qualifications requiredby the Insolvency law; and

(2) Their credits must be thosecontemplated by the Insolvency Law.

Steps in Involuntary insolvency.

The following steps constitute theproceedings for involuntary insolvency:

(1) Filing of the petition by three (3) ormore creditors (Sec. 20);

(2) Issuance of order requiring thedebtor to show cause why he shouldnot be adjudged insolvent (Se. 21);

(3) Service of order to show cause (sec.22)

(4) Filing of answer or motion to dismiss(sec. 23)

(5) Hearing of the case (sec. 24)(6) Issuance of order or decisionadjudging debtor insolvency (ibid)

(7) Meeting of creditors for election ofan assignee in insolvency;

(8) Conveyance of debtors property byclerk of court to the assignee (Sec.32);

(9) Liquidation of assets and paymentof debts (Sec. 33)

(10) Composition, if agreed upon (Sec.63)

(11) Discharge of the debtor or hisapplication (Sec. 64) except acorporation (Sec. 52);

(12) Objection, if any, to the discharge(Sec. 66) and

(13) Appeal to the Supreme Court incertain cases (Sec. 62)

Requisites pf petition for involuntary insolvency.

The petition is to be filed by:

(1) Three or more creditors.

(2) None of whom has becomesuch creditor by assignment,within 30 days prior to the filingof the petition;

(3) Residents of the Philippines;(4) Whose credits accrued in the

Philippines,(5) The total amount of which

credits is not less than P1,000.00 and

(6) In the Regional Trial Court ofthe province or city in which thedebtor resides or has hisprincipal place of business.

(7) Must be verified by at leastthree (3) of the petitioningcreditors,

(8) Must set forth one or more actsof insolvency mentioned in thelaw, and

(9) Must be accompanied by abond, approved by the Courtwith at least two sureties, in

such penal sum as the courtshall direct. (Sec. 20)

Acts of insolvency

In voluntary insolvency, the filing of apetition for voluntary insolvency is an act ofinsolvency. (Sec. 14.)

In involuntary insolvency, the followingare considered acts of insolvency:

(1) Intention to depart or departurefrom the Philippines to defraudcreditors;

(2) Absence from the Philippines todefraud creditors;

(3) Concealment of debtor to avoidlegal process;

(4) Concealment or removal of hisproperty to avoid legal process;

(5) Allowing his property to be attachedfor three (3) days in fraud creditors;

(6) Confession of judgment in favor ofany creditor to defraud othercreditors;

(7) Allowing default judgment in favorof a creditor to defraud othercreditors;

(8) Allowing his property to be takenunder legal process in preference ofa particular creditor to defraudother creditors;

(9) Making conveyance, assignment ortransfer of his property to defraudhis creditors;

(10) Making conveyance, assignment ortransfer of his property incontemplation of insolvency;

(11) Default of a merchant or tradesmanto pay his current obligations for aperiod of thirty (30) days;

(12) Failure to pay money on deposit orreceived in a fiduciary capacity for a

period of thirty (30) days afterdemand; and

(13) Insufficiency of property to satisfyan execution issued against him.(Sec. 20.)

Any debtor who commits an act ofinsolvency may be adjudged insolvent.

Adjudication of insolvency.

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If the respondent debtor shall make adefault, or it, after trial, the issues are found infavor of the petitioning creditors, the court shallmake an order adjudging that said respondent isand was, at the time of the filing of the petition,an insolvent debtor and that the debtor wasguilty of the acts and things charged in thepetition or such of them as the court may find tobe true. (Sec. 24.)

The date of adjudication of insolvencyretroacts to the date of the filing of the petitionfor insolvency.

Distinctions between voluntary insolvency andinvoluntary insolvency.


1. In the former, one creditor issufficient, while in the latter, three ormore creditors are required;

2. In the former, it is filed by the

insolvent debtor, while in the latter,it is filed by three or more creditorswho possess the qualificationsrequired by the law;

3. In the former, the debtor must notbe guilty of any of the acts ofinsolvency enumerated in Section20, while in the latter, the debtormust have committed one or more ofsuch acts of insolvency;

4. In the former, the amount of indebtedness must exceedP1,000.00 while in the latter, it mustnot be less than P1,000.00;

5. In the former, a bond is not required,while in the latter, the petition mustbe accompanied by a bond;

6. In the former, an order of adjudication of insolvency may begranted ex-parte, while in the latter,it is granted only after hearing; and

7. In the former, the petition is filed inthe Court of First Instance* ( nowRegional Trial Court) of the provinceor city in which the debtor hasresided for six months, while in thelatter, the length or residence isimmaterial.

Injunctions.

The adjudication or declaration ofinsolvency by the court, after hearing or defaultshall have the following effects:

1. Forbid the payment to the debtor ofany debt sue to him and the deliveryto him of any property belonging tohim;

2. Forbid the transfer of any propertyby him; and

3. stay of all pending civil proceedingsagainst the insolvent (secs. 18 and24, Act 1956)

SECTION 18. Order of court

declaring petitioner insolvent;Publication notice. Uponreceiving and filing said petition,schedule, and inventory, the court,or the judge thereof in vacation,shall make an order declaring thepetitioner insolvent, and directingthe sheriff of the province or city inwhich the petition is filed to takepossession of, and safely keep, untilthe appointment of a receiver or

assignee, all the deeds, vouchers,books of account, papers, notes,bonds, bills, and securities of thedebtor, and all his real and personalproperty, estate, and effects,except such as may be by lawexempt from execution. 3 Saidorder shall further forbid thepayment to the debtor of any debtsdue to him and the delivery to thedebtor, or to any person for him,and the transfer of any property byhim, and shall further appoint atime and place for a meeting of thecreditors to choose an assignee ofthe estate. Said order shalldesignate a newspaper of generalcirculation published in theprovince or city in which thepetition is filed, if there be one, andif there be none, in a newspaperwhich, in the opinion of the judge,will best give notice to the creditors

of the said insolvent, and in thenewspaper so designated saidorder shall be published 4 as oftenas may be prescribed by the courtor the judge The time appointed forthe election of an assignee shall notbe less than two, nor more thaneight, weeks from the date of theorder of adjudication. Upon thegranting of said order all civilproceedings pending against saidinsolvent shall be stayed. When areceiver is appointed, or anassignee chosen, as provided in thisAct, the sheriff shall thereupondeliver to such receiver or assigneechosen, as provided in this Act, thesheriff shall thereupon deliver tosuch receiver or assignee, as thecase may be, all the property,assets, and belongings of theinsolvent which have come into hispossession, and he shall be allowedand paid as compensation for hisservices the same expenses andfees as would by law be collectibleif the property had been leviedupon and safely kept underattachment.

SECTION 24. Default; Paymentsto debtor. If the respondent shallmake default, or if, after trial, theissues are found in favor of thepetitioners, the court shall make anorder adjudging that saidrespondent is and was, at the timeof filing the petition, an insolventdebtor and that the debtor wasguilty of the acts and thingscharged in the petition, or such ofthem as the court may find to betrue; and shall require said debtor,within such time as the court maydesignate, not to exceed three

days, to file in court the scheduleand inventory provided for insections fifteen and sixteen of thisAct, duly verified as required of apetitioning debtor: 10 Provided, That in the affidavit of theinsolvent, touching his property andits disposition, he shall not berequired to swear that he has notmade any fraudulent preference orcommitted any other act in conflict

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with the provisions of this Act; buthe may do so if he desires. Saidorder shall further direct the sheriffof the province or city where theinsolvency petition is filed, or thereceiver, if one has beentheretofore appointed, to takepossession of and safely keep, untilthe appointment of an assignee, allthe deeds, vouchers, books ofaccount, papers, notes, bills, bondsand securities of the debtor, and allhis real and personal property,estate and effects, except such asmay be by law exempt fromexecution. 11 Said order shallfurther forbid the payment to thedebtor of any debts due to him, andthe delivery to the debtor, or to anyperson for him, of any propertybelonging to him, and the transferof any property by him, and shallfurther appoint a time and place for

a meeting of the creditors tochoose an assignee of the estate.Said order shall designate anewspaper of general circulationpublished in the province or city inwhich the petition is filed, if therebe one, and if there be none, in anewspaper which, in the opinion ofthe judge, will best give notice tothe creditors of the said insolvent,and in the newspaper sodesignated said order shall bepublished 12 as often as may beprescribed by the court or the judgethereof. The time appointed for theelection of an assignee shall not beless than two nor more than eightweeks from the date of the order ofadjudication. Upon the granting ofsaid order, all civil proceedingspending against the said insolventshall be stayed. When an assigneeis chosen as provided in this Act,the sheriff or receiver, if there beone, shall thereupon deliver to suchassignee all the property, estate,and belongings of the insolvent,which have come into hispossession, and he shall be allowed

and paid as compensation for hisservices the same expenses andfees as would by law be collectibleif the property had been leviedupon and safely kept underattachment.

More specifically, in respect to civil suitsagainst the insolvents, the following rules wouldgoverns

(1) As to unsecured credits or claims( unsecured under Arts. 2241-2242, Civil Code)

(a) Cases already pending prior to the

insolvency proceedings shall bestayed, except for purposes ofdetermining the amount of thecredit or claim, until an assignee isdesignated, and no execution canissue while the insolvencyproceedings are in progress(OBrien vs Del Rosario, 49 Phils.657); instead, the demand must bemade with the insolvency court. The final judgment on such cases

filed before the insolvencyproceedings are preferred creditunder Article 2244 of the Civil Code(Central Bank v. Morfe, 63 SCRA114).

(b) No action may be instituted duringthe insolvency proceedings, andany such suit either against theinsolvency or the assignee shouldbe dismissed; instead, the demandmust be made before insolvencycourt (De Amuzategui v. Macleod,33 Phil. 80)

(2) As to secure credits or claims underArticles 2241-3342, Civil Code)

(a) Cases already pending prior tothe insolvency proceedings shallbe suspended until the electionor appointment of an assignee inorder to permit him to properlytake charge of the pending case;

thereafter, the court in said casemay proceed and render finaljudgment.

(b) Foreclosure suits mayindependently be institutedduring the insolvencyproceedings, but leave of theinsolvency court must beobtained so as to ensure theproper representation of theinsolvents estate.

ASSIGNEES

SECTION 31. Appointment of assignee by court. If, on the dayappointed for the meeting,creditors do not attend, or fail orrefuse to elect an assignee, or if,after election, the assignee shall failto qualify within the proper time, orif a vacancy occurs by death orotherwise, the court shall appointan assignee and fix the amount ofhis bond.SECTION 32. Transfer of propertyto assignee. As soon as anassignee is elected or appointedand qualified, the clerk of the court

shall, by an instrument under hishand and seal of the court, assignand convey to the assignee all thereal and personal property, estate,and effects of the debtor with all hisdeeds, books, and papers relatingthereto, and such assignment shallrelate back to the commencementof the proceedings in insolvency,and shall relate back to the actsupon which the adjudication wasfounded, and by operation of lawshall vest the title to all suchproperty, estate, and effects in theassignee, although the same is

then attached on mesne process,as the property of the debtor. Suchassignment shall operate to vest inthe assignee all of the estate of theinsolvent debtor not exempt by lawfrom execution. 17 It shall alsodissolve any attachment leviedwithin one month next precedingthe commencement of theinsolvency proceedings and vacateand set aside any judgment

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entered in any action commencedwithin thirty days immediately priorto the commencement of insolvency proceedings and shallvacate and set aside any executionissued thereon and shall vacate andset aside any judgment entered bydefault or consent of the debtorwithin thirty days immediately priorto the commencement of theinsolvency proceedings.SECTION 33. Recovery andaction of assignee. The assigneeshall have the right to recover allthe state debts, and effects of saidinsolvent. If, at the time of thecommencement of proceedings ininsolvency, an action is pending inthe name of the debtor, for therecovery of a debtor other thingwhich might or ought to pass to theassignee by the assignment, theassignee shall be allowed and

admitted to prosecute the action, inlike manner and with like effect asif it had been originally commencedby him. If there are any rights ofaction in favor of the insolvent fordamages, on any account, for whichan action is not pending, theassignee shall have the right toprosecute the same with the sameeffect as the insolvent might havedone himself if no proceedings ininsolvency had been instituted. Ifany action or proceeding in whichthe insolvent is defendant ispending at the time of theadjudication, the assignee maydefend the same in the samemanner and with like effect as itmight have been defended by theinsolvent. In a suit prosecuted ordefended by the assignee, acertified copy of the assignmentmade to him shall be conclusiveevidence of his authority to sue ordefend.SECTION 34. Registration of assignment to assignee. Theassignee shall, within one monthafter the making of the assignment

to him, cause the same to berecorded in every province or citywithin the Philippine Islands whereany real estate owned by thedebtor is situated, and the record ofsuch assignment, or a duly certifiedcopy thereof, shall be conclusiveevidence thereof in all courts. If theschedule and inventory required bythis Act have not been filed by thedebtor the assignee shall, withinone month after his election,prepare and file such schedule andinventory from the best informationhe can obtain, and shall thereupon

personally deliver notice or sendsame by registered mail, postageprepaid, to all creditors named insuch schedule, whose claims havenot been filed, to forthwith provetheir demands.SECTION 35. Resignation of assignee. Any assignee may atany time, by writing filed in court,resign his appointment, having firstsettled his accounts and delivered

up all the deeds, vouchers, books ofaccount, notes, bills, bonds, andsecurities of the debtor and all hisreal and personal property, estate,and effects to such successor asthe court shall appoint: Provided, That if, in the discretion of thecourt, the circumstances of thecase require it, upon good causebeing shown, the court may, at anytime before such settlement ofaccount and delivery of the estateshall have been completed, revokethe appointment of such assigneeand appoint another in his stead. The liability of the outgoingassignee, or of the sureties on hisbond, shall not be in any mannerdischarged, released, or affected bysuch appointment of another in hisstead.SECTION 36. The saidassignee shall have power:

1. To sue and recover all theestate, assets, debts, and claims,belonging to or due to such debtor;and no set-off or counterclaim shallbe allowed in any such for debtscontracted by the insolvent withinthirty days immediately precedingthe filing of the petition ofinsolvency except in case ofcreditors specified in section fifty ofthis Act.2. To take in to his possessionall the estate of such debtor exceptproperty exempt by law fromexecution, 18 whether attached ordelivered to him, or afterwardsdiscovered, and all books,vouchers, evidence of indebtedness, and securitiesbelonging to the same.3. In case of a nonresident orabsconding or concealed debtor, todemand and receive of everysheriff who shall have attached anyof the property of such debtor, orwho shall have in his possessionany moneys arising from the sale ofsuch property, all such propertyand moneys, on paying him his

lawful costs and charges forattaching and keeping the same.4. From time to time to sell atpublic auction after advertisementin the manner provided bysubsections (1), (2), and (3) ofsection four hundred and fifty-fourof the Code of Civil Procedure, 19upon order of the court, any of theestate, real and personal, which hascome into his possession, andwhich is vested in him as suchassignee, and on such sales toexecute the necessaryconveyances and bills of sale.

5. To redeem all validmortgages and conditionalcontracts, and all valid pledges ofpersonal property, and to satisfyany judgments which may be anincumbrance on any property soldby him; or to sell such property,subject to such mortgage,contracts, pledges, judgments, orliens.

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6. To settle all mattersand accounts between suchdebtor and his creditorssubject to the approval of thecourt.7. Under the order of the courtor judge appointing him, tocompound with any personindebted to such debtor, andthereupon discharge all demandsagainst such person.8. To recover from any personreceiving a conveyance, gifttransfer, payment, or assignment,made contrary to any provision ofthis Act, the property therebytransferred or assigned; or in case aredelivery of the property can notbe had, to recover the value thereofwith damages for the detention.

Assignee in insolvency defined.

The assignee is the person elected bythe creditors or appointed by the court to whoman insolvent debtor makes an assignment for thebenefit of his creditors.

Nature of office of assignee.

The assignee represents the insolvent aswell as the creditors in voluntary and involuntaryproceedings. (Chartered Bank vs. Imperial, 48Phil. 931; Asia Banking Corporation vs. Herridge,45 Phil. 527)

Creditors not entitled to vote in the election ofassignee


1. Those who did not file their claims atleast two days prior to the timeappointed for such election (Sec.29.);

2. Those whose claims are barred bythe statute of limitations (ibid);

3. Secured creditors unless theysurrender their security or lien to thesheriff or receiver or unless theyshall first have the value of suchsecurity fixed (see Sec. 59.); and

4. Holders of claims for unliquidateddamages arising out or pure tort.(Schall vs. Comors, 215 U.S. 239. - )

Effects of assignment

They are as follows:

1. The assignee takes the property inthe plight and conditions that theinsolvent held it (Giberson vs.Jureidini Bros. 44 Phil. 216.);

2. All actions to recover all the estate,debts and effects of the insolventshall be brought by the assignee andnot by the creditors (Sec. 33.) and

3. The assignment shall

a. Dissolve any attachmentlevied within one month nextpreceding thecommencement of insolvency proceeding;

b. Vacate and set aside any judgment entered in anyaction commenced within 30

days immediately prior tothe commencement ofinsolvency proceedings;

c. Vacate and set aside anyexecution issued thereon;and

d. Vacate and set aside anyjudgment entered by defaultor consent of the debtorwithin 30 days prior to thecommencement of insolvency proceedings.(Sec. 32)

Properties of the insolvent that pass to theassignee:

a. All real and personal property, estateand effects of the debtor includingall deeds, books and papers inrelation thereto (Sec. 32)

b. Properties fraudulently conveyed(secs. 33, 36)

c. Right for action for damages to realproperty; and

d. The undivided share or interest ofthe insolvent debtor in property heldunder co-ownership (Arts. 2239, CivilCode)

Properties of the insolvent that do not pass tothe assignee.

a. Property exempt from execution(Sec. 32);

b. Property held in trust (Art 2240, CivilCode);

c. Property of the conjugal partnershipor absolute community as long assaid partnership or community existsexcept insofar as the insolventdebtors obligations have redoundedto the benefit of the former ( Art.2238, Civil Code); and

d. Property over which a mortgage orpledge exists unless the creditorsurrenders his security or lien (Sec.59)

Powers of the assignee

The assignee in insolvency shall have

the power:

(1) To sue and recover all the estate,debts and claims belonging to ordue to the debtor;

(2) To take into his possession all theestate of the debtor exceptproperty exempt from execution;

(3) In case of a non-resident orabsconding or concealed debtor, todemand and receive every sheriffall the property and moneys in hispossession belonging to thedebtor;

(4) To sell, upon order of the court,

any estate of the debtor which hascome into his possession;

(5) To redeem all mortgages andpledges and to satisf6y any judgment which may be anencumbrance on any property soldby him;

(6) To settle all accounts between thedebtor and his debtors, subject tothe approval of the court;

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(7) To compound, under the order ofthe court, with any personindebted to such debtor; and

(8) To recover any propertyfraudulently conveyed by thedebtor. (Sec. 36)

Duties of the assignee.

(1) To register the assignment to himof the real estate of the debtor(sec. 34);

(2) To file the schedule and inventoryof the property of the debtor (ibid);

(3) To convert, as speedily as possible,the estate, real and personal, intomoney (Sec. 39);

(4) To keep a regular account of allmoneys received by him asassignee (ibid);

(5) To petition the court to allow theprivate sale of the debtorsproperty if it appears that it is for

the best interest of the estate(ibid);

(6) To file a just and true accounts ofall receipts and payments (Sec.43);

(7) To file accounts upon order of thecourt on motion of two or morecreditors (Sec. 44);

(8) To distribute such dividends as hemay be required (ibid); and

(9) To file his final account within oneyear from the date of order ofadjudication.

Dividend in insolvency defined.

A dividend in insolvency is a parcel ofthe fund arising from the assets of the estate,rightfully allotted to a creditor entitled to sharein the fund, whether in the same proportion withother creditors or in a different proportion. ( Inre Baerber 97 ed, 547). It is Paid by theassignee only upon order of the Court (see Secs.43,44)

Effect of debts subsequently proved on right todividends.

Whenever any dividend ahs been dulydeclared, the distribution of it shall not be stayedor affected by reason of debts beingsubsequently proved, but any creditor provingsuch a debt shall be entitled to a dividend equalto those already received by the other creditorsbefore any further dividend is made to the latter,if the failure to prove such claim shall not beresulted from his own neglect. (Sec. 45)

CLASSIFICATION AND PREFERENCE OFCREDITORS

Classification and Preference of Credits underthe Insolvency Law

SECTION 48. Property not belonging toinsolvent; Dowry; Paraphernal property. Merchandise, effects, and any other kind ofproperty found among the property of theinsolvent, the ownership of which has notbeen conveyed to him by a legal andirrevocable title, shall be considered to bethe property of other persons and shall beplaced at the disposal of its lawful ownerson order of the court made at the hearing

mentioned in section forty-three or at anyordinary hearing, if the assignee or anycreditor whose right in the estate of theinsolvent has been established shallpetition in writing for such hearing and thecourt in its discretion shall so order, thecreditors, however, retaining such rights insaid property as belong to the insolvent,and subrogating him whenever they shallhave complied with all obligationsconcerning said property.

The following shall be includedin this section:1. Dowry property 21 inestimadoand such property estimado which mayremain in the possession of thehusband where the receipt thereof is amatter of record in a public instrumentregistered under the provisions ofsections twenty-one and twenty-sevenof the Code of Commerce in force.2. Paraphernal property which thewife may have acquired by inheritance,

legacy, or donation whether remainingin the form in which it was received orsubrogated or invested in otherproperty, provided that suchinvestment or subrogation has beenregistered in the registro mercantile inaccordance with the provisions of thesections of the Code of Commercementioned in the next precedingparagraph.3. Property and effects depositedwith the bankrupt, or administered,leased, rented, or held in usufruct byhim.4. Merchandise in the possession ofthe bankrupt, on commission, forpurchase, sale, forwarding, or delivery.5. Bills of exchange or promissorynotes without indorsement or otherexpression transferring ownershipremitted to the insolvent for collection6. Money remitted to the insolvent,otherwise than on current account, andwhich is in his possession for delivery toa definite person in the name and forthe account of the remitter or for thesettlement of claims which are to bemet at the insolvents domicile.7. Amounts due the insolvent for

sales of merchandise on commission,and bills of exchange and promissorynotes derived therefrom in hispossession, even when the same arenot made payable to the owner of themerchandise sold, provided it is proventhat for the obligation to the insolventis derived therefrom and that said billsof exchange and promissory notes werein the possession of the insolvent foraccount of the owner of themerchandise to be cashed andremitted, in due time, to the saidowner; all of which shall be a legalpresumption when the amount involved

in any such sale shall not have beencredited on the books of both the ownerof the merchandise and of theinsolvent.8. Merchandise bought on credit bythe insolvent so long as the actualdelivery thereof has not been made tohim at his store or at any other placestipulated for such delivery, andmerchandise the bills of lading orshipping receipts of which have been

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sent him after the same has beenloaded by order of the purchaser andfor his account and risk.In all cases arising under this paragraphassignees may retain the merchandiseso purchased or claim it for thecreditors by paying the price thereof tothe vendor.9. Goods or chattels wrongfullytaken, converted, or withheld by theinsolvent if still existing in hispossession or the amount of the valuethereof.SECTION 49. Creditors sharing prorata. All creditors, except thosewhose claims are mentioned in thenext following section, whose debts areduly proved and allowed shall beentitled to share in the property andestate pro rata, after the propertybelonging to other persons referred toin the last in preceding section hasbeen deducted therefrom, without

priority or preference whatever:Provided, That any debt proved by anyperson liable as bail, surety, guarantor,or otherwise, for the debtor, shall notbe paid to the person so proving thesame until satisfactory evidence shallbe produced of the payment of suchdebt by such person so liable, and theshare to which such debt would beentitled may be paid into court, orotherwise held, for the benefit of theparty entitled thereto, as the court maydirect.

SECTION 50. The following arethe preferred claims whichshall be paid in the ordernamed:(a) Necessary funeral expenses ofthe debtor, or of his wife, or childrenwho are under their parental authorityand have no property of their own,when approved by the court;(b) Debts due for personal servicesrendered the insolvent by employees,laborers, or domestic servantsimmediately preceding thecommencement of proceedings ininsolvency;

(c) Compensation due the laborersor their dependents under theprovisions of Act Numbered Thirty-fourhundred and twenty-eight, known asthe Workmen's Compensation Act, 22as amended by Act Numbered Thirty-eight hundred and twelve, and underthe provisions of Act NumberedEighteen hundred and seventy-four,known as the Employees' Liability Act23 and of other laws providing forpayment of indemnity for damages incases of labor accidents;(d) Legal expenses, and expensesincurred in the administration of the

insolvent's estate for the commoninterest of the creditors, when properlyauthorized and approved by the court;(e) Debts, taxes, and assessmentsdue the Insular Government; 24(f) Debts, taxes, and assessmentsdue to any province or provinces of thePhilippine Islands;(g) Debts, taxes, and assessmentsdue to any municipality or municipalities of the Philippine Islands;

All other creditors shall be paidpro rata.

Classification of Creditsunder the Civil Code.

ARTICLE 2241. With reference to specificmovable property of the debtor, thefollowing claims or liens shall be preferred:(1) Duties, taxes and fees due thereon to

the State or any subdivision thereof;(2) Claims arising from misappropriation,

breach of trust, or malfeasance bypublic officials committed in theperformance of their duties, on themovables, money or securitiesobtained by them;

(3) Claims for the unpaid price ofmovables sold, on said movables, solong as they are in the possession ofthe debtor, up to the value of thesame; and if the movable has beenresold by the debtor and the price is

still unpaid, the lien may be enforcedon the price; this right is not lost bythe immobilization of the thing bydestination, provided it has not lostits form, substance and identity;neither is the right lost by the sale ofthe thing together with other propertyfor a lump sum, when the pricethereof can be determinedproportionally;

(4) Credits guaranteed with a pledge solong as the things pledged are in thehands of the creditor, or thoseguaranteed by a chattel mortgage,upon the things pledged ormortgaged, up to the value thereof;

(5) Credits for the making, repair,safekeeping or preservation ofpersonal property, on the movablethus made, repaired, kept orpossessed;

(6) Claims for laborers' wages, on thegoods manufactured or the workdone;

(7) For expenses of salvage, upon thegoods salvaged;

(8) Credits between the landlord and thetenant, arising from the contract oftenancy on shares, on the share of

each in the fruits or harvest;(9) Credits for transportation, upon thegoods carried, for the price of thecontract and incidental expenses,until their delivery and for thirty daysthereafter;

(10) Credits for lodging and suppliesusually furnished to travellers byhotel keepers, on the movablesbelonging to the guest as long assuch movables are in the hotel, butnot for money loaned to the guests;

(11) Credits for seeds and expenses forcultivation and harvest advanced tothe debtor, upon the fruits harvested;

(12) Credits for rent for one year, upon thepersonal property of the lesseeexisting on the immovable leased andon the fruits of the same, but not onmoney or instruments of credit;

(13) Claims in favor of the depositor if thedepositary has wrongfully sold thething deposited, upon the price of thesale.

In the foregoing cases, if the movables towhich the lien or preference attaches

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have been wrongfully taken, thecreditor may demand them from anypossessor, within thirty days from theunlawful seizure. (1922a)

ARTICLE 2242. With reference to specificimmovable property and real rights ofthe debtor, the following claims,mortgages and liens shall bepreferred, and shall constitute anencumbrance on the immovable orreal right:

(1) Taxes due upon the land or building;(2) For the unpaid price of real property

sold, upon the immovable sold;(3) Claims of laborers, masons,

mechanics and other workmen, aswell as of architects, engineers andcontractors, engaged in theconstruction, reconstruction or repairof buildings, canals or other works,upon said buildings, canals or otherworks;

(4) Claims of furnishers of materials usedin the construction, reconstruction, orrepair of buildings, canals or otherworks, upon said buildings, canals orother works;

(5) Mortgage credits recorded in theRegistry of Property, upon the realestate mortgaged;

(6) Expenses for the preservation orimprovement of real property whenthe law authorizes reimbursement,upon the immovable preserved orimproved;

(7) Credits annotated in the Registry ofProperty, in virtue of a judicial order,by attachments or executions, uponthe property affected, and only as tolater credits;

(8) Claims of co-heirs for warrantyin the partition of animmovable among them, uponthe real property thus divided;

(9) Claims of donors or realproperty for pecuniary chargesor other conditions imposedupon the donee, upon theimmovable donated;

(10) Credits of insurers, upon theproperty insured, for the

insurance premium for twoyears. (1923a)

Meaning of preference.

A preference is what its name implies an exception to the general rule. By it, oneperson is given a superior right or claim overanother. For such reason, the law as topreferences is strictly construed. ( Roman vs.Herridge, 47 Phil. 98)

Case of distribution.

In the distribution of the estate, the

priorities fixed by law govern and the claimswhich are given priority must be paid in full inthe order of their priority, before the generalcreditors receive anything. Creditors claimingpreference must sufficiently establish the claimof preference to entitle their credits to suchpreference.

The following is the order in whichpayment of debts should be made by theassignee:

(1) Equitable claims underSection 48;

(2) Preferred claims withrespect to specific movableproperty and specificimmovable property underArticles 2241 and 2242,respectively of the NewCivil Code;

(3) Preferred claims as tounencumbered property ofthe debtor which shall bepaid in the order namedunder Articles 2242 of thenew Civil Code; and

(4) Common or ordinarycredits which shall be paidpro rata regardless of datesunder Article 2245 of theCivil Code. * see alsoArticle 2241)

With reference to specific movable andimmovable property of the debtor, the taxes due

to the State shall first be satisfied. (see Arts.2242, 2244), ibid)

Equitable claims under the Insolvency Law

Under Section 48, any property foundamong the property of the insolvent, theownership of which has not been conveyed tohim by legal and irrevocable title, shall not beconsidered to be the property of the insolventand shall be placed at the disposal of its lawfulowners, on order of the Court on petition of theassignee or any creditor whose right to theestate of the insolvent has been established.The following shall be included:

(1) Paraphernal propertybelonging to the wife of theinsolvent;

(2) Property held by theinsolvent on deposit,administration, lease orusufruct;

(3) Merchandise held by thedebtor on commission;

(4) Negotiable instruments forcollection or remittance;

(5) Money held by the debtorfor remittance;

(6) Amounts due the insolventfor sales of merchandise oncommission;

(7) Merchandise bought by theinsolvent on credit whereno delivery is made orwhere the right of ownership or possessionhas been retained by theseller ( see Arts. 1478,1503, 1523, 1525, 1526,1527, 1530 Civil Code);and

(8) Goods or chattelswrongfully taken by the

insolvent or the amount ofthe value thereof. (Sec.48).

PARTNERSHIPS AND CORPORATIONS

In petition for suspension of payments(but not petition for insolvency) by corporationsand partnerships, jurisdiction lies exclusivelywith the Courts in accordance with Republic ActNo. 8799.

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5.2. The Commission's jurisdiction over all casesenumerated under Section 5 ofPresidential Decree No. 902-A ishereby transferred to the Courts ofgeneral jurisdiction or theappropriate Regional Trial Court:Provided, That the Supreme Courtin the exercise of its authority maydesignate the Regional Trial Courtbranches that shall exercisejurisdiction over these cases. TheCommission shall retain jurisdiction over pending casesinvolving intra-corporate disputessubmitted for final resolution whichshould be resolved within one (1)year from the enactment of thisCode. The Commission shall retain jurisdiction over pendingsuspension of payments/rehabilitation cases filed

as of 30 June 2000 until finallydisposed.

A. Partnership under Insolvency Law

SECTION 51. Partnerships. Apartnership, during the continuationof the partnership business, or afterits dissolution and before the finalsettlement thereof, may be adjudgedinsolvent, either on the petition of thepartners or any one of them, or onthe petition of three or more creditorsof the partnership, qualified asprovided in section twenty of this Act,in either of which cases the courtshall issue an order in the mannerprovided by this Act, upon which allthe property of the partnership, andalso all the separate property of eachof the partners, if they are liable,shall be taken, excepting such partsthereof as may be exempt by law;and all creditors of the partnership,and the separate creditors of eachpartner, shall be allowed to provetheir respective claims; and theassignee shall be chosen by thecreditors of the partnership, and shall

also keep separate accounts of theproperty of the partnership, and ofthe separate estate of each memberthereof. The expenses of theproceedings shall be paid from thepartnership property and theindividual property of the partners insuch proportions as the court shalldetermine. The net proceeds of thepartnership property shall beappropriated to the payment of thepartnership debts and the netproceeds of the individual estate ofeach partner to the payment of hisindividual debts. Should any surplus

remain of the property of any partnerafter paying his individual debts, suchsurplus shall be added to thepartnership assets and be applied tothe payment of the partnership debts.Should any surplus of the partnershipproperty remain after paying thepartnership debts, such surplus shallbe added to the assets of theindividual partners in the proportionof their respective interests in the

partnership. Certificate of dischargeshall be granted or refused to eachpartner as the same would or oughtto be if the proceedings had been byor against him alone under this Act;and in all other respects theproceedings as to the partners shallbe conducted in like manner as ifthey had been commenced andprosecuted by or against one personalone. If such partners reside indifferent provinces, the court in whichthe petition is first filed shall retainexclusive jurisdiction over the case. Ifthe petition to be filed by less than allthe partners of a partnership thosepartners who do not join in thepetition shall be ordered to showcause why they, as individuals, andsaid partnership, should not beadjudged to be insolvent, in the samemanner as other debtors are requiredto show cause upon a creditor's

petition, as in this Act provided; andno order of adjudication shall bemade in said proceedings until afterthe hearing of said order to showcause.

When partnership may be declared insolvent.

A partnership may be adjudged insolventvoluntary or involuntary, during the continuationof the partnership business or after itsdissolution but before the final settlementthereof.

Who may petition for declaration of insolvency ofa partnership.

(1) In case of voluntary insolvency- Thepetition may be filed by all of thepartners, or any one of them.

(2) In case of involuntary insolvency The petition is filed by one or moreof the partners or three or morecreditors of the partnership. If thepetition be filed by less than all thepartners of the partnership, thosepartners who do not join the petitionshall be ordered to show cause whythey, as individuals and said

partnership, should not be adjudgedto be insolvent in the same manneras other creditors are required toshow cause upon a creditorspetition.

Properties included in the insolvencyproceedings.

Upon order of the Court, the followingproperty shall be taken:

All property of the partnership; andAll the separate property of each of the partnersexcept

Separate properties of limited partners (See Art.1843) andProperties which are exempt by law (sec. 51)

Effects of filing of petition.

(1) When insolvency proceedings areinstituted against or by a partnership,the proceedings are deemed tocommence against the partners at thesame time even if a partner is not

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ordered included in the proceedings untilafter sometime later (Far Eastern suretyvs. Yu Guioc Lo, L-44767);

(2) Upon order of the court, all the propertyof the partnership and also all theseparate property of each partner, ifthey are liable, shall be taken (Sec. 51)

(3) All creditors of the partnership and theseparate creditors of each partner shallbe allowed to prove their respectiveclaims;

(4) The assignee shall be chosen by thecreditors of the partnership; and

(5) Pending the insolvency proceedings byor against any partnership (person orcorporation), no statute of limitationsshall run upon a claim of or against theestate of the debtor (See Sec. 73)

Distribution of the proceeds.

If the partnership is adjudged insolvent,the distribution of the net proceeds shall be as

follows:

(1) The net proceeds of thepartnership property shall beappropriated to the payment ofpartnership debts ( see Art. 1839(8) Civil Code;

(2) The net proceeds of the individualestate of each partner shall beapplied to the payment of hisindividual debts (ibid);

(3) Should any surplus remain of theproperty of any (general) partnerafter paying his individual debts,so much thereof as corresponds tohim as his share in the subsidiaryliability for partnership debts (seeArt. 1816, ibid, under which thesolidary liability of the partner hasbeen abolished) shall be added tothe partnership assets and beapplied to the payment of suchdebts (see Art. 1839 (9), ibid); and

(4) Should any surplus of thepartnership property remain afterpaying the partnership debts, suchsurplus shall be added to theassets of the individual partners inthe proportion of their respective

interests in the partnership. (Sec.51; see Arts. 1812, 1839 (2), ibid)

Corporation under Insolvency Law

SECTION 52. Corporations andsociedades anonimas; Banking. Theprovisions of this Act shall apply tocorporations and sociedades anonimas,and upon the petition of any officer ofany corporation or sociedad anonima,duly authorized by the vote of theboard of directors or trustees, at ameeting specially called for thatpurpose, or by the assent in writing of a

majority of the directors or trustees asthe case may be, or upon a creditor'spetition made and presented in themanner provided in respect to debtors,of the like proceedings shall be had andtaken as are provided in the case ofdebtors: Provided, That in case thearticles of association or by-laws of anycorporation the or sociedad anonimaprovide a method for such proceedings,such method shall be followed. All the

provisions of this Act which apply to thedebtor, or set forth his duties,examination, and liabilities, or prescribepenalties, or relate to fraudulentconveyances, payments, andassignments, apply to each and everyofficer of any corporation or sociedadanonima in relation to the samematters concerning the corporation.Whenever any corporation is declaredinsolvent, its property and assets shallbe distributed to the creditors; due atbut no discharge shall be granted toany corporation. The provisions of thisAct shall not apply to corporationsengaged principally in the bankingbusiness, 26 or to any other corporationas to which there is any specialprovision of law for its liquidation incase of insolvency.

Who may petition for declaration of insolvency ofa corporation.

(1) In case of voluntary insolvency.- Thepetition may be filed by any officer dulyauthorized by the vote of the board of directors rtrustees at a meeting especially called for thatpurpose, or by the assent in writing of a majorityof the directors or trustees, as the case may be(Sec. 52).

(2) In case of involuntary insolvency

(a) First view- Upon a creditorspetition made andpresented in the mannerprovided in respect todebtors (ibid)

(b) Secondview The petition mustbe filed by at least three(3) creditors of thecorporation of thecorporation undercircumstancesmentioned by law (seeSec. 52)

When so adjudged, the property and

assets of the corporation shall be distributed tothe creditors, but no discharge shall be grantedto it.

The declaration of insolvency of banksand insurance companies is governed by speciallaws (see the New Central Bank Act and theInsurance Code.

PROOF OF DEBTS

SECTION 53. Class of debts. All debtsdue and payable from the debtor at thetime of the adjudication of insolvency, andall debts then existing but not payable until

a future time, a discount being made if nointerest is payable by the terms of thecontract, may be proved against againstthe estate of the debtor.SECTION 54. Commercial paper. If thedebtor is bound as indorser, surety, bail, orguarantor, upon any bill, bond, note, orother specialty or contract, or for any debtany person, and his liability shall not havebecome absolute until after theadjudication of insolvency, the creditor may

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prove the same after such liability shallhave become fixed, and before the finaldividend shall have been declared.SECTION 55. Contingent debts. In allcases of contingent debts and contingentliabilities, contracted by the debtor, and notherein otherwise provided for, the creditormay make claim therefor and have hisclaim allowed, with the right to share in thedividends, if the contingency shall happenbefore the order of the final dividend; or hemay, at any time, apply to the court tohave the present value of the debt orliability ascertained and liquidated, whichshall be done in such manner as the courtshall order, and it shall be allowed for theamount so ascertained.SECTION 56. Bail, surety, etc., for thedebtor. Any person liable as bail, surety,or guarantor, or otherwise, for the debtor,who shall have paid the debt, or any partthereof, in discharge of the whole, shall beentitled to prove such debt, or to stand in

the place of the creditor, if he shall haveproved the same, although such paymentsshall have been made after the proceedingsin insolvency were commenced; and anyperson so liable for the debtor, and who hasnot paid the whole of said debt, but is stillliable for the same, or any part thereof,may, if the creditor shall fail or omit toprove such debt, prove the same in thename of the creditor.SECTION 57. Rents and periodicalpayments. Where the debtor is liable topay rent, or other debt falling due at fixedand stated periods, the creditor may prove,for a proportionate part thereof up to thetime of the insolvency, as if the samebecame due from day to day, and not atsuch fixed and stated periods.SECTION 58. Mutual debts and credits. In all cases of mutual debts and mutualcredits between the parties, the accountbetween them shall be stated, and onedebt set off against the other, and thebalance only shall be allowed of a claim inits nature not provable against the estate:Provided, That no set-off or counterclaimshall be allowed in favor of any debtor tothe insolvent of a claim purchased by ortransferred to such debtor within thirty

days immediately preceding the filing, orafter the filing of the petition by or againstthe insolvent.SECTION 59. Mortgages, pledges, liens,etc.; Release or sale by assignee. Whena creditor has a mortgage, or pledge of realor personal property of the

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