VICTORINO-AQUINO v.
PACIFIC PLANS plan holders, based on fifty-percent (50%) of Average School Fee of SY 2005-2006 for every
G.R. No. 193108 December 10, 2014
MARILYN VICTORIO-AQUINO, Petitioner,
vs.
PACIFIC PLANS, INC. and MAMERTO A. MARCELO, JR. (Court-Appointed
Rehabilitation Receiver of Pacific Plans, Inc.), Respondents.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court which seeks to annul and set aside the Decision1 of the Special First Division of the Court
of Appeals (CA), dated February 26, 2010, and its Resolution2 dated July 21, 2010 denying
petitioner's Motion for Reconsideration in the case entitled Marilyn Victoria-Aquino v. Pacific
Plans, Inc. and Mamerto A. Marcelo, Jr., docketed as CA-G.R. SP No. 105237.
Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation or
"APEC")3 is engaged in the business of selling pre-need plans and educational plans, including
traditional open-ended educational plans (PEPTrads). PEPTrads are educational plans where
respondent guarantees to pay the planholder, without regard to the actual cost at the time of
enrolment, the full amount of tuition and other school fees of a designated
beneficiary.4Petitioner is a holder of two (2) units of respondent’s PEPTrads.5
On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing
planholders as they fall due, respondent filed a Petition for Corporate Rehabilitation with the
Regional Trial Court (Rehabilitation Court), praying that it be placed under rehabilitation and
suspension of payments pursuant to Presidential Decree (P.D.) No. 902-A, as amended, in
relation to the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules).6 At the
time of filing of the Petition for Corporate Rehabilitation, respondent had more or less thirty four
thousand (34,000) outstanding PEPTrads.7
On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the suspension of
payments of the obligations of respondent and ordering all creditors and interested parties to
file their comments/oppositions, respectively, to the Petition for Corporate Rehabilitation.8 The
same Order also appointed respondent Mamerto A. Marcelo (Rehabilitation Receiver) as the
rehabilitation receiver and set the initial hearing of the case on May 25, 2005.9
Pursuant to the prevailing rules on corporate rehabilitation, respondent submitted to the
Rehabilitation Court its proposed rehabilitation plan. Under the terms thereof, respondent
proposed the implementation of a "Swap,"10 which will essentially give the planholder a means
to exit from the PEPTrads at terms and conditions relative to a termination value that is more
advantageous than those provided under the educational plan in case of voluntary termination.11
On February 16, 2006, the Rehabilitation Receiver submitted an Alternative Rehabilitation Plan
(ARP) for the approval of the Rehabilitation Court. Under the ARP, the benefits under the PEP
Trads shall be translated into fixed-value benefits as of December 31, 2004, which will be
termed as Base Year-end 2004 Entitlement, and shall be computed as follows: (i) for availing
remaining year of availment; (ii) for nonavailing (Group 1) plan holders,12 based on the higher of
Base Year-end 2004 Entitlement under the Rehabilitation Proposal or fifty-percent (50%) of
Average School Fee of SY 2005-2006 for every year of availment; and (iii) for non-availing
(Group 2) plan holders,13 based on the planholders’ contributions with seven percent (7%) net
interest per annum from date of full payment on record to December 31, 2004.14 The Base Year-
end Entitlement will be covered by a Rehabilitation Plan Agreement in lieu of a fixed-value
plan.15
For petitioner, she is entitled toreceive an aggregate amount consisting of: (a) the value of her
total contributions plus interest at the rate of seven percent (7%) from the date of full payment
until December 31, 2005 (Net Translated Value); and (b) interest on the Net Translated Value at
the annual rate of seven percent (7%) from January 1, 2006 until 2010.16
The ARP also provided for tuition support for each enrolment period until SY 2009-2010
depending on the prevailing market rate of the NAPOCOR Bonds and Peso-Dollar exchange
rate.17 The tuition support is computed as the lesser of the remaining balance of Base Year-end
2004 Entitlement, the last-term tuition or reimbursement on record and the following tuition
support ceiling:
Availment Mode Ceiling (in Php)
Annual ₱20,000.00
Semester ₱10,000.00
Trimester ₱6,000.0018
These tuition support payments are considered advances from the Base Year-end 2004
Entitlement.19
As to the funding for the tuition support, the same shall be sourced from either two (2) ways:
(1) Outright sale of the NAPOCOR bonds and conversion of Dollar proceeds to Peso, up to the
equivalent of the tuition support requirements. The payment of the tuition support will be
dependent on the terms and exchange rate under which the bonds are liquidated; or
(2) Forward sale of the underlying Dollars to a financial institution, which then issues notes
credit linked with NAPOCOR Bonds. The notes can then be sold to interested financial institution
to provide for liquidity to fund the requirements for tuition support.20
The creditors/oppositors did not oppose/comment on the Rehabilitation Receiver’s ARP,
although the Parents Enabling Parents Coalition, Inc. (PEPCI) filed with the CA, a Petition for
Certiorari with Application for a TRO/Writ of Preliminary Injunction dated February 10, 2006. As
no TRO/Writ of Preliminary Injunction has been issued against the conduct of further
proceedings, on April 27, 2006, the Court issued a Decision21 approving the ARP, which cradled
several appeals filed with the CA, and later on, to this Court that are still pending resolution.22
1
Page
Nevertheless, respondent commenced with the implementation of its ARP in coordination with,
and with clearance from, the Rehabilitation Receiver.23
In the meantime, the value of the Philippine Peso strengthened and appreciated. In view of this
development, and considering that the trust fund of respondent is mainly composed of
NAPOCOR bonds that are denominated in US Dollars, respondent submitted a manifestation
with the Rehabilitation Court on February 29, 2008, stating that the continued appreciation of
the Philippine Peso has grossly affected the value of the U.S. Dollar-denominated NAPOCOR
bonds, which stood as security for the payment of the Net TranslatedValues of the PEPTrads.24
Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion to Admit dated March 7,
2008, echoing the earlier tenor and substance of respondent’s manifestation, and praying that
the Modified Rehabilitation Plan (MRP) be approved by the Rehabilitation Court. Under the MRP,
the ARP previously approved by the Rehabilitation Court is modified as follows: (a) suspension
of the tuition support; (b) converting the Philippine Peso liabilities to U.S. Dollar liabilities by
assigning to each planholder a share of the remaining asset in proportion to the share of
liabilities in 2010; and (c) payments of the trust fund assets in U.S. Dollars at maturity.25
After the submission of comments/opposition by the concerned parties, the Rehabilitation Court
issued a Resolution26 dated July 28, 2008 approving the MRP. In approving the same, the
Rehabilitation Court reasoned that in view of the "cram down" power of the rehabilitation court
under Section 23 of the Interim Rules, courts have the power to approve a rehabilitation plan
over the objection of creditors and even when such proposed rehabilitation plan involvesthe
impairment of contractual obligations.27
Petitioner questioned the approval of the MRP before the CA on September 26, 2008. It likewise
prayed for the issuance of a TRO and a writ of preliminary injunction to stay the execution of
the Resolution dated July 28, 2008.28
In dismissing or denying the Petition for Review, the CA held that: (a) petitioner did not pay the
proper amount of docket fees; (b) a Petition for Review under Rule 43 is an improper remedy to
question the approval of a modified rehabilitation plan; (c) contrary to petitioner’s claim, the
alterations in the MRP are consistent with the goalsof the ARP; and (d) the approval of the MRP
did not amount to an impairment of the contract between petitioner and respondent. The falloof
the assailed Decision29 states:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DENYING
or DISMISSING the petition for review filed in this case and AFFIRMING the corporate
rehabilitation Court’s Resolution dated July 28, 2008 in Special Proceeding No. M-
6059.30 Unfortunately for petitioner, despite its motion for reconsideration, the CA denied the
same on July 21, 2010.31
Hence, this Petition for Review on Certiorariraising the following grounds:
I
The Court of Appeals rendered a decision contrary to law and not in accord with the applicable
decisions of the Supreme Court when it sustained the Rehabilitation Court’s approval of the
Modified Rehabilitation Plan.
II
The Court of Appeals rendered a decision contrary to law when it ruled that a Petition for
Review was an improper remedy to question a final order of the Rehabilitation Court approving
the Modified Rehabilitation Plan.
III
The Court of Appeals rendered a decision not in accord with the issuances of the Supreme Court
and the usual course of judicial proceedings when it declared that Petitioner had not paid the
proper amount of filing and docket fees, despite the fact that, as clearly shown in the receipts
presented by petitioner, the proper amount of filing fees were paid.32
In its Comment dated October 23, 2006, respondent raised various procedural infirmities on the
petition warranting its dismissal, to wit: (1) the assailed decision has become final and executory
for failure of petitioner to timely serve a copy of the Petition for Time upon the CA in violation of
Section 3, Rule 45 of the Rules of Court; (2) petitioner’s motion for reconsideration on the
questioned decision raises no new arguments; thus, is merely pro formaand did not toll the
running of the reglementary period; (3) a petition for review under Rule 43 of the Rules of Court
is an improper mode to question the MRP; and (4) petitioner failed to pay the appropriate
amount of docket fees when she filed the Petition for Review with the CA.33
On procedural grounds, this Court finds for the petitioner.
First. Respondent asseverates that the CA correctly held that the Petition for Review under Rule
43 of the Rules of Court is an improper mode to question the Resolution approving the MRP,
since the same constitutes merely as an interlocutory order and, therefore, a proper subject of a
certiorari case under Rule 65 of the Rules of Court. On the other hand, petitioner counters that
such Resolution isa final order with respect to the approval of the MRP; hence, her recourse to a
Petition for Review under Rule 43 of the Rules of Court was proper. Petitioner further argues
that such remedy is clearly in line with the directive of AM No. 04-9-07-SC,34 which took effect
on October 15, 2004 and, therefore, was the correct rule on appeals prevailing at the time
petitioner filed her petition with the CA.35
Petitioner’s contention is impressed with merit.
It bears emphasis that the governing rule at the time respondent filed its petition for
rehabilitation was the Interim Rules, which does not expressly state the mode of appeal from
the decisions, orders and resolutions of the Rehabilitation Court, either prior or after the
approval of the rehabilitation plan. Accordingly, this Court issued a Resolution, A.M. No. 04-9-
07-SC,36 which lays down the proper mode of appeal in cases involving corporate rehabilitation
and intra-corporate controversies in order to prevent cluttering the dockets of the courts with
appeals and/or petitions for certiorari. The first paragraph thereof provides:
1. All decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies
under Republic Act No. 8799 shall be appealable to the Court of Appeals through a petition for
2
review under Rule 43 of the Rules of Court.37
Page
Under the said Resolution, all decisions and final orders of the rehabilitation court, regardless of
whether they are issued before or after the approval of the rehabilitation court, shall be brought
on appeal to the CA via a petition for review under Rule 43 of the Rules of Court.
Subsequently, the Supreme Court issued A.M. No. 00-8-10-SC38 (Rehabilitation Rules), which
took effect on January 16, 2009, embodying the rehabilitation rules applicable to petitions for
rehabilitation of corporations, partnerships and associations pursuant to P.D. No. 902-A, as
amended. Section 1, Rule 8 thereof unequivocally states:
SEC. 1. Motion for Reconsideration. — A party may file a motion for reconsideration of any order
issuedby the court prior to the approval of the rehabilitation plan. No relief can be extended to
the party aggrieved by the court’s order on the motion through a special civil action for certiorari
under Rule 65 of the Rules of Court. Such order can only be elevated to the Court of Appeals as
an assigned error in the petition for review of the decision or order approving or disapproving
the rehabilitation plan.
An order issued after the approval of the rehabilitation plan can be reviewed only through a
special civil action for certiorari under Rule 65 of the Rules of Court.39
While We agree with respondent that the later rule states that orders issued after the approval
of the rehabilitation plan can be reviewed only through a special civil action for certiorari under
Rule 65 of the Rules of Court, such rule does not apply to the instant case as the same was not
yet in effect at the time petitioner filed her Petition for Review with the CA. Stated otherwise,
the prevailing law at the time petitioner filed said petition with the CA is the Interim Rules as
well as A.M. No. 04-9-07-SC. As such, the proper remedy of appeal from all decisions and final
orders of the RTC was Rule 43 of the Rules of Court, and not Rule 65 thereof.
In any case, We cannot also subscribe to respondent’s view that the approval of the MRP is
merely an interlocutory order. In Alma Jose v. Javellana,40 We have already defined a final order
as one that puts an end to the particular matter involved, or settles definitely the matter therein
disposed of, as to leave nothing for the trial court to do other than to execute the order.41 Here,
it cannot be gainsaid that the Resolution approving the MRP is a final order with respect to the
validity thereof, specifically on the following issues: (1) the suspension of the tuition support;
(2) conversion of Philippine Peso entitlements to U.S. Dollar entitlements; and (3) the payments
in U.S. Dollars upon maturity in 2010. In this regard, the issue as to its alleged infringement on
the non-impairment clause under the Constitution has likewise been settled. The doctrine laid
down in New Frontier Sugar Corp. v. Regional Trial Court Branch 39, Iloilo City,42 cannot be used
to counter the foregoing because in that case, the Court merely stressed that an original action
for certiorarimay be directed against an interlocutory order of the lower court prior to an appeal
from the judgment; or where there is no appeal or any plain, speedy or adequate
remedy.43 New Frontier does not categorically preclude the filing of a petition for review under
Rule43 for decisions or orders issued after the approval of the rehabilitation plan such as a
modification thereof.
Second. We find respondent’s contention on the non-payment of the docket fees devoid of merit
because the records rather show that petitioner had, in fact, paid the appropriate amount of
docket fees for her Petition with the CA and her application for a TRO on September 12, 2008.
To support this allegation, petitioner attached copies of official receipts, representing the fees
she has paid in the aggregate amount of Four Thousand Six Hundred Eighty Pesos (₱4,680.00).
Third. With respect to respondent’s allegation that petitioner violated Section 2,44 in relation to
Section 3,45 Rule 45 of the Rules of Court, in particular the failure of petitioner to serve a copy
ofits petition for time with the CA within the prescribed period, the same is mislaid.
A careful examination of the records will show that said petition was personally served on the
CA on August 17, 2010, within the prescribed period pursuant to Sections 2 and 3, Rule 45 of
the Rules of Court. This is the most logical explanation since the Manifestation regarding such
service, together with the attached Petition for Time, was filed on August 18, 2010. Thus, the
date "August 27, 2010" on the stamp of the CA is clearly a clerical error and respondent’s
assertion that the CA was not timely served the Petition for Time is erroneous.
Similarly, owing to the significance of the issues raised in the instant case, We rule that any
lapse on the filing of the motion for reconsideration with the CA is not grave enough to dismiss
the instant petition on technical grounds. Moreover, it is settled that although a motion for
reconsideration may merely reiterate issues already passed upon by the court, that, by itself,
does not make it pro forma. In fact, the CA did not declare said motion for reconsideration as
pro forma when it denied the same. Hence, considering that the motion for reconsideration is
not pro forma and a mere scrap of paper, its filing tolled the running period of appeal pursuant
to Section 2,46 Rule 37 of the Rules of Court.
Fourth. Anent the Verification and Certification against Forum Shopping of the instant petition,
we recognize that petitioner failed to comply with Section 6, Rule II of A.M. No. 02-8-13-SC,
otherwise known as the Rules on Notarial Practice of 2004 (Notarial Rules), which provides that
in order for a jurat to be valid, the following requirements should be present:
SEC. 6. Jurat. - "Jurat" refers to an act in which an individual on a single occasion:
(a) appears in person before the notary public and presents an instrument or
document;
(b) is personally known to the notary public or identified by the notary public through
competent evidence of identityas defined by these Rules;
(c) signs the instrument ordocument in the presence of the notary; and
(d) takes an oath or affirmation before the notary public as to such instrument or
document.47 as well as Section 12, Rule II of the Notarial Rules, which defines what
constitutes competent evidence of identity, to wit –
SEC. 12. Competent Evidence of Identity. - The phrase "competent evidence of identity" refers
to the identification of an individual based on:
(a) at least one current identification document issued by an official agency bearing
the photograph and signature of the individual; or
(b) the oath or affirmation of one credible witness not privy to the instrument,
document or transaction who is personally known to the notary public and who
3
personally knows the individual, or of two credible witnesses neither of whom is privy
to the instrument, document or transaction who each personally knows the individual
Page
and shows to the notary public documentary identification.
While we agree with the observation of respondent that in the instant Petition, the Verification
and Certification against Forum Shopping attached thereto is defective because the jurat thereof
does not contain the required competent evidence of identity of the affiant, petitioner herein,
such omission may be overlooked in the name of judicial leniency, in order to give this Court an
avenue to dispose of the substantive issues of this case.
As to respondent’s allegation that the instant petition contained a false Certification of Non-
Forum Shopping since the same failed to disclose the pendency of a related petition pending
before the CA, the same warrants scant consideration.
While it would appear that there is substantial identity ofparties, since both petitioner and PEPCI
are creditors of respondent and both are questioning the Rehabilitation Court’s approval of the
MRP, the identity of cause of action is absent in the present case. An assiduous scrutiny of the
respondent’s Petition for Review with the CA and PEPCI’s Petition for Review dated September
3, 2008, also filed with the CA, will show that they raised different causes of action. In Majority
Stockholders of Ruby Industrial Corporation v. Lim,48 we have reiterated that no forum shopping
exists when two (2) groups of oppositors in a rehabilitation case act independently of each
other, even when they have sought relief from the same appellate court, thus:
On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87.
Thus:
We hold that private respondents are not guilty of forum shopping. In Ramos, Sr. v. Court of
Appeals, we ruled:
"The private respondents can be considered to have engaged in forum shopping if all of them,
acting as one group, filed identical special civil actions in the Court of Appeals and in this Court.
There must be identity of parties or interests represented, rights asserted and relief sought in
different tribunals. In the case at bar, two groups of private respondents appear to have acted
independently of each other when they sought relief from the appellate court. Both groups
sought relief from the same tribunal.
"It would not matter even if there are several divisions in the Court of Appeals. The adverse
party can always ask for the consolidation of the two cases. x xx"
In the case at bar, private respondents represent different groups with different interests - the
minority stockholders' group, represented by private respondent Lim; the unsecured creditors
group, Allied Leasing & Finance Corporation; and the old management group. Each group has
distinct rights to protect. In line with our ruling in Ramos, the cases filed by private respondents
should be consolidated. In fact, BENHAR and RUBY did just that - in their urgent motions filed
on December 1, 1993 and December 6, 1993, respectively, they prayed for the consolidation of
the cases before the Court of Appeals.49
In any case, this Court resolves tocondone any procedural lapse in the interest of substantial
justice given the nature of business of respondent and its overreaching implication to society.To
deny this Court of its duty to resolve the substantive issues would be tantamount to judicial
tragedy as planholders, like petitioner herein, would be placed in a state of limbo as to its
remedies under existing laws and jurisprudence.
Indeed, where strong considerations of substantive justice are manifest in the petition, the strict
application of the rules of procedure may be relaxed, in the exercise of its equity
jurisdiction.50 Thus, a rigid application of the rules of procedure will not be entertained if it will
only obstruct rather than serve the broader interests of justice in the light of the prevailing
circumstances in the case under consideration.51 It is a prerogative duly embedded in
jurisprudence, as in Alcantara v. Philippine Commercial and International Bank,52 where the
Court had the occasion to reiterate that:
x x x In appropriate cases, the courts may liberally construe procedural rules in order to meet
and advance the cause of substantial justice. Lapses in the literal observation of a procedural
rule will be overlooked when they do not involve public policy, when they arose from an honest
mistake or unforeseen accident, and when they have not prejudiced the adverse party or
deprived the court of its authority. The aforementioned conditions are present in the case at
bar. x x x x
There is ample jurisprudence holding that the subsequent and substantial compliance of an
appellant may call for the relaxation of the rules of procedure. In these cases, weruled that the
subsequent submission of the missing documents with the motion for reconsideration amounts
to substantial compliance. The reasons behind the failure of the petitioners in these two cases to
comply with the required attachments were no longer scrutinized. What we found noteworthy in
each case was the fact that the petitioners therein substantially complied with the formal
requirements. We ordered the remand of the petitions in these cases to the Court of Appeals,
stressing the ruling that by precipitately dismissing the petitions "the appellate court clearly put
a premium on technicalities at the expense of a just resolution of the case."
While it is true that the rules of procedure are intended to promote rather than frustrate the
ends of justice, and the swift unclogging of court docket is a laudable objective, it nevertheless
must not be met at the expense of substantial justice. This Court has time and again reiterated
the doctrine that the rules of procedure are mere tools aimed at facilitating the attainment of
justice, rather thanits frustration. A strict and rigid application of the rules must alwaysbe
eschewed when it would subvert the primary objective of the rules, that is, to enhance fair trials
and expedite justice. Technicalities should never beused to defeat the substantive rights of the
other party. Every party-litigant must be afforded the amplest opportunity for the proper and
just determination of his cause, free from the constraints of technicalities. Considering that there
was substantial compliance, a liberal interpretation of procedural rules in this labor case is more
in keeping with the constitutional mandate to secure social justice.53
Notwithstanding our liberal interpretation of the rules, the instant petition must fail on
substantive grounds.
Petitioner contends that the MRP is ultra vires insofar as it reduces the original claim and even
the original amount that petitioner was to receive under the ARP.54 She also claims that it was
beyond the authority of the Rehabilitation Court to sanction a rehabilitation plan, or the
modification thereof, when the essential feature of the plan involves forcing creditors to reduce
their claims against respondent.55
Petitioner’s argument is misplaced. The "cram-down" power of the Rehabilitation Court has long
been established and even codified under Section 23, Rule 4 of the Interim Rules, to wit:
Section 23. Approval of the Rehabilitation Plan. – The court may approve a rehabilitation plan
4
over the opposition of creditors, holding a majority of the total liabilities of the debtor if, in its
Page
judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is
manifestly unreasonable.
Such prerogative was carried over inthe Rehabilitation Rules, which maintains that the court
may approve a rehabilitation plan over the objection of the creditors if, in its judgment, the
rehabilitation of the debtors is feasible and the opposition of the creditors is manifestly
unreasonable. The required number of creditors opposing such plan under the Interim Rules
(i.e.,those holding the majority of the total liabilities of the debtor) was, in fact, removed.
Moreover, the criteria for manifest unreasonableness is spelled out, to wit:
SEC. 11. Approval of Rehabilitation Plan. — The court may approve a rehabilitation plan even
over the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor
is feasible and the opposition of the creditors is manifestly unreasonable. The opposition of the
creditors is manifestly unreasonable if the following are present:
(a) The rehabilitation plan complies with the requirements specified in Section 18 of
Rule 3;56 (b) The rehabilitation plan would provide the objecting class of creditors with
payments whose present value projected in the plan would be greater than that which
they would have received if the assets of the debtor were sold by a liquidator within a
six (6)month period from the date of filing of the petition; and
(c) The rehabilitation receiver has recommended approval of the plan.
In approving the rehabilitation plan, the court shall ensure that the rights of the secured
creditors are not impaired. The court shall also issue the necessary orders or processes for its
immediate and successful implementation. It may impose such terms, conditions, or restrictions
as the effective implementation and monitoring thereof may reasonably require, or for the
protection and preservation of the interests of the creditors should the plan fail.57
This legal precept is not novel and has, in fact, been reinforced in recent decisions such as in
Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation,58 where the Court elucidated
the rationale behind Section 23, Rule 4 of the Interim Rules, thus:
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules) states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a majority of the corporation’s total
liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is
currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency
to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater
long-term benefit of all stakeholders. Otherwise stated, it forces the creditors toaccept the terms
and conditions of the rehabilitation plan, preferring long-term viability over immediate but
incomplete recovery.59
as well as in Pryce Corporation v. China Banking Corporation,60 to wit:
In any case, the Interim Rules or the rules in effect at the time the petition for corporate
rehabilitation was filed in 2004 adopts the cramdown principle which "consists of two things: (i)
approval despite opposition and (ii) binding effect of the approved plan x x x."
First, the Interim Rules allows the rehabilitation court to "approve a rehabilitation plan even over
the opposition of creditors holding a majority of the total liabilities of the debtor if, in its
judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is
manifestly unreasonable."
Second, it also provides that upon approval by the court, the rehabilitation plan and its
provisions "shall be binding upon the debtor and all persons who may be affected by it,
including the creditors, whether or not such persons have participated inthe proceedings or
opposed the plan or whether or not their claims have been scheduled."
Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final and
executory resulting from the resolution of BPI v. Pryce Corporation docketed as G.R. No.
180316, binds all creditors including respondent China Banking Corporation.61
Based on the aforequoted doctrines, petitioner’s outright censure of the concept of the cram-
down power of the rehabilitation court cannot be countenanced. To adhere to the reasoning of
petitioner would be a step backward — a futile attempt to address an outdated set of
challenges. It is undeniable that there is a need to move to a regime of modern restructuring,
cram-down and court supervision in the matter of corporation rehabilitation in order to address
the greater interest of the public. This is clearly manifested in Section 64 of Republic Act (R.A.)
No. 10142, otherwise known as Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the
latest law on corporate rehabilitation and insolvency, thus:
Section 64. Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the
creditors and stakeholders that the Plan is ready for their examination. Within twenty (2Q) days
from the said notification, the rehabilitation receiver shall convene the creditors, either as a
whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be deemed
rejected unless approved by all classes of creditors w hose rights are adversely modified or
affected by the Plan. For purposes of this section,the Plan is deemed tohave been approved by a
class of creditors if members of the said class holding more than fifty percent (50%) of the total
claims of the said class vote in favor of the Plan. The votes of the creditors shall be based solely
on the amount of their respective claims based on the registry of claims submitted by the
rehabilitation receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the
Rehabilitation Plan if all of the following circumstances are present:
(a)The Rehabilitation Plan complies with the requirements specified in this Act;
(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation
Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at least their
controlling interestas a result of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would have
5
received if the debtor were under liquidation.62
Page
While the voice and participation of the creditors is crucial in the determination of the viability of their share will be substantially diluted. In fact, the planholders may even benefit from this
the rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the modification in the rehabilitation plan if the United States dollars appreciates in 2010.66
interests of all stakeholders is the ultimate and prime consideration. Thus, while we recognize
the predisposition of the planholders in vacillating on the enforcement of the MRP, since the
As can be gleaned from the foregoing, the modification guarantees that each planholder has an
terms and conditions stated therein have been fundamentally changed from those stated in the
adequate return on his/her investment regardless of changes in the surge of the Philippine
Original and Amended Rehabilitation Plan, the MRP cannot be considered an abrogation of rights
economy.67
to the planholders/creditors.

We, therefore, agree with respondent that the proposed modification seeks to establish a
First. An examination of the changes proposed in the MRP would confirm that the same is, in
balance between adequate returns to the planholders/creditors, while ensuring that respondent
fact, an effective risk management tool intended to serve both the interests of respondent and
shall be an on-going concern that can eventually undergo normal operations after the
its planholders/creditors.
implementation of the MRP.68

It is a matter of fact and record that the Philippine Peso unexpectedly and uncharacteristically
strengthened and appreciated from Fifty-Two and 02/100 Pesos (Php52.02) to One U.S. Dollar
(USD1.00) at the time of the approval of the ARP to Forty and (63)/100 Pesos (Php40.63) to
One U.S. Dollar (USD1.00) as of March 7, 2008, the day the Rehabilitation Receiver filed his
Manifestation with Motion to Admit praying for the approval of the MRP.63 There is no
gainsaying that during this period, the value of the U.S. Dollar-denominated NAPOCOR bonds —
the assets covering the trust fund subject of the traditional education plan — has already been
substantially diluted because of the stronger value of the Philippine Peso vis-à-visthe U.S. Dollar
from the time of the approval of the ARP.64 As succinctly held by the RTC in its Resolution dated
July 28, 2008, to wit:
Second. The recommendation of the Rehabilitation Receiver cannot simply be unsung without
violating the basic tenet of Section 14, Rule 4 of the Interim Rules, which provides the powers
and functions of the Rehabilitation Receiver, thus:
Sec. 14. Powers and Functions of the Rehabilitation Receiver. - The Rehabilitation Receiver shall
nottake over the management and control of the debtor but shall closely oversee and monitor
the operations of the debtor during the pendency of the proceedings, and for this purpose shall
have the powers, duties and functions of a receiver under Presidential Decree No. 902-A, as
amended, and the Rules of Court.

First, there is in tr[u]th no quibble that the Philippine Peso has behaved in an uncharacteristic x x x Accordingly, he shall have the following powers and functions:
mannerby appreciating significantly vis-àvis the United States Dollar. This fact is not disputed by
any of the parties. Further, the Court takes cognizance that at the time the Alternative xxxx
Rehabilitation Plan was approved on 27 April 2006, the exchange rate was Php52.02/US$1.00.
As of 15 July 2008, the exchange rate was Php45.35/US$1.00, or an appreciation of atleast
fourteen percent (14%). Since the NAPOCOR Bonds are denominated in United States dollars, it (j) To monitor the operations of the debtor and to immediately report to the court any material
means that the NAPOCOR Bonds have losttheir original value by at least fourteen percent (14%) adverse change in the debtor's business;
since the approval of the Alternative Rehabilitation Plan on 27 April 2006. Ergo, the continued
payment of tuition support in Philippine Pesos will lead to the certainty of the trust fund being xxxx
substantially diluted when the planholders avail of the same upon maturity of the NAPOCOR
Bonds in 2010.65
(l) To determine and recommend to the court the best way to salvage and protect the interests
of the creditors, stockholders, and the general public;
This defense mechanism is reasonable because sustaining the current terms of the ARP would
render the trust fund of no value given the high probability of its dilution. Resultantly, the very
foundation of the rehabilitation plan, which is to minimize the loss of all stakeholders, would be xxxx
rendered in futile since the trust funds may no longer be sufficient to meet the basic terms of
the ARP. (v) To recommend any modification of an approved rehabilitation plan as he may deem
appropriate;
In addition, the MRP merely establishes the planholders’ claim on a percentage/pro rata share of
the assets of the trust fund. It does not, in any way, diminish the value of their claims or their (w) To bring to the attention of the court any material change affecting the debtor's ability to
share in the proverbial pie. The propriety of this theory was recognized by the Rehabilitation meet the obligations under the rehabilitation plan;
Court, to wit:
x x x.69
Second, the conversion of the Philippine Peso entitlements into United States Dollar entitlements
would not diminish the pro rata share of the planholders. Each planholder would still receive his
proportionate share of the pie, so to speak, albeitin United States Dollars. The said conversion As correctly recognized by the Rehabilitation Court in its Resolution dated July 28, 2008, the

6
would merely ensure that regardless of the performance of the Philippine Pesos, planholders of Rehabilitation Receiver has the duty and authority to recommend any modification of an

Page
petitioner PPI are guaranteed payment upon maturity of the NAPOCOR Bonds, without fear that approved rehabilitation plan as he may deem appropriate and for the purpose of achieving the
desired targets or goals set forth therein, thus:
It is the strenuous proposition of the CARR that under the Interim Rules, he has the duty to of their credit’s value, with more reason that they should be able to accept 50% thereof as full
recommend any modification of an approved rehabilitation plan as he may been appropriate. Ex settlement by their debtor. x x x.72
concesso, the Court recognizes that under Rule 4, Section 26 of the Interim Rules, an approved
rehabilitation plan may be modified if, in the judgment of the Court, such modification is
Here, petitioner’s claim is not cancelled or obliterated all together.1awp++i1 Contrary to her
necessary to achieve the desired targets or goals set forth therein.70
view, petitioner’s claim isin fact restructured in a way that would allow respondent to revive its
financial health while offering the optimal returns to its clients.
The Rehabilitation Rules allow the modification and alteration of the rehabilitation plan precisely
because ofconditions that may supervene or affect the implementation thereof subsequent to its
It is undisputable that the corporation is in the process of corporate rehabilitation precisely
approval. In the case at bar, to force through with the tuition support would surely jeopardize
because it is undergoing financial distress. Petitioner cannot expect to receive the contracted
the implementation of the ARP in the long-run since it would not be feasible to keep on
amount owed by respondent because a modification of the terms and conditions of the contract
liquidating the NAPOCOR Bonds.
is certainly foreseeable and reasonable in a corporate rehabilitation case, as correctly held by
the Rehabilitation Court, to wit:
Third. We confirm that there is a substantial likelihood for respondent to be successfully
rehabilitated considering that its business remains viable and is operating on a going-concern
x x x It is an established principle in rehabilitation proceedings that rehabilitation courts have
premise.
the cram down power to approve rehabilitation plans even over the objections of creditors,
which cram down power shall nonetheless bind the latter. In fact, the CARR is given the
A careful reading of the records will show that respondent’s liquidity problems were mostly authority to "notify counterparties and the court asto contracts that the debtor has decided to
caused by the deregulation of the education sector, which triggered sharp increases in tuition continue to perform or breach." A fortiori, the mere impairment of contracts is not a justification
fees of schools and universities beyond what was projected by pre-need companies dealing with to question the modification of a rehabilitation plan because the very nature of rehabilitation
traditional educational plans. Surely, we are mindful of the financial distress in 1997, which has proceedings sometimes necessitates such a course of action.73
destroyed various institutions not only in the Philippines but across Asia, further compromising
the pre-need industry’s ability to meet its obligations under the PEPTrads. The surrounding
Indeed, the rights of petitioner arising from the contracts it entered with respondent are not in
circumstances of the time was peculiar and may no longer be pertinent at present.
any way weakened by the approval of the ARP, and then the MRP, despiteany reduction in the
amount of the obligation due to petitioner. As enunciated in Pacific Wide,74 the reduction of the
Thus, pointing fingers to respondent at this point for its alleged mismanagement of assets would debt of the debtor is one of the essential features of a rehabilitation case, and is not considered
be irrational, and even counter-productive, because the feasibility of respondent’s rehabilitation prejudicial to the interest of a secured creditor, thus:
has already been duly established by the Rehabilitation Court. A subsequent allegation to the
contrary has no leg to stand on. Conversely, by virtue of the corporate rehabilitation,
We find nothing onerous in the terms of PALI's rehabilitation plan. The Interim Rules on
respondentwill have enough breathing room to improve its operations in order to sustain its
Corporate Rehabilitation provides for means of execution of the rehabilitation plan, which may
business operations and at the same time, settle all its outstanding obligations in a just and fair
include, among others, the conversion of the debts or any portion thereof to equity,
manner, in accordance with the MRP. In this regard, We find reason in respondent’s contention
restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest.
that the MRP will not only be beneficial to itself, but also to its planholders and creditors as well.
Anent petitioner’s argument that the approval of the MRP is offensive to the non-impairment
clause of the Constitution, the same fails to persuade. The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per
findings offact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI
would notbe prejudicial to the interest of PWRDC as a secured creditor. Enlightening is the
Petitioner’s interpretation of Section 37 of the Rehabilitation Rules vis-à-vis the means within
observation of the CA in this regard, viz.:
which a rehabilitation plan may be pursued, is misplaced. As held in a plethora of cases, a
rehabilitation plan may involve a reduction of liability. On this score, the principle enunciated in
Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc.,71 is instructive, thus There is nothing unreasonable or onerous about the 50% reduction of the principal amount
– when, as found by the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI
from its creditors at deep discounts of as much as 85%. Meaning, PALI's creditors accepted only
15% of their credit's value. Stated otherwise, if PALI's creditors are in a position to accept 15%
The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per
of their credit's value, with more reason that they should be able to accept 50% thereof as full
findings of fact of the RTC and as affirmed by the CA, the restructuring of the debts of PALI
settlement by their debtor. x x x.
would not be prejudicial to the interest of PWRDC as a secured creditor. Enlightening is the
observation of the CA in this regard, viz.:
We also find no merit in PWRDC’s contention that there is a violation of the impairment clause.
Section 10, Article III of the Constitution mandates that no law impairing the obligations of
There is nothing unreasonable or onerous about the 50% reduction of the principal amount
contract shall be passed. This case does not involve a law or an executive issuance declaring the
when, as found by the court a quo, a Special Purpose Vehicle (SPV) acquired the credits of PALI
modification of the contract among debtor PALI, its creditors and its accommodation

7
from its creditors at deep discounts of as much as 85%. Meaning, PALI’s creditors accepted only
mortgagors. Thus, the non-impairment clause may not be invoked. Furthermore, as held in

Page
15% of their credit’s value. Stated otherwise, if PALI’s creditors are in a position to accept 15%
Oposa v. Factoran, Jr.even assuming that the same may be invoked, the non-impairment clause
must yield to the police power of the State. Property rights and contractual rights are not
absolute. The constitutional guaranty of nonimpairment of obligations is limited by the exercise
of the police power of the State for the common good of the general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors,

employees, and the economy in general.1âwphi1 The court may approve a rehabilitation plan
evenover the opposition of creditors holding a majority of the total liabilities of the debtor if, in
its judgment, the rehabilitation of the debtor isfeasible and the opposition of the creditors is
manifestly unreasonable. The rehabilitation plan, once approved, is binding upon the debtor and
all persons who may be affected by it, including the creditors, whether or not such persons have
participated in the proceedings or have opposed the plan or whether or not their claims have
been scheduled.75

Similarly, the reasoning laid down by the CA for the application of the cram-down power of the
Rehabilitation Court is enlightening, thus:

This Court likewise rejects petitioner Aquino’s claims that the Modified Rehabilitation Plan
constitutes an impairment of contracts. The non-impairment clause under the Constitution
applies only to the exercise of legislative power. It does not apply to the Rehabilitation Court
which exercises judicial power over the rehabilitation proceedings. As held by the Supreme
Court in Bank of the Philippine Islands vs. Securities and Exchange Commission, [G.R. No.
164641, December 20, 2007:

"The Court reiterates that the SEC’s approval of the Rehabilitation Plan did not impair BPI’s right
to contract. As correctly contended by private respondents, the nonimpairment clause is a limit
on the exercise of legislative power and not of judicial or quasi-judicial power. The SEC, through
the hearing panel that heard the petition for approval of the Rehabilitation Plan, was acting as a
quasi judicial body and thus, its order approving the plan cannot constitute an impairment of the
right and the freedom to contract."76

In view of all of the foregoing, We find no basis to overturn the findings of the CA with respect
to the substantive issues in this case. Accordingly, the prayer for the issuance of a TRO and/or a
writ of preliminary injunction must necessarily fail.

A final note. The evolving times of corporate rehabilitation, owing to the rise and fall of
economic activity over time, calls on the Judiciary to take an active role in filling in the gaps of
the law pertaining to this issue as the inimitable factual milieu of each case would require a
different approach in the application of prevailing laws, rules and regulations on corporate
rehabilitation. In the case at bar, we hold that the modification of the rehabilitation plan is a risk
management tool to address the volatility of the exchange rate of the Philippine Peso vis-à-vis
the U.S. Dollars, with the goal of ensuring that all planholders or creditors receive adequate
returns regardless of the tides of the Philippine market by making payment in U.S. Dollars. This
plan would prevent the trust fund of respondent from being diluted due to the appreciation of
the Philippine Peso and assure that all planholders and creditors shall receive payment upon
maturity of the NAPOCOR bonds in the most equitable manner.

WHEREFORE, the petition is DENIED. The February 26, 2010 Decision and July 21, 2010
Resolution of the Court of Appeals in CA-G.R. SP No. 105237 are hereby AFFIRMED.

8
Page
SO ORDERED
 BPI SAVINGS v. SMMC
March 25, 2015
G.R. No. 205469
BPI FAMILY SAVINGS BANK, INC., Petitioner,
vs.
ST. MICHAEL MEDICAL CENTER, INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
Before the Court is a petition for review on certiorari1 assailing the Decision2 dated August 30,
2012 and the Resolution3 dated January 18, 2013 of the Court of Appeals (CA) in CA-G.R. SP
No. 121004 which affirmed the approval of the Rehabilitation Plan of respondent St. Michael
Medical Center, Inc. (SMMCI) by the Regional Trial Court of Imus, Cavite, Branch 21 (RTC)
through its Order4 dated August 4, 2011 in SEC Case No. 086-10.
The Facts
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole proprietors of St.
Michael Diagnostic and Skin Care Laboratory Services and Hospital (St. Michael Hospital), a 5-
storey secondary level hospital built on their property located in Molino 2, Bacoor, Cavite. With a
vision to upgrade St. Michael Hospital into a modern, well-equipped and full service tertiary 11-
storey hospital, Sps. Rodil purchased two (2) parcels of land adjoining their existing property
and, on May 22, 2003, incorporated SMMCI, with which entity they planned to eventually
consolidate St. Michael Hospital’s operations. SMMCI had an initial capital of 2,000,000.00 which
was later increased to 53,500,000.00, 94.49% of which outstanding capital stock, or
50,553,000.00, was subscribed and paid by Sps. Rodil.5
In May 2004, construction of a new hospital building on the adjoining properties commenced,
with Sps. Rodil contributing personal funds as initial capital for the project which was estimated
to cost at least 100,000,000.00.6 To finance the costs of construction, SMMCI applied for a loan
with petitioner BPI Family Savings Bank, Inc. (BPI Family) which gave a credit line of up to
35,000,000.00,7 secured by a Real Estate Mortgage8 (mortgage) over three (3) parcels of
land9 belonging to Sps. Rodil, on a portion of which stands the hospital building being
constructed. SMMCI was able to draw the aggregate amount of 23,700,000.00,10 with interest at
the rate of 10.25% per annum (p.a.) and a late payment charge of 3% per month accruing on
the overdue amount, for which Sps. Rodil, who agreed to be co-borrowers on the loan, executed
and signed a Promissory Note.11
In the meantime, after suffering financial losses due to problems with the first building
contractor,12 Sps. Rodil temporarily deferred the original construction plans for the 11-storey
hospital building and, instead, engaged the services of another contractor for the completion of
the remaining structural works of the unfinished building up to the 5th floor. In this regard, they
spent an additional 25,000,000.00, or a total of 55,000,000.00 for the construction. The lack of
funds for the finishing works of the 3rd, 4th and 5th floors, however, kept the new building from
becoming completely functional and, in turn, hampered the plans for the physical transfer of St.
Michael Hospital’s operations to SMMCI. Nevertheless, using hospital- generated revenues, Sps.
Rodil were still able to purchase new equipment and machinery for St. Michael Hospital valued
in excess of 20,000,000.00.13
Although the finishing works were later resumed and some of the hospital operations were
eventually transferred to the completed first two floors of the new building, as of May 2006,
SMMCI was still neither operational nor earning revenues. Hence, it was only able to pay the
interest on its BPI Family loan, or the amount of 3,000,000.00 over a two-year period, from the
income of St. Michael Hospital.14
On September 25, 2009, BPI Family demanded immediate payment of the entire loan
obligation15 and, soon after, filed a petition for extrajudicial foreclosure16 of the real properties
covered by the mortgage. The auction sale was scheduled on December 11, 2009, which was
postponed to February 15, 2010 with the conformity of BPI Family.17
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation18 (Rehabilitation
Petition), docketed as SEC Case No. 086-10, before the RTC, with prayer for the issuance of a
Stay Order as it foresaw the impossibility of meeting its obligation to BPI Family, its purported
sole creditor.19
In the said petition, SMMCI claimed that it had to defer the construction of the projected 11-
storey hospital building due to the problems it had with its first contractor as well as the rise of
the cost of construction materials. As of date, only two (2) floors of the new building are
functional, in which some of the operations of St. Michael had already been transferred.20
Also, it was alleged that more than 66,000,000.00 had been spent for the construction of the
existing structure (in excess of its proportionate share of the original estimated cost for the
entire project), said amount having come from the personal funds of Sps. Rodil and/or income
generated by St. Michael Hospital, aside from the drawings from the credit line with BPI Family.
At the same time, Sps. Rodil continued to shoulder the costs of equipment and machinery
amounting to 20,000,000.00, in order to build up the hospital’s medical capabilities. However,
since SMMCI was neither operational nor earning revenues, it could only pay interest on the BPI
Family loan, using St. Michael Hospital’s income, over a two-year period.21
Further, it was averred that while St. Michael Hospital – whose operations were to be eventually
absorbed by SMMCI – was operating profitably, it was saddled with the burden of paying the
loan obligation of SMMCI and Sps. Rodil to BPI Family, which it cannot service together with its
current obligations to other persons and/or entities. The situation became even more difficult
when the bank called the entire loan obligation which, as of November 16, 2009, amounted to
52,784,589.34 (net of unapplied payment), consisting of: (a) the principal of 23,700,000.00; (b)
accrued interest of 7,048,152.74; and (c) late payment charges amounting to 23,510,400.00.
While several persons approached Sps. Rodil signifying their interest to invest in the corporation,
they needed enough time to complete their audit and due diligence of the company,22 hence,
the Rehabilitation Petition.
In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI Family (a) to defer
foreclosing on the mortgage and (b) to agree to a moratorium of at least two (2) years during
which SMMCI – either through St. Michael Hospital or its successor – will retire all other
9
obligations. After which, SMMCI can then start servicing its loan obligation to the bank under a
Page
mutually acceptable restructuring agreement.24 SMMCI declared that it intends to conclude
pending negotiations for investments offered by a group of medical doctors whose capital
infusion shall be used (a) to complete the finishing requirements for the 3rd and 5th floors of
the new building; (b) to renovate the old 5- storey building where St. Michael Hospital operates;
and (c) to pay, in whole or in part, the bank loan with the view of finally integrating St. Michael
Hospital with SMMCI.25
The Proceedings Before the RTC
Finding the Rehabilitation Petition to be sufficient in form and substance, the RTC issued a Stay
Order26 on August 16, 2010. After the initial hearing on October 5, 2010, and the filing of
comments to the said petition,27 the same was referred to the court-appointed Rehabilitation
Receiver, Dr. Uriel S. Halum (Dr. Halum), who submitted in due time his Report and
Recommendations28 (Receiver’s Report) to the RTC on February 17, 2011.29
In the said report, Dr. Halum gave credence to the feasibility study conducted by Mrs. Nenita
Alibangbang (Mrs. Alibangbang), a certified public accountant and Dean of the College of
Accountancy at the University of Perpetual Help Dalta, who was commissioned in 2008 to do a
study on the viability of the project, finding that the same was feasible given that St. Michael
Hospital, whose operations SMMCI will eventually absorb, registered outstanding revenue
performance for the last seven years of its operation with an average growth rate of 42.21%
annually.30Accordingly, Dr. Halum found that SMMCI may be rehabilitated because it is a viable
option but, nevertheless, opined that it will take more than what it had proposed to successfully
bring the company back to good financial health considering the finding that its obligation
actually extends beyond the bank, and also includes accounts payable due to suppliers and
informal lenders.31 Thus, he made the following recommendations:
1.The two-year moratorium period to pay the bank is not enough. The Court should
seriously consider extending it by another three years or a total of five (5) years, at
least. The bank, whose loan is secured by mortgages on three prime parcels of land
with improvements should discuss restructuring the loan with the creditors with the
end in view of stretching the term and allowing for more flexible rate.
2.Obligations to other creditors such as the suppliers and lenders can be serviced at
once. Given the performance of the hospital, the undersigned reasonably believes that
these obligations can be settled in next three (3) years. These accounts can be paid
proportionately provided that [SMMCI] should be allowed to re- structure these
accounts to allow for longer and more convenient payment terms.
3.[SMMCI] should be allowed to spend for the improvement of the building but not
necessarily continuing with the planned 11-storey building. It should make do with
what it has but should be permitted to spend reasonable part of the hospital’s
revenues to improve the facilities. For instance, we recommend that the fifth floor of
the building should be finished to provide for an intensive care unit or ICU with
equipments (sic) and required facilities. [SMMCI] should also consider spending (sic)
an elevator to make access to and from the higher floors convenient to patients,
doctors, nurses and guests. Incidentally, these improvements should be programmed
for the next two to three years. Given the budgetary constraints of the hospital, doing
all these improvements all at once would be impossible.
4.Finally, [SMMCI] should provide for details on its statements regarding the
prospective investors. It (sic) true, or in case it happens, then this fresh capital should
be used partly to pay the bank and the rest to improve the hospital to make it more
competitive with the nearby medical service providers.32
On May 26, 2011, the RTC issued an order requiring the counsels of the creditors/oppositors to
file their comments to the Receiver’s Report within ten (10) days from notice, but only counsel
for South East Star Enterprises complied.33
The RTC Ruling
In an Order34 dated August 4, 2011, the RTC approved the Rehabilitation Plan with the
modifications recommended by the Rehabilitation Receiver and thus, ordered: (a) a five-year
moratorium on SMMCI’s bank loan; (b) a restructuring and payment of obligations to other
creditors such as suppliers and lenders; (c) a programmed spending of a reasonable part of the
hospital’s revenues for the finishing of the 5th floor and the improvement of hospital facilities in
the next two or three years; and (d) use of fresh capital from prospective investors to partly pay
SMMCI’s bank loan and improve St. Michael Hospital’s competitiveness.35
It cited the following considerations which had justified its approval: (1) the Rehabilitation Plan
is endorsed by the Rehabilitation Receiver subject to certain recommendations; (2) the plan
ensures preservation of assets and orderly payment of debts; (3) the plan provides for recovery
rates on operating mode as opposed to liquidation values; (4) it contains details for a business
plan which will restore profitability and solvency of petitioner; (5) the projected cash flow can
support the continuous operation of the debtor as a going concern; (6) the plan did not ask for
a waiver of the principal; (7) the plan preserves the security of the secured creditor; (8) the plan
has provisions to ensure that future income will inure to the benefit of the creditors; and (9) the
rehabilitation of the debtor benefits its employees, creditors, stockholders and, in a large sense,
the general public as it will generate employment and is a potential source of revenue for the
government.36
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing that the approval of
the Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same
was submitted without prior consultation with creditors.37
The CA Ruling
In a Decision38 dated August 30, 2012, the CA affirmed the RTC’s approval of the Rehabilitation
Plan.39
It found that: (a) the rehabilitation of SMMCI is feasible considering the outstanding revenue
performance of St. Michael Hospital, which it shall absorb, showing its gross profit exceeding its
operating expenses and the large probability of increased profitability due to the favorable
economic conditions of the locality; (b) the approval of the Rehabilitation Plan did not amount to
an impairment of contract since there was no directive for the release of the mortgaged
properties to which BPI Family is entitled to as a secured creditor but only a suspension of the
provisions of the loan agreements; (c) it is not mandatory for the validity of the Rehabilitation
Plan that the Rehabilitation Receiver should consult with the creditors; and (d) the approval of
the Rehabilitation Plan was not made arbitrarily since it was done only after a review of the
10
pleadings filed and the report submitted by the Rehabilitation Receiver, and its approval was
anchored on valid considerations.40
Page
Dissatisfied, BPI Family moved for reconsideration which was denied in a Resolution41 dated Perforce, the remedy of corporate rehabilitation is improper, thus rendering the dispositions of
January 18, 2013, hence, this petition. the courts a quoinfirm.

The Issue Before the Court II.

The essential issue in this case is whether or not the CA correctly affirmed SMMCI’s In fact, for the same reasons, the Court observes that SMMCI could not have even complied
Rehabilitation Plan as approved by the RTC. with the form and substance of a proper rehabilitation petition, and submit its accompanying
documents, among others, the required financial statements of a going concern. Section 2, Rule
4 of the 2008 Rules of Procedure on Corporate Rehabilitation47 (Rules), which were in force at
The Court’s Ruling
the time SMMCI’s rehabilitation petition was filed on August 11, 2010, pertinently provides:

The petition is meritorious.

SEC. 2. Contents of Petition. -

I.
xxxx

Restoration is the central idea behind the remedy of corporate rehabilitation. In common
(b)The petition shall be accompanied by the following documents:
parlance, to "restore" means "to bring back to or put back into a former or original
state."42 Case law explains that corporate rehabilitation contemplates a continuance of corporate
life and activities in an effort to restore and reinstate the corporation to its former (1)An audited financial statement of the debtor at the end of its last fiscal year;
position of successful operation and solvency, the purpose being to enable the
company to gain a new lease on life and allow its creditors to be paid their claims
(2)Interim financial statements as of the end of the month prior to the filing of the
out of its earnings.43 Consistent therewith is the term’s statutory definition under Republic Act
petition;
No. 10142,44 otherwise known as the "Financial Rehabilitation and Insolvency Act of 2010"
(FRIA), which provides:
xxxx
Section 4. Definition of Terms. – As used in this Act, the term:
Note that this defect is not negated by the submission of the financial documents pertaining to
St. Michael Hospital, which is a separate and distinct entity from SMMCI. While the CA gave
xxxx
considerable weight to St. Michael Hospital’s supposed "profitability," as explicated in its own
financial statements, as well as the feasibility study conducted by Mrs. Alibangbang,48 in
(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful affirming the RTC, it has unwittingly lost sight of the essential fact that SMMCI stands as the
operation and solvency, if it is shown that its continuance of operation is economically sole petitioning debtor in this case; as such, its rehabilitation should have been primarily
feasible and its creditors can recover by way of the present value of payments projected in the examined from the lens of its own financial history. While SMMCI claims that it would absorb St.
plan, more if the debtor continues as a going concern than if it is immediately liquidated. Michael Hospital’s operations, there was dearth of evidence to show that a merger was already
agreed upon between them. Accordingly, St. Michael Hospital’s financials cannot be utilized as
basis to determine the feasibility of SMMCI’s rehabilitation.
x x x x (Emphasis supplied)

Note further that while it appears that Sps. Rodil effectively owned and exercised control over
In other words, rehabilitation assumes that the corporation has been operational but
the two entities, such fact does not, by and of itself, warrant their singular treatment for to do
for some reasons like economic crisis or mismanagement had become distressed or
so would only confuse the objective of the proceedings which is to ascertain whether the
insolvent, i.e., that it is generally unable to pay its debts as they fall due in the ordinary course
petitioning corporation, and not any other entity related thereto (except if joining as a co-
of business or has liability that are greater than its assets.45 Thus, the basic issues in
petitioning debtor), may be rehabilitated. Neither is the proceeding the proper forum to pierce
rehabilitation proceedings concern the viability and desirability of continuing the business
the corporate fictions of both entities for it involves no creditor claiming to be a victim of fraud,
operations of the distressed corporation,46 all with a view of effectively restoring it to a state of
an essential requisite for the application of such doctrine.49
solvency or to its former healthy financial condition through the adoption of a rehabilitation plan.

In fine, the petition should not have been given due course, nor should a Stay Order have been
In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a position of
issued.1âwphi1
successful operation and solvency at the time the Rehabilitation Petition was filed on August 11,

11
2010. While it had indeed "commenced business" through the preparatory act of opening a
credit line with BPI Family to finance the construction of a new hospital building for its future

Page
operations, SMMCI itself admits that it has not formally operated nor earned any income since
its incorporation. This simply means that there exists no viable business concern to be restored.
 III.
To compound its error, the CA even disregarded the fact that SMMCI’s Rehabilitation Plan, an
indispensable requisite in corporate rehabilitation proceedings, failed to comply with the
fundamental requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a material
financial commitment to support the rehabilitation and an accompanying liquidation analysis, all
of the petitioning debtor:
SEC. 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business
targets or goals and the duration and coverage of the rehabilitation; (b) the terms and
conditions of such rehabilitation which shall include the manner of its implementation, giving
due regard to the interests of secured creditors such as, but not limited, to the non- impairment
of their security liens or interests; (c) the material financial commitments to support the
rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may
include debt to equity conversion, restructuring of the debts, dacion en pago or sale exchange
or any disposition of assets or of the interest of shareholders, partners or members; (e) a
liquidation analysis setting out for each creditor that the present value of payments
it would receive under the plan is more than that which it would receive if the assets
of the debtor were sold by a liquidator within a six-month period from the estimated
date of filing of the petition; and (f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the rehabilitation plan. (Emphases
supplied)
A. Lack of Material Financial Commitment
to Support the Rehabilitation Plan.
A material financial commitment becomes significant in gauging the resolve, determination,
earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the
would- be investors of the debtor-corporation indicating their readiness, willingness and ability
to contribute funds or property to guarantee the continued successful operation of the
debtor corporation during the period of rehabilitation.50
In this case, aside from the harped on merger of St. Michael Hospital with SMMCI, the only
proposed source of revenue the Rehabilitation Plan suggests is the capital which would come
from SMMCI’s potential investors, which negotiations are merely pending. Evidently, both
propositions commonly border on the speculative and, hence, hardly fit the description of a
material financial commitment which would inspire confidence that the rehabilitation would turn
out to be successful. In fact, the Rehabilitation Receiver himself recognizes the ambiguity of the
proposition when he recommended that:
[T]he petitioner should provide for details on its statements regarding the prospective investors.
If true or in case it happens, then this fresh capital should be used partly to pay the bank and
the rest, to improve the hospital to make it more competitive with the nearby medical service
providers.51
In the same manner, the fact that St. Michael Hospital had previously made payments for the
benefit of SMMCI is not enough assurance that the arrangement would prospectively apply in
the event that rehabilitation is granted. As case law intimates, nothing short of legally binding
investment commitment/s from third parties is required to qualify as a material financial
commitment.52 However, no such binding investment was presented in this case.
B. Lack of Liquidation Analysis.
SMMCI likewise failed to include any liquidation analysis in its Rehabilitation Plan. The Court
observes that as of November 16, 2009, or about 9 months prior to the filing of the petition for
rehabilitation, the loan with BPI Family had already amounted to 52,784,589.34, with interest at
10.25% p.a. or a daily interest of about 6,655.48 and late payment charge of 36%
p.a.53 However, with no SMMCI financial statement on record, it is unclear to the Court what
assets it possesses in order to determine the values to be derived if liquidation has to be had
thereby. Accordingly, this prevents the Court from ascertaining if the petitioning debtor’s
creditors can recover by way of the present value of payments projected in the plan,
more if the debtor continues as a going concern than if it is immediately liquidated, a
crucial factor in a corporate rehabilitation case. Again, the financial records of St. Michael
Hospital, being a separate and distinct entity whose merger with SMMCI only exists in the realm
of probability, cannot be taken as a substitute to fulfill the requirement. What remains pertinent
are the financial statements of SMMCI for it solely stands as the debtor to be rehabilitated, or
liquidated in this case.
At any rate, records disclose that St. Michael Hospital’s current cash operating position54 is just
enough to meet its own maturing obligations.55 While it has substantial total assets, a large
portion thereof is comprised of fixed assets, while its current assets56 consist mostly of
inventory.57 Still, the total liquidation assets and the estimated liquidation return to the creditors,
as well as the fair market value vis-à-vis the forced liquidation value of the fixed assets that
would guide the Court in assessing the feasibility of the Rehabilitation Plan were not shown.
C. Effect of Non-Compliance.
The failure of the Rehabilitation Plan to state any material financial commitment to support
rehabilitation, as well as to include a liquidation analysis, translates to the conclusion that the
RTC’s stated considerations for approval, i.e., that (a) the plan provides for recovery rates on
operating mode as opposed to liquidation values; (b) it contains details for a business plan
which will restore profitability and solvency on petitioner; (c) the projected cash flow can
support the continuous operation of the debtor as a going concern; and (d) the plan has
provisions to ensure that future income will inure to the benefit of the creditors,58 are
actually unsubstantiated, and hence, insufficient to decree SMMCI’s rehabilitation. It is well to
emphasize that the remedy of rehabilitation should be denied to corporations that do not qualify
under the Rules. Neither should it be allowed to corporations whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence
of a sound and workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the execution of the
business plan.59 Unfortunately, these negative indicators have all surfaced to the fore, much to
SMMCI’s chagrin.
IV.
While the Court recognizes the financial predicaments of upstart corporations under the
prevailing economic climate, it must nonetheless remain forthright in limiting the remedy of
rehabilitation only to meritorious cases. As above-mentioned, the purpose of rehabilitation
12
proceedings is not only to enable the company to gain a new lease on life but also to allow
creditors to be paid their claims from its earnings, when so rehabilitated. Hence, the remedy
must be accorded only after a judicious regard of all stakeholders’ interests; it is not a one-sided
Page
tool that may be graciously invoked to escape every position of distress.
In this case, not only has the petitioning debtor failed to show that it has formally began its
operations which would warrant restoration, but also it has failed to show compliance with the
key requirements under the Rules, the purpose of which are vital in determining the propriety of
rehabilitation. Thus, for all the reasons hereinabove explained, the Court is constrained to rule in
favor of BPI Family and hereby dismiss SMMCI’s Rehabilitation Petition. With this
pronouncement, it is now unnecessary to delve on the other ancillary issues raised herein.

WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2012 and the
Resolution dated January 18, 2013 of the Court of Appeals in CA-G.R. SP No. 121004 upholding
the Order dated August 4, 2011 of the Regional Trial Court of Imus, Cavite, Branch 21
approving the Rehabilitation Plan of respondent St. Michael Medical Center, Inc. (SMMCI) are
hereby REVERSED and SET ASIDE. Accordingly, SMMCI’s Petition for Corporate Rehabilitation
is DISMISSED.

SO ORDERED.

13
Page
 PBC v. BPPC
G.R. No. 187581 October 20, 2014
PHILIPPINE BANK OF COMMUNICATIONS, Petitioner,
vs.
BASIC POLYPRINTERS AND PACKAGING CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This appeal is taken from the decision promulgated on December 16, 2008 in C.A.-G.R. CV No. I
02484 entitled Philippine Bank of Communications, v. Basic Polyprinters and Packaging
Corporation,1 whereby the Court of Appeals (CA) affirmed the order issued on January 11, 2008
by the Regional Trial Court (RTC), Branch 21, in Imus, Cavite, viz:
WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Order dated
January 11, 2008 of the Regional Trial Court oflmus, Cavite, Branch 21, is hereby AFFIRMED.
SO ORDERED.2
Antecedents
Respondent Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a domestic
corporation engaged in the business of printing greeting cards, gift wrappers, gift bags,
calendars, posters, labels and other novelty items.3
On February 27, 2004, Basic Polyprinters, along with the eight other corporations belonging to
the Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine Arts International,
Gibson HP Corporation, Gibson Mega Corporation, Harry U. Limtong Corporation, Main Pacific
Features, Inc., T.O.L. Realty & Development Corp., and Wonder Book Corporation), filed a joint
petition for suspension of paymentswith approval of the proposed rehabilitation in the RTC
(docketed as SEC Case No. 031-04).4 The RTC issued a stay order, and eventually approved the
rehabilitation plan, but the CA reversed the RTC on October 25, 2005,5 and directed the
petitioning corporations tofile their individual petitions for suspension of payments and
rehabilitation in the appropriate courts.
Accordingly, Basic Polyprinters brought its individual petition,6 averring therein that: (a) its
business since incorporation had been very viable and financially profitable; (b) it had obtained
loans from various banks, and had owed accounts payable to various creditors; (c) the Asian
currency crisis, devaluation of the Philippine peso, and the current state of affairs of the
Philippine economy, coupled with: (i) high interest rates, penalties and charges by its creditors;
(ii) low demand for gift items and cards due to the economic recession and the use of cellular
phones; (iii) direct competition from stores like SM, Gaisano, Robinson and other malls; and (iv)
the fire of July 19, 2002 that had destroyed its warehouse containing inventories worth
₱264,000,000.00, resulting in difficulty of meeting its obligations; (d) its operations would be
hampered and would render rehabilitation difficult should its creditors enforce their claims
through legal actions, including foreclosure proceedings; (e) included in its overall Rehabilitation
Program was the full payment of its outstanding loans in favor of petitioner Philippine Bank of
Communications (PBCOM), RCBC, Land Bank, EPCI Bank and AUB via repayment over 15 years
with moratorium of two-years for the interestand five years for the principal at 5% interest per
annumand a dacion en pagoof its affiliate property in favor of EPCI Bank; and (f) its assets
worth ₱15,374,654.00 with net liabilities amounting to ₱13,031,438.00.7
Finding the petition sufficient in formand substance, the RTC issued the stay order dated August
31, 2006.8 It appointed Manuel N. Cacho III as the rehabilitation receiver, and required all
creditors and interested parties, including the Securities and Exchange Commission (SEC), to file
their comments.
After the initial hearing and evaluation of the comments and opposition of the creditors,
including PBCOM, the RTC gave due course to the petition and referred it to the rehabilitation
receiver for evaluation and recommendation.9
On October 18, 2007, the rehabilitation receiver submitted his report recommending the
approval of the rehabilitation plan. On December 19, 2007, the rehabilitation receiver submitted
his clarifications and corrections to his report and recommendations.10
Ruling of the RTC
On January 11, 2008, the RTC issued an order approving the rehabilitation plan,11 the pertinent
portion of which reads:
Petitioner’s primary business is in the printing business. Based on its updated financial report,
the financial condition has greatly improved.
However, because of the indebtedness and the slowdown in sales brought about by a depressed
economy, the present income from the operations will be insufficient to pay off its maturing
obligations. Thus, the success of the rehabilitation planlargely depends on its ability to reduce its
debt obligation to a manageable level by the suspension of payments of obligations and the
proposed "dacion en pago."
The projected cash flow attached to the report and the repayment program demonstrates the
ability of the company to settle its debt liability.
Other factors which justify the approval of the Rehabilitation Plan are as follows:
1. The petitioner has a positive net worth and inventory that can be converted into
resources.
2. The Plan ensures preservation of assets, optimizes recovery of creditors’ claims and
provides ofan orderly payment of debts.
3. The plan will restore petitioner to profitability and solvency and maintain it as an
14
on-going concern to the benefit of the stockholders, investors and creditors.
Page
 4. The rehabilitation and the continuous operation of the company will generate
employment.
5. The plan is endorsed by the Rehabilitation Receiver.
CONSIDERING THE FOREGOING, the Court hereby approves the detailed Rehabilitation Plan
including the Receiver’s Report and Recommendations and its clarifications and corrections and
enjoins the petitioner to comply strictly with the provisions of the plan, perform its obligations
thereunder and take all actions necessary to carry out the plan, failing which, the Court shall
either, upon motion, motu proprio or upon the recommendation of the Rehabilitation Receiver,
terminate the proceedings pursuant to Section 27, Rule 1 of the Interim Rules of Procedure on
Corporate Rehabilitation.
The Rehabilitation Receiver is directed to strictly monitor the implementation of the Plan and
submit a quarterly report on the progress thereon.
SO ORDERED.
PBCOM appealed to the CA in due course.
Ruling of the CA
In the assailed decision promulgated on December 16, 2008,12 the CA affirmed the questioned
order of the RTC, agreeing with the finding of the rehabilitation receiver that there were
sufficient evidence, factors and actual opportunities in the rehabilitation plan indicating that
Basic Polyprinters could be successfully rehabilitated in due time.13
Emphasizing the equitable and rehabilitative purposes of rehabilitation proceedings, the CA
stated that Presidential Decree No. 902-A, as amended, sought to "effect a feasible and viable
rehabilitation by preserving a foundering business as going concern" because it would be more
valuable to preserve the assets of the corporation14 rather than to pursue its liquidation; and
observed in closing:
One last word. The purpose of rehabilitation proceedings is to enable the company to gain new
lease on life and thereby allows creditors to be paid their claims from its earnings. Rehabilitation
contemplates a continuance of corporate life and activities in an effort to restore and reinstate
the financially distressed corporation to its former position of successful operation and solvency.
This is in consonance with the State’s objective to promote a wider and moremeaningful
equitable distribution of wealth to protect investments and the public. The approval of the
Rehabilitation Plan by the trial court is precisely in furtherance of the rationale behind the
Interim Rules of Corporate Rehabilitation is to effect a feasible and viable rehabilitation ofailing
corporations which affect the public welfare.15
PBCOM moved for reconsideration, 16
but its motion was denied.
Issues
Hence, this appeal by PBCOM upon the following issues, namely:
I
THE COURT OF APPEALS GRAVELY ERRED IN DISMISSING PETITIONER’S PETITION FOR
REVIEW AND AFFIRMING THE ORDER DATED JANUARY 11, 2008, CONSIDERING THAT:
A
A PETITION FILED PURSUANT TO THE INTERIM RULES OF PROCEDURE ON CORPORATE
REHABILITATION PRESUPPOSES THAT THE PETITIONING CORPORATION HAS SUFFICIENT
PROPERTY TO COVER ALL ITS INDEBTEDNESS. RESPONDENT IS INSOLVENT AS ITS ASSETS
ARE LESS THAN ITS OBLIGATIONS;
B
THE "DETAILED REHABILITATION PLAN" DOES NOT PROVIDE MATERIAL FINANCIAL
COMMITMENTS FROM RESPONDENT ITSELF OR WOULD-BE INVESTORS
C
THE TERMS AND CONDITIONS OF THE "APPROVED REHABILITATION PLAN" ARE TOO
ONEROUS PARTICULARLY THE REHABILITATION TERM OF FIFTEEN (15) YEARS AS WELL AS
THE "WAIVER" OF ALL INTEREST AND PENALTIES BEGINNING FEBRUARY 2004 UPTO THE
TIME OF ITS APPROVAL.17
The petitioner claims that the CA did not pass upon the issues presented in its petition,
particularly Basic Polyprinters’ liquidity that was material in proceedings for corporate
rehabilitation; that a petition for rehabilitation presupposed that the petitioning corporation had
sufficient property to cover all its indebtedness, but Basic Polyprinters did not show so because
its assets were much less thanits outstanding obligations; that Basic Polyprinters had under-
declared its outstanding loans, i.e., its total loan obligations with the petitioner was at
₱118,411,702.70 as of June 30, 2006, and not just ₱71,315,086.00 as it claimed; that the
independent appraisal by the Professional Asset Valuers, Inc. (PAVI) on Basic Polyprinters’
machineries and printing equipment mortgaged to it (PBCOM) had a fair market value of only
₱6,531,000.00, and a prompt sale value of only ₱4,572,000.00, as compared to the fair market
value of ₱15,110,000.00 declared by Basic Polyprinters; that the rehabilitation plandid not
contain the material financial commitments required by Section 5, Rule 4 of the Interim Rules of
Procedure for Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed
repayment scheme did not constitute a material financial commitment, and the proposed dacion
en pagowas not proper because the property subject thereof had been mortgaged in its favor;
and that the absence of capital infusion rendered impossible the proposal to invest in new
machineries that would increase sales and improve quality and capacity.18
The petitioner posits that the assailed decision of the CA effectively gave Basic Polyprinters a
moratoriumfor seven years on both interest and principal payments counted from the issuance
of the stay order in 2004 that effectively prejudiced its creditors.19
15
Basic Polyprinters refutes the petitioner, saying that the petitioner raises factual issues improper
under Rule 45 of the Rules of Court; that as long as the rehabilitation court found that the
Page
petitioning corporation could still be rehabilitated, its findings of fact should be binding when
they were supported by substantial evidence; that the independent appraisal report by PAVI was
unauthorized by the RTC; and that the validity of the rehabilitation plan could be upheld for its or his liabilities as they fall due in the ordinary course of business or has liabilities that are
complete satisfaction of the requirements of Section 5, Rule4 of the Interim Rules. greater than its or his assets."28

In fine, we shall determine whether the approval of the rehabilitation plan was proper despite:
(a) the alleged insolvency of Basic Polyprinters; and (b) absence of a material financial
commitment pursuant to Section 5, Rule 4 of the Interim Rules.
Ruling
We reverse the judgment of the CA.
I commitment in the rehabilitation plan, thereby violating Section 5, Rule 4 of the Interim Rules,
Liquidity was not an issue in a petition for rehabilitation
The petitioner contends that the sole issue in corporate rehabilitation is one of liquidity; hence,
the petitioning corporation should have sufficient assets to cover all its indebtedness because it
only foresees the impossibility of paying the indebtedness falling due. It claims that
rehabilitation became inappropriate because Basic Polyprinters was insolvent due to its assets
being inadequate to cover the outstanding obligations.20
We disagree with the contention of the petitioner.
As such, the contention that rehabilitation becomes inappropriate because of the perceived
insolvency of BasicPolyprinters was incorrect.
II
A material financial commitment is significant in a rehabilitation plan
The petitioner next argues that Basic Polyprinters did not present any material financial
the rule applicable at the time of the filing of the petition for rehabilitation. In that regard, Basic
Polyprinters made no commitment in relation to the infusion of fresh capital by its
stakeholders,29 and presented only a "lopsided" protracted repayment schedule that included the
dacion en pago involving an asset mortgaged to the petitioner itself in favor of another creditor.
A material financial commitment becomes significant in gauging the resolve, determination,
earnestness and good faith ofthe distressed corporation in financing the proposed rehabilitation
plan.30 This commitment may include the voluntary undertakings ofthe stockholders or the
would-be investors of the debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation.31

Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a position of Basic Polyprinters presented financial commitments, as follows:
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
(a) Additional ₱10 million working capital to be sourced from the insurance claim;
plan more if the corporation continues as a going concern that if it is immediately
liquidated."21 It contemplates a continuance ofcorporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and solvency.22 (b) Conversion of the directors’ and shareholders’ deposit for future subscription to
common stock;32
In Asiatrust Development Bank v. First Aikka Development, Inc.,23 we said that rehabilitation
proceedings have a two-pronged purpose, namely: (a) to efficiently and equitably distribute the (c) Conversion of substituted liabilities, if any, to additional paid-in capital to increase
assets of the insolvent debtor to its creditors; and (b) to provide the debtor with a fresh start, the company’s equity; and
viz: Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes. On
the one hand, they attempt to provide for the efficient and equitable distribution ofan insolvent
(d) All liabilities (cash advances made by the stockholders) of the company from the
debtor's remaining assets to its creditors; and on the other, to provide debtors with a "fresh
officers and stockholders shall be treated as trade payables.33
start" by relieving them of the weight of their outstanding debts and permitting them to
reorganize their affairs. The purpose of rehabilitation proceedings is to enable the company to
gain a new lease on life and thereby allow creditors to be paidtheir claims from its earnings.24 However, these financial commitments were insufficient for the purpose.1âwphi1 We explain.

Consequently, the basic issues inrehabilitation proceedings concern the viability and desirability
of continuing the business operations of the petitioning corporation. The determination of such
issues was to be carried out by the court-appointed rehabilitation receiver,25 who was Cacho in
this case.
The commitment to add ₱10,000,000.00 working capital appeared to be doubtful considering
that the insurance claim from which said working capital would be sourced had already been
written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation.34 A claim that has been
written-off is considered a bad debt or a worthless asset,35 and cannot be deemed a material
financial commitment for purposes of rehabilitation. At any rate, the proposed additional
₱10,000,000.00 working capital was insufficient to cover at least half ofthe shareholders’ deficit

16
Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA) of 2010),
that amounted to ₱23,316,044.00 as of June 30, 2006.
a law that is applicable hereto,26 has defined a corporate debtor as a corporation duly organized
and existing under Philippine laws that has become insolvent.27 The term insolventis defined in

Page
Republic Act No. 10142 as "the financial condition of a debtor that is generally unable to pay its
We also declared in Wonder Book Corporation v. Philippine Bank of Communications (Wonder
Book)36 that the conversion of all deposits for future subscriptions to common stock and the
treatment of all payables to officers and stockholders as trade payables was hardly constituting
material financial commitments. Such "conversion" of cash advances to trade payables was, in
fact, a mere re-classification of the liability entry and had no effect on the shareholders’ deficit.
On the other hand, we cannot determine the effect of the "conversion"of the directors’ and
shareholders’ deposits for future subscription to common stock and substituted liabilities on the
shareholders’ deficit because their amounts were not reflected in the financial statements
contained in the rollo.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to
address the low demands for their products and the effect of direct competition from stores like
SM, Gaisano, Robinsons, and other malls. Even the ₱245 million insurance claim that was
supposed to cover the destroyed inventories worth ₱264 million appears to have been written-
off with no probability of being realized later on.

We observe, too, that Basic Polyprinters’s proposal to enter into the dacion en pagoto create a
source of "fresh capital" was not feasible because the object thereof would not be its own
property but one belonging to its affiliate, TOL Realty and Development Corporation, a
corporation also undergoing rehabilitation. Moreover, the negotiations (for the return of books
and magazines from Basic Polyprinters’s trade creditors) did not partake of a voluntary
undertaking because no actual financial commitments had been made thereon.

Worthy of note here is that Wonder Book Corporation was a sister company of Basic
Polyprinters, being one of the corporations that had filed the joint petition for suspension of
payments and rehabilitation in SEC Case No. 031-04 adverted to earlier. Both of them submitted
identical commitments in their respective rehabilitation plans. As a result, as the Court observed
in Wonder Book,37 the commitments by Basic Polyprinters could not be considered as firm
assurances that could convince creditors, future investors and the general public of its financial
and operational viability.

Due to the rehabilitation plan being an indispensable requirement in corporate rehabilitation

proceedings,38 Basic Polyprinters was expected to exert a conscious effort in formulating the
same, for such plan would spell the future not only for itself but also for its creditors and the
public in general. The contents and execution of the rehabilitation plan could not be taken
lightly. We are not oblivious to the plight of corporate debtors like Basic Polyprinters that have
inevitably fallen prey to economic recession and unfortunate incidents in the course of their
operations. However, we must endeavor to balance the interests of all the parties that had a
stake in the success of rehabilitating the debtors. In doing so here, we cannot now find the
rehabilitation plan for Basic Polyprinters to be genuine and in good faith, for it was, in fact,
unilateral and detrimental to its creditors and the public.

ACCORDINGLY, the Court GRANTS the petition for review on certiorari; SETS ASIDE and
REVERSES the decision promulgated on December 16, 2008 and the resolution promulgated on
April 22, 2009, both by the Court of Appeals, as well as the order issued on January 11, 2008 by
the Regional Trial Court approving the rehabilitation plan submitted by Basic Polyprinters and
Packaging Corporation; DISMISSES the petition for suspension of payments and rehabilitation of
Basic Polyprinters and Packaging Corporation; and DIRECTS Basic Polyprinters and Packaging

17
Corporation to pay the costs of suit.

Page
SO ORDERED.
 VIVA SHIPPING v. KEPPEL PHILIPPINES
February 17, 2016
G.R. No. 177382
VIVA SHIPPING LINES, INC., Petitioner,
vs.
KEPPEL PHILIPPINES MINING, INC., METROPOLITAN BANK & TRUST COMPANY,
PILIPINAS SHELL PETROLEUM CORPORATION, CITY OF BATANGAS, CITY OF
LUCENA, PROVINCE OF QUEZON, ALEJANDRO OLIT, NIDA MONTILLA, PIO
HERNANDEZ, EUGENIO BACULO, and HARLAN BACALTOS,Respondents.
DECISION
LEONEN, J.:
Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and decisions in
corporate rehabilitation cases filed under the Interim Rules of Procedure on Corporate
Rehabilitation. 1 Liberality in the application of the rules is not an end in itself. It must be
pleaded with factual basis and must be allowed for equitable ends. There must be no indication
that the violation of the rule is due to negligence or design. Liberality is an extreme exception,
justifiable only when equity exists.
On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for Corporate
Rehabilitation before the Regional Trial Court of Lucena City.2 The Regional Trial Court initially
denied the Petition for failure to comply with the requirements in Rule 4, Sections 2 and 3 of the
Interim Rules of Procedure on Corporate Rehabilitation.3 On October 17, 2005, Viva Shipping
Lines filed an Amended Petition.4
In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime
vessels5 and Ocean Palace Mall, a shopping mall in downtown Lucena City.6 Viva Shipping Lines
also declared its total properties’ assessed value at about ₱45,172,790.00.7 However, these
allegations were contrary to the attached documents in the Amended Petition.
One of the attachments, the Property Inventory List, showed that Viva Shipping Lines owned
only two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen.8 The list also
stated that the fair market value of all of Viva Shipping Lines’ assets amounted to
₱447,860,000.00,9 ₱400 million more than what was alleged in its Amended Petition. Some of
the properties listed in the Property Inventory List were already marked as "encumbered" by its
creditors;10 hence, only ₱147,630,000.00 of real property and its vessels were marked as "free
assets."11
Viva Shipping Lines also declared the following debts:
Amount of
Name of Creditor Nature of Debts
Obligation
Loan secured by Real
(1) Metropolitan Bank & Trust Company Estate Mortgage ₱176,428,745.50
Charges for Repair of
(2) Keppel Philippines Marine, Inc. Vessels 9,000,000.00+
(3) Province of Quezon, Lucena City, and Realty Taxes and
Province of Batangas, Batangas City Assessments 35,000,000.00+
TOTAL12 ₱220,428,745.50+
According to Viva Shipping Lines, the devaluation of the Philippine peso, increased competition,
and mismanagement of its businesses made it difficult to pay its debts as they became due.13 It
also stated that "almost all [its] vessels were rendered unserviceable either because of age and
deterioration that [it] can no longer compete with modern made vessels owned by other
operators."14
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of funding
such as the sale of old vessels and commercial lots of its sister company, Sto. Domingo Shipping
Lines.15 It also proposed the conversion of the Ocean Palace Mall into a hotel, the acquisition of
two (2) new vessels for shipping operations, and the "re-operation"16 of an oil mill in Buenavista,
Quezon.17
Viva Shipping Lines nominated two individuals to be appointed as rehabilitation receiver:
Armando F. Ragudo, a businessman from Tayabas, Quezon, and Atty. Calixto Ferdinand B. Dauz
III, a lawyer from Lucena City.18 A day after filing the Amended Petition, Viva Shipping Lines
submitted the name of a third nominee, Former Judge Jose F. Mendoza (Judge Mendoza).19
On October 19, 2005, the Regional Trial Court found that Viva Shipping Lines’ Amended Petition
to be "sufficient in form and substance," and issued a stay order.20 It stayed the enforcement of
all monetary and judicial claims against Viva Shipping Lines, and prohibited Viva Shipping Lines
from selling, encumbering, transferring, or disposing of any of its properties except in the
ordinary course of business.21 The Regional Trial Court also appointed Judge Mendoza as
rehabilitation receiver.
Before the initial hearing scheduled on December 5, 2005, the City of Batangas, Keppel
Philippines Marine, Inc., and Metropolitan Bank and Trust Company (Metrobank) filed their
respective comments and oppositions to Viva Shipping Lines’ Amended Petition.22
During the initial hearing, Pilipinas Shell Petroleum Corporation (Pilipinas Shell) moved for
additional time to write its opposition to Viva Shipping Lines’ Amended Petition.23 Pilipinas Shell
later filed its Comment/Opposition with Formal Notice of Claim.24
Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a Manifestation and
18
Registration of Monetary Claim stating that Viva Shipping Lines owes her ₱232,000.00 as
separation and 13th month pay.25 The Securities and Exchange Commission filed a Comment
Page
informing the Regional Trial Court that Viva Shipping Lines violated certain laws and rules of the
Commission.26
On March 24, 2006, Judge Mendoza withdrew his acceptance of appointment as rehabilitation
receiver.27 As replacement, Viva Shipping Lines nominated Atty. Antonio Acyatan, while
Metrobank nominated Atty. Rosario S. Bernaldo.28 Keppel Philippines Marine,
Inc.1âwphi1 adopted Metrobank’s nomination.29
On April 4, 2006, Metrobank filed a Motion for Production or Inspection of relevant documents
relating to Viva Shipping Lines’ business operations such as board resolutions, tax returns,
accounting ledgers, bank accounts, and contracts.30 Viva Shipping Lines filed its opposition.
However, the Regional Trial Court granted Metrobank’s Motion.31 Viva Shipping Lines failed to
comply with the Order to produce the documents,32 as well as with the Regional Trial Court
Order to submit a memorandum.33
On September 27, 2006, Viva Shipping Lines’ former employees Alejandro Olit, Nida Montilla, Pio
Hernandez, Eugenio Baculo, and Harlan Bacaltos34 (Alejandro Olit, et al.) filed their comment on
the Amended Petition, informing the Regional Trial Court of their pending complaint against Viva
Shipping Lines before the National Labor Relations Commission.35
In the Order dated October 30, 2006,36 the Regional Trial Court lifted the stay order and
dismissed Viva Shipping Lines’ Amended Petition for failure to show the company’s viability and
the feasibility of rehabilitation. The Regional Trial Court summarized Viva Shipping Lines’
creditors and debts:37
₱
TOTAL 147,630,000.00
The Regional Trial Court found that Viva Shipping Lines’ assets all appeared to be non-
performing. Further, it noted that Viva Shipping Lines failed to show any evidence of consent to
sell real properties belonging to its sister company.41
Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules of Court
before the Court of Appeals.42 It only impleaded Hon. Adolfo V. Encomienda, the Presiding
Judge of the trial court that rendered the assailed decision. It did not implead any of its
creditors, but served copies of the Petition on counsels for Metrobank, Keppel Philippines
Marine, Inc., Pilipinas Shell, City of Batangas, Province of Quezon, and City of Lucena.43 Viva
Shipping Lines neither impleaded nor served a copy of the Petition on its former employees or
their counsels.
The Court of Appeals dismissed Viva Shipping Lines’ Petition for Review in the Resolution dated
January 5, 2007.44It found that Viva Shipping Lines failed to comply with procedural
requirements under Rule 43.45 The Court of Appeals ruled that due to the failure of Viva
Shipping Lines to implead its creditors as respondents, "there are no respondents who may be
required to file a comment on the petition, pursuant to Section 8 of Rule 43."46

Viva Shipping Lines moved for reconsideration.47 It argued that its procedural misstep was cured
Amount of when it served copies of the Petition on the Regional Trial Court and on its former
Name of Creditor Nature of Debts38
Obligation employees.48 In the Resolution dated March 30, 2007, the Court of Appeals denied Viva Shipping
1 Batangas City Real Estate Taxes ₱264,006.52 Lines’ Motion for Reconsideration.49

2 Keppel Philippines Marine, Inc.
3 Metropolitan Bank & Trust
Company
Charges for Repair of Vessels
Loan secured by Real Estate
Mortgage
20,054,977.84 Viva Shipping Lines filed before this court a Petition for Review on Certiorari assailing the
January 5, 2007 and March 30, 2007 Court of Appeals Resolutions.50 It prayed that the case be
remanded to the Court of Appeals for adjudication on the merits.51
191,963,465.79

4 Pilipinas Shell Petroleum Corp. Supply Agreement 20,546,797.74 Without necessarily giving due course to the Petition, this court required respondents to
comment.52 Keppel Philippines Marine, Inc.,53 Pilipinas Shell,54 Metrobank,55 former employees
5 Luzviminda C. Cueto Labor 232,000.00 Alejandro Olit et al.,56 the City of Batangas,57 the City Treasurer of Lucena,58 and the Provincial
TOTAL ₱233,061,247.89 Treasurer of Quezon59 filed their respective Comments.

On September 17, 2008,60 December 10, 2008,61 and July 20, 2009,62 this court required Viva
The Regional Trial Court also noted the following as Viva Shipping Lines’ free assets:39 Shipping Lines to file replies to respondents’ comments. Viva Shipping Lines’ counsel, Abesamis
Law Office, withdrew its representation, which was accepted by this court.63 Viva Shipping Lines
was unable to file its consolidated reply; hence, this court resolved that Viva Shipping Lines’
Assessed right to file a consolidated reply was deemed waived.64
Nature of Property Market Value
Value

1. Agricultural/Industrial Lot in San Narciso, Quezon
covered by TCT No. T-155423
2. Agricultural Lot located at San Andres, Quezon
covered by TCT No. T-215549
₱ On September 1, 2011, Atty. Vicente M. Joyas (Atty. Joyas) entered his appearance as Viva
16,493,050.00 ₱ 40,000,000.00 Shipping Lines’ new counsel.65 Atty. Joyas moved for several extensions of time to comply with
this court’s order to file a consolidated reply. This court allowed Atty. Joyas’ Motions, and Viva
Shipping Lines’ consolidated reply was noted in our Resolution dated December 7, 2011.66 This
1,235,010.00 47,630,000.00 court then ordered the parties to submit their respective memoranda.67

19
3. MV Viva Peñafrancia 5 30,000,000.00

Page
4. MV Marian Queen 40
30,000,000.00
Viva Shipping Lines, Inc.68 and respondents Pilipinas Shell,69 Keppel Philippines Marine,
Inc.,70 and Metrobank71submitted their respective memoranda. This court dispensed with the
filing of the other respondents’ memoranda.72
We resolve the following issues:
First, whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines’ Petition for
Review on procedural grounds; and
Second, whether petitioner was denied substantial justice when the Court of Appeals did not
give due course to its petition.
Petitioner argues that the Court of Appeals should have given due course to its Petition and
excused its non-compliance with procedural rules.73 For petitioner, the Interim Rules of
Procedure on Corporate Rehabilitation mandates a liberal construction of procedural rules, which
must prevail over the strict application of Rule 43 of the Rules of Court.74
According to petitioner, this court disfavors dismissals based on pure technicalities and adopts a
policy stating that rules on appeal are "not iron-clad and must yield to loftier demands of
substantial [j]ustice and equity."75 For petitioner, the immediate dismissal of its Petition for
Review is contrary to the purpose of corporate rehabilitation to rescue and rehabilitate
financially distressed companies.76
Respondents, on the other hand, argue that the dismissal of petitioner’s Petition for Review was
proper for its failure to implead any of its creditors. Petitioner’s procedural misstep resulted in
the denial of the creditors’ right to due process as they could not file a comment on the
Petition.77 Respondent Pilipinas Shell points out that petitioner did not even try to explain why it
failed to implead its creditors in its Petition.78
Respondents cite Rule 43, Section 7, which states that non-compliance with any of the
requirements of proof of service of the Petition, and the required contents, shall be sufficient
ground for the dismissal of the Petition.79Compliance with Rule 43 is required under the Interim
Rules of Procedure on Corporate Rehabilitation because it is the prescribed mode of appealing
trial court decisions and final orders in corporate rehabilitation cases.80 According to respondent
Metrobank, contrary to the views of petitioner, the policy of liberality in construction of the
Interim Rules of Procedure on Corporate Rehabilitation are limited to proceedings in the
Regional Trial Court, and not with respect to procedural rules in elevating appeals relating to
corporate rehabilitation.81
Respondents note that because petitioner repeatedly defied procedural rules, it therefore was
no longer entitled to the relaxation of these rules.82 Respondent Pilipinas Shell also points out
the defects in the verification, certification of non-forum shopping, and attachments of petitioner
in its Petition before this court.83
Respondent City of Batangas emphasizes that the Rules of Court are promulgated to facilitate
the adjudication of cases. It argues that petitioner should not be afforded equitable
considerations as it acted in bad faith by concealing material information during the
rehabilitation proceedings.84
Respondents further argue that even if the Court of Appeals gave due course to the Petition, it
would still have dismissed the case on the merits. Respondents cite petitioner’s failure to provide
material facts with sufficient particularity in its Amended Petition for Corporate
Rehabilitation.85 Petitioner also failed to disclose some of its creditors, as well as the several
pending cases relating to its financial liabilities.86 It failed to describe with specificity the cause
of its inability to pay its debts.87 It also failed to clarify which vessels were still under its
ownership, and which vessels had maritime liens.88 Petitioner merely estimated its liabilities
against its creditors.89 Respondents also allege that petitioner nominated rehabilitators who are
professionally connected with its counsel despite the existence of conflict of interest.90
Respondents point out that petitioner’s admission that almost all its vessels are rendered
unserviceable suggests that rehabilitation is no longer viable.91 Former employees also mention
that despite petitioner’s desire to rehabilitate, after the Regional Trial Court’s final order,
petitioner began disposing of some of its assets.92Respondents also cannot rely on the plan to
sell some of petitioner’s sister company’s properties. They also express doubts regarding
petitioner’s plan of converting its mall to a hotel/restaurant because it had no such experience.
Respondents thus characterize Viva Shipping Lines’ rehabilitation plan as "unrealistic, untested,
and improbable."93
We deny the Petition.
I
Corporate rehabilitation is a remedy for corporations, partnerships, and associations "who
[foresee] the impossibility of meeting [their] debts when they respectively fall due."94 A
corporation under rehabilitation continues with its corporate life and activities to achieve
solvency,95 or a position where the corporation is able to pay its obligations as they fall due in
the ordinary course of business. Solvency is a state where the businesses’ liabilities are less than
its assets.96
Corporate rehabilitation is a type of proceeding available to a business that is insolvent. In
general, insolvency proceedings provide for predictability that commercial obligations will be met
despite business downturns. Stability in the economy results when there is assurance to the
investing public that obligations will be reasonably paid. It is considered state policy
to encourage debtors, both juridical and natural persons, and their creditors to collectively and
realistically resolve and adjust competing claims and property rights[.] . . . [R]ehabilitation 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. When rehabilitation is not feasible, it is in the interest of the State to
facilitate a speedy and orderly liquidation of these debtors’ assets and the settlement of their
obligations.97 (Emphasis supplied)
The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because
"assets . . . are often more valuable when so maintained than they would be when
liquidated."98 Rehabilitation assumes that assets are still serviceable to meet the purposes of the
20
business. The corporation receives assistance from the court and a disinterested rehabilitation
receiver to balance the interest to recover and continue ordinary business, all the while
Page
attending to the interest of its creditors to be paid equitably. These interests are also referred to
as the rehabilitative and the equitable purposes of corporate rehabilitation.99
The nature of corporate rehabilitation was thoroughly discussed in Pryce Corporation v. China
Banking Corporation:100
Corporate rehabilitation is one of many statutorily provided remedies for businesses that
experience a downturn. Rather than leave the various creditors unprotected, legislation now
provides for an orderly procedure of equitably and fairly addressing their concerns. Corporate
rehabilitation allows a court-supervised process to rejuvenate a corporation. . . . It provides a
corporation’s owners a sound chance to re-engage the market, hopefully with more vigor and
enlightened services, having learned from a painful experience.
Necessarily, a business in the red and about to incur tremendous losses may not be able to pay
all its creditors. Rather than leave it to the strongest or most resourceful amongst all of them,
the state steps in to equitably distribute the corporation’s limited resources.
....
Rather than let struggling corporations slip and vanish, the better option is to allow commercial
courts to come in and apply the process for corporate rehabilitation.101
Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation102 reiterates
that courts "must endeavor to balance the interests of all the parties that had a stake in the
success of rehabilitating the debtors."103These parties include the corporation seeking
rehabilitation, its creditors, and the public in general.104
The public’s interest lies in the court’s ability to effectively ensure that the obligations of the
debtor, who has experienced severe economic difficulties, are fairly and equitably served. The
alternative might be a chaotic rush by all creditors to file separate cases with the possibility of
different trial courts issuing various writs competing for the same assets. Rehabilitation is a
means to temper the effect of a business downturn experienced for whatever reason. In the
process, it gives entrepreneurs a second chance. Not only is it a humane and equitable relief, it
encourages efficiency and maximizes welfare in the economy.
Clearly then, there are instances when corporate rehabilitation can no longer be achieved. When
rehabilitation will not result in a better present value recovery for the creditors,105 the more
appropriate remedy is liquidation.106
It does not make sense to hold, suspend, or continue to devalue outstanding credits of a
business that has no chance of recovery. In such cases, the optimum economic welfare will be
achieved if the corporation is allowed to wind up its affairs in an orderly manner. Liquidation
allows the corporation to wind up its affairs and equitably distribute its assets among its
creditors.107
Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at the same
time.108 In rehabilitation, corporations have to maintain their assets to continue business
operations. In liquidation, on the other hand, corporations preserve their assets in order to sell
them. Without these assets, business operations are effectively discontinued. The proceeds of
the sale are distributed equitably among creditors, and surplus is divided or losses are re-
allocated.109
Proceedings in case of insolvency are not limited to rehabilitation. Our laws have evolved to
provide for different procedures where a debtor can undergo judicially supervised reorganization
or liquidation of its assets.110
Corporate rehabilitation traces its roots to Act No. 1956, otherwise known as the Insolvency Law
of 1909. Under the Insolvency Law, a debtor in possession of sufficient properties to cover all its
debts but foresees the impossibility of meeting them when they fall due may file a petition
before the court to be declared in a state of suspension of payments.111 This allows time for the
debtor to organize its affairs in order to achieve a state where it can comply with its obligations.
The relief was also provided in the amendatory provisions of Presidential Decree No. 902-A.
Section 5 of Presidential Decree No. 902-A states that the Securities and Exchange Commission
has jurisdiction to decide:
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when
they respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver
or Management Committee created pursuant to this Decree.112 (Emphasis supplied).
In 2000, the jurisdiction of the Securities and Exchange Commission over these cases was
transferred to the Regional Trial Court,113 by operation of Section 5.2 of the Securities
Regulation Code.114 In the same year, this court approved the Interim Rules of Procedure on
Corporate Rehabilitation. The Interim Rules of Procedure on Corporate Rehabilitation provides a
summary and non-adversarial proceeding to expedite the resolution of cases for the benefit of
the corporation in need of rehabilitation, its creditors, and the public in general.115
Currently, the prevailing law and procedure for corporate rehabilitation is the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA).116 FRIA provides procedures for the different
types of rehabilitation and liquidation proceedings. The Financial Rehabilitation Rules of
Procedure was issued by this court on August 27, 2013.117
However, since the Regional Trial Court acted on petitioner’s Amended Petition before FRIA was
enacted, Presidential Decree No. 902-A and the Interim Rules of Procedure on Corporate
Rehabilitation were applied to this case.118
II
The controversy in this case arose from petitioner’s failure to comply with appellate procedural
rules in corporate rehabilitation cases. Petitioner now pleads this court to apply the policy of
liberality in constructing the rules of procedure.119
We observe that during the corporate rehabilitation proceedings, the Regional Trial Court
already exercised the liberality contemplated by the Interim Rules of Procedure on Corporate
Rehabilitation. The Regional Trial Court initially dismissed Viva Shipping Lines’ Petition but
21
allowed the filing of an amended petition. Later on, the same court issued a stay order when
there were sufficient grounds to believe that the Amended Petition complied with Rule 4,
Page
Section 2 of the Interim Rules of Procedure on Corporate Rehabilitation. Petitioner was not
penalized for its non-compliance with the court’s order to produce relevant documents or for its
non-submission of a memorandum.120
Even with these accommodations, the trial court still found basis to dismiss the plea for
rehabilitation.
Any final order or decision of the Regional Trial Court may be subject of an appeal.121 In Re:
Mode of Appeal in Cases Formerly Cognizable by the Securities and Exchange
Commission,122 this court clarified that all decisions and final orders falling under the Interim
Rules of Procedure on Corporate Rehabilitation shall be appealable to the Court of Appeals
through a petition for review under Rule 43 of the Rules of Court.123
New Frontier Sugar Corporation v. Regional Trial Court, Branch 39, Iloilo City124 clarifies that an
appeal from a final order or decision in corporate rehabilitation proceedings may be dismissed
for being filed under the wrong mode of appeal.125
New Frontier Sugar doctrinally requires compliance with the procedural rules for appealing
corporate rehabilitation decisions. It is true that Rule 1, Section 6 of the Rules of Court provides
that the "[r]ules shall be liberally construed in order to promote their objective of securing a
just, speedy and inexpensive disposition of every action and proceeding." However, this
provision does not negate the entire Rules of Court by providing a license to disregard all the
other provisions. Resort to liberal construction must be rational and well-grounded, and its
factual bases must be so clear such that they outweigh the intent or purpose of an apparent
reading of the rules.
Rule 43 prescribes the mode of appeal for corporate rehabilitation cases:
Sec. 5. How appeal taken. – Appeal shall be taken by filing a verified petition for review in seven
(7) legible copies with the Court of Appeals, with proof of service of a copy thereof on the
adverse party and on the court or agency a quo. The original copy of the petition intended for
the Court of Appeals shall be indicated as such by the petitioner.
....
Sec. 6. Contents of the petition. – The petition for review shall (a) state the full names of the
parties to the case, without impleading the court or agencies either as petitioners or
respondents; (b) contain a concise statement of the facts and issues involved and the grounds
relied upon for the review; (c) be accompanied by a clearly legible duplicate original or a
certified true copy of the award, judgment, final order or resolution appealed from, together
with certified true copies of such material portions of the record referred to therein and other
supporting papers; and (d) contain a sworn certification against forum shopping as provided in
the last paragraph of section 2, Rule 42. The petition shall state the specific material dates
showing that it was filed within the period fixed herein. (Emphasis supplied)
Petitioner did not comply with some of these requirements. First, it did not implead its creditors
as respondents. Instead, petitioner only impleaded the Presiding Judge of the Regional Trial
Court, contrary to Section 6(a) of Rule 43. Second, it did not serve a copy of the Petition on
some of its creditors, specifically, its former employees. Finally, it did not serve a copy of the
Petition on the Regional Trial Court.
Petitioner justified its failure to furnish its former employees with copies of the Petition by
stating that the former employees were late in filing their opposition before the trial court.126 It
also stated that its failure to furnish the Regional Trial Court with a copy of the Petition was
unintentional.127
The Court of Appeals correctly dismissed petitioner’s Rule 43 Petition as a consequence of non-
compliance with procedural rules. Rule 43, Section 7 of the Rules of Court states:
Sec. 7. Effect of failure to comply with requirements. – The failure of the petitioner to comply
with any of the foregoing requirements regarding the payment of the docket and other lawful
fees, the deposit of costs, proof of service of the petition, and the contents of and the
documents which should accompany the petition shall be sufficient ground for the dismissal
thereof.
Petitioner admitted its failure to comply with the rules. It begs the indulgence of the court to
give due course to its Petition based on their belated compliance with some of these procedural
rules and the policy on the liberal construction of procedural rules.
There are two kinds of "liberality" with respect to the construction of provisions of law. The first
requires ambiguity in the text of the provision and usually pertains to a situation where there
can be two or more viable meanings given the factual context presented by a case. Liberality
here means a presumption or predilection to interpret the text in favor of the cause of the party
requesting for "liberality."
Then there is the "liberality" that actually means a request for the suspension of the operation
of a provision of law, whether substantive or procedural. This liberality requires equity. There
may be some rights that are not recognized in law, and if courts refuse to recognize these
rights, an unfair situation may arise.128 Specifically, the case may be a situation that was not
contemplated on or was not possible at the time the legal norm was drafted or promulgated.
It is in the second sense that petitioner pleads this court.
III
Our courts are not only courts of law, but are also courts of equity.129 Equity is justice outside
legal provisions, and must be exercised in the absence of law, not against it.130 In Reyes v.
Lim:131 Equity jurisdiction aims to do complete justice in cases where a court of law is unable to
adapt its judgments to the special circumstances of a case because of the inflexibility of its
statutory or legal jurisdiction. Equity is the principle by which substantial justice may be attained
in cases where the prescribed or customary forms of ordinary law are inadequate.132 (Citation
omitted)
Liberality lies within the bounded discretion of a court to allow an equitable result when the
proven circumstances require it. Liberality acknowledges a lacuna in the text of a provision of
law. This may be because those who promulgated the rule may not have foreseen the unique
circumstances of a case at bar. Human foresight as laws and rules are prepared is powerful, but
22
not perfect.
Page
Liberality is not an end in itself. Otherwise, it becomes a backdoor disguising the arbitrariness or
despotism of judges and justices. In North Bulacan Corp. v. PBCom,133 the Regional Trial Court
ignored several procedural rules violated by the petitioning corporation and allowed
rehabilitation in the guise of liberality. This court found that the Regional Trial Court grossly
abused its authority when it allowed rehabilitation despite the corporation’s blatant non-
compliance with the rules.
The factual antecedents of a plea for the exercise of liberality must be clear. There must also be
a showing that the factual basis for a plea for liberality is not one that is due to the negligence
or design of the party requesting the suspension of the rules. Likewise, the basis for claiming an
equitable result—for all the parties—must be clearly and sufficiently pleaded and argued. Courts
exercise liberality in line with their equity jurisdiction; hence, it may only be exercised if it will
result in fairness and justice.
IV
The first rule breached by petitioner is the failure to implead all the indispensable parties.
Petitioner did not even interpose reasons why it should be excused from compliance with the
rule to "state the full names of the parties to the case, without impleading the court . . . as . . .
respondents." Petitioner did exactly the opposite. It failed to state the full names of its creditors
as respondents. Instead, it impleaded the Presiding Judge of the originating court.
The Rules of Court requires petitioner to implead respondents as a matter of due process. Under
the Constitution, "[n]o person shall be deprived of life, liberty or property without due process of
the law."134 An appeal to a corporate rehabilitation case may deprive creditor-stakeholders of
property. Due process dictates that these creditors be impleaded to give them an opportunity to
protect the property owed to them.
Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is non-
adversarial. In Boston Equity Resources, Inc. v. Court of Appeals:135
An indispensable party is one who has such an interest in the controversy or subject matter of a
case that a final adjudication cannot be made in his or her absence, without injuring or affecting
that interest. He or she is a party who has not only an interest in the subject matter of the
controversy, but "an interest of such nature that a final decree cannot be made without
affecting [that] interest or leaving the controversy in such a condition that its final determination
may be wholly inconsistent with equity and good conscience. It has also been considered that
an indispensable party is a person in whose absence there cannot be a determination between
the parties already before the court which is effective, complete or equitable." Further, an
indispensable party is one who must be included in an action before it may properly proceed.136
A corporate rehabilitation case cannot be decided without the creditors’ participation. The
court’s role is to balance the interests of the corporation, the creditors, and the general public.
Impleading creditors as respondents on appeal will give them the opportunity to present their
legal arguments before the appellate court. The courts will not be able to balance these
interests if the creditors are not parties to a case. Ruling on petitioner’s appeal in the absence of
its creditors will not result in judgment that is effective, complete, and equitable.
This court cannot exercise its equity jurisdiction and allow petitioner to circumvent the
requirement to implead its creditors as respondents. Tolerance of such failure will not only be
unfair to the creditors, it is contrary to the goals of corporate rehabilitation, and will invalidate
the cardinal principle of due process of law.
The failure of petitioner to implead its creditors as respondents cannot be cured by serving
copies of the Petition on its creditors. Since the creditors were not impleaded as respondents,
the copy of the Petition only serves to inform them that a petition has been filed before the
appellate court. Their participation was still significantly truncated. Petitioner’s failure to implead
them deprived them of a fair hearing. The appellate court only serves court orders and
processes on parties formally named and identified by the petitioner. Since the creditors were
not named as respondents, they could not receive court orders prompting them to file remedies
to protect their property rights.
The next procedural rule that petitioner pleaded to suspend is the rule requiring it to furnish all
parties with copies of the Rule 43 Petition. Petitioner admitted its failure to furnish its former
employees with copies of the Petition because they belatedly filed their claims before the
Regional Trial Court.
This argument is specious at best; at worst, it foists a fraud on this court. The former employees
were unable to raise their claims on time because petitioner did not declare them as creditors.
The Amended Petition did not contain any information regarding pending litigation between
petitioner and its former employees. The only way the former employees could become aware
of the corporate rehabilitation proceedings was either through the required publication or
through news informally circulated among their colleagues. Clearly, it was petitioner who caused
the belated filing of its former employees’ claims when it failed to notify its employees of the
corporate rehabilitation proceedings. Petitioner’s failure was conveniently and disreputably
hidden from this court.
Former employee Luzviminda C. Cueto filed her Manifestation and Registration of Monetary
Claim as early as November 25, 2005. Alejandro Olit, et al., the other employees, filed their
Comment on September 27, 2006. By the time petitioner filed its Petition for Review dated
November 21, 2006 before the Court of Appeals, it was well aware that these individuals had
expressed their interest in the corporate rehabilitation proceedings. Petitioner and its counsel
had no excuse to exclude these former employees as respondents on appeal.
Petitioner’s belated compliance with the requirement to serve the Petition for Review on its
former employees did not cure the procedural lapse. There were two sets of employees with
claims against petitioner: Luzviminda C. Cueto and Alejandro Olit, et al. When the Court of
Appeals dismissed petitioner’s appeal, petitioner only served a copy on Alejandro Olit, et al.
Petitioner still did not serve a copy on Luzviminda C. Cueto.
We do not see how it will be in the interest of justice to allow a petition that fails to inform some
of its creditors that the final order of the corporate rehabilitation proceeding was appealed. By
not declaring its former employees as creditors in the Amended Petition for Corporate
Rehabilitation and by not notifying the same employees that an appeal had been filed, petitioner
consistently denied the due process rights of these employees.
This court cannot be a party to the inequitable way that petitioner’s employees were treated.
Petitioner also pleaded to be excused from the requirement under Rule 6, Section 5 of the Rules
of Court to serve a copy of the Petition on the originating court. According to petitioner, the
23
annexes for the Petition for Review filed before the Court of Appeals arrived from Lucena City on
the last day of filing the petition. Petitioner’s representative from Lucena City and petitioner’s
Page
counsel rushed to compile and reproduce all the documents, and in such rush, failed to send a
copy to the Regional Trial Court. When petitioner realized that it failed to furnish the originating
court with a copy of the Petition, a copy was immediately sent by registered mail.137
Again, petitioner’s excuse is unacceptable. Petitioner had 15 days to file a Rule 43 petition,
which should include the proof of service to the originating court. Rushing the compilation of the
pleading with the annexes has nothing to do with being able to comply with the requirement to
submit a proof of service of the copy of the petition for review to the originating court. If at all,
it further reflects the unprofessional way that petitioner and its counsel treated our rules.
As this court has consistently ruled, "[t]he right to appeal is not a natural right[,] nor a part of
due process; it is merely a statutory privilege, and may be exercised only in the manner and in
accordance with the provisions of the law."138
In line with this, liberality in corporate rehabilitation procedure only generally refers to the trial
court, not to the proceedings before the appellate court. The Interim Rules of Procedure on
Corporate Rehabilitation covers petitions for rehabilitation filed before the Regional Trial Court.
Thus, Rule 2, Section 2 of the Interim Rules of Procedure on Corporate Rehabilitation, which
refers to liberal construction, is limited to the Regional Trial Court. The liberality was given "to
assist the parties in obtaining a just, expeditious, and inexpensive disposition of the case."139
proceedings are also deemed terminated upon the trial court’s disapproval of a rehabilitation
plan, "or a determination that the rehabilitation plan may no longer be implemented in
accordance with its terms, conditions, restrictions, or assumptions."144
Bank of the Philippine Islands v. Sarabia Manor Hotel Corp.145 provides the test to help trial
courts evaluate the economic feasibility of a rehabilitation plan:
In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a
thorough examination and analysis of the distressed corporation’s financial data must be
conducted. If the results of such examination and analysis show that there is a real opportunity
to rehabilitate the corporation in view of the assumptions made and financial goals stated in the
proposed rehabilitation plan, then it may be said that a rehabilitation is feasible. In this accord,
the rehabilitation court should not hesitate to allow the corporation to operate as an on-going
concern, albeit under the terms and conditions stated in the approved rehabilitation plan. On the
other hand, if the results of the financial examination and analysis clearly indicate that there lies
no reasonable probability that the distressed corporation could be revived and that liquidation
would, in fact, better subserve the interests of its stakeholders, then it may be said that a
rehabilitation would not be feasible. In such case, the rehabilitation court may convert the
proceedings into one for liquidation.146 (Emphasis supplied)

Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests
In Spouses Ortiz v. Court of Appeals,140 the petitioners made a procedural mistake with the
specific characteristics of an economically feasible rehabilitation plan:
attachments of the petition before the Court of Appeals. The petitioners subsequently provided
the correct attachments; however, this court still upheld the Court of Appeals’ dismissal:
a. The debtor has assets that can generate more cash if used in its daily operations
than if sold.
The party who seeks to avail [itself] of [an appeal] must comply with the requirements of the
rules. Failing to do so, the right to appeal is lost. Rules of procedure are required to be followed,
except only when for the most persuasive of reasons, they may be relaxed to relieve a litigant of b. Liquidity issues can be addressed by a practicable business plan that will generate
an injustice not commensurate with the degree of his thoughtlessness in not complying with the enough cash to sustain daily operations.
procedure prescribed.141
c. The debtor has a definite source of financing for the proper and full implementation
Petitioner’s excuses do not trigger the application of the policy of liberality in construing of a Rehabilitation Plan that is anchored on realistic assumptions and
procedural rules. For the courts to exercise liberality, petitioner must show that it is suffering goals.147 (Emhasis supplied)
from an injustice not commensurate to the thoughtlessness of its procedural mistakes. Not only
did petitioner exercise injustice towards its creditors, its Rule 43 Petition for Review did not
These requirements put emphasis on liquidity: the cash flow that the distressed corporation will
show that the Regional Trial Court erred in dismissing its Amended Petition for Corporate
obtain from rehabilitating its assets and operations. A corporation’s assets may be more than its
Rehabilitation.
current liabilities, but some assets may be in the form of land or capital equipment, such as
machinery or vessels. Rehabilitation sees to it that these assets generate more value if used
V efficiently rather than if liquidated.

Petitioner’s main argument for the continuation of corporate rehabilitation proceedings is that
the Regional Trial Court should have allowed petitioner to clarify its Amended Petition with
respect to details regarding its assets and its liabilities to its creditors instead of dismissing the
Petition outright.142
On the other hand, this court enumerated the characteristics of a rehabilitation plan that is
infeasible:
(a) the absence of a sound and workable business plan;

The Regional Trial Court correctly dismissed the Amended Petition for Corporate Rehabilitation.
(b) baseless and unexplained assumptions, targets and goals;
The dismissal of the Amended Petition did not emanate from petitioner’s failure to provide

24
complete details on its assets and liabilities but on the trial court’s finding that rehabilitation is
no longer viable for petitioner. Under the Interim Rules of Procedure on Corporate (c) speculative capital infusion or complete lack thereof for the execution of the
business plan;

Page
Rehabilitation, a "petition shall be dismissed if no rehabilitation plan is approved by the court
upon the lapse of one hundred eighty (180) days from the date of the initial hearing."143 The
 (d) cash flow cannot sustain daily operations; and Finally, petitioner argues that after Judge Mendoza’s withdrawal as rehabilitation receiver, the
Regional Trial Court should have appointed a new rehabilitation receiver to evaluate the
rehabilitation plan. We rule otherwise. It is not solely the responsibility of the rehabilitation
(e) negative net worth and the assets are near full depreciation or fully depreciated.148
receiver to determine the validity of the rehabilitation plan. The Interim Rules of Procedure on
Corporate Rehabilitation allows the trial court to disapprove a rehabilitation plan156 and
In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also suggests that terminate proceedings or, should the instances warrant, to allow modifications to a rehabilitation
the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on rehabilitation that plan.157
provides for better present value recovery for its creditors.149
The Regional Trial Court rendered a decision in accordance with facts and law. Thus, we deny
Present value recovery acknowledges that, in order to pave way for rehabilitation, the creditor the plea for liberalization of procedural rules. To grant the plea would cause more economic
will not be paid by the debtor when the credit falls due. The court may order a suspension of hardship and injustice to all those concerned.
payments to set a rehabilitation plan in motion; in the meantime, the creditor remains unpaid.
By the time the creditor is paid, the financial and economic conditions will have been changed.
WHEREFORE, the Petition is DENIED. The Court of Appeals Resolutions dated January 7,
Money paid in the past has a different value in the future.150 It is unfair if the creditor merely
2007 and March 30, 2007 in CA-G.R. SP No. 96974 are AFFIRMED.
receives the face value of the debt. Present value of the credit takes into account the interest
that the amount of money would have earned if the creditor were paid on time.151
SO ORDERED.
Trial courts must ensure that the projected cash flow from a business’ rehabilitation plan allows
for the closest present value recovery for its creditors. If the projected cash flow is realistic and
allows the corporation to meet all its obligations, then courts should favor rehabilitation over
liquidation. However, if the projected cash flow is unrealistic, then courts should consider
converting the proceedings into that for liquidation to protect the creditors.

The Regional Trial Court correctly dismissed petitioner’s rehabilitation plan. It found that
petitioner’s assets are non-performing.152 Petitioner admitted this in its Amended Petition when
it stated that its vessels were no longer serviceable.153 In Wonder Book Corporation v. Philippine
Bank of Communications,154 a rehabilitation plan is infeasible if the assets are nearly fully or fully
depreciated. This reduces the probability that rehabilitation may restore and reinstate petitioner
to its former position of successful operation and solvency.

Petitioner’s rehabilitation plan should have shown that petitioner has enough serviceable assets
to be able to continue its business. Yet, the plan showed that the source of funding would be to
sell petitioner’s old vessels. Disposing of the assets constituting petitioner’s main business
cannot result in rehabilitation. A business primarily engaged as a shipping line cannot operate
without its ships. On the other hand, the plan to purchase new vessels sacrifices the
corporation’s cash flow. This is contrary to the goal of corporate rehabilitation, which is to allow
present value recovery for creditors. The plan to buy new vessels after selling the two vessels it
currently owns is neither sound nor workable as a business plan.

The other part of the rehabilitation plan entails selling properties of petitioner’s sister
company.1âwphi1 As pointed out by the Regional Trial Court, this plan requires conformity from
the sister company. Even if the two companies have the same directorship and ownership, they
are still two separate juridical entities. In BPI Family Savings Bank v. St. Michael Medical
Center,155 this court refused to include in the financial and liquidity assessment the financial
statements of another corporation that the petitioning-corporation plans to merge with.

As pointed out by respondents, petitioner’s rehabilitation plan is almost impossible to implement.

Even an ordinary individual with no business acumen can discern the groundlessness of

25
petitioner’s rehabilitation plan. Petitioner should have presented a more realistic and practicable
rehabilitation plan within the time periods allotted after initiatory hearing, or otherwise, should

Page
have opted for liquidation.
 LINGKOD MANGGAGAWA v. RUBBERWORLD The facts:

On August 26, 1994, Rubberworld filed with the Department of Labor and Employment
LINGKOD MANGGAGAWA SA RUBBERWORLD, ADIDAS- G.R. No. 153882
ANGLO, its officers and members as represented by SONIA (DOLE) a Notice of Temporary Partial Shutdown due to severe financial crisis, therein announcing
ESPERANZA, Present:
Petitioners, the formal actual company shutdown to take effect on September 26, 1994. A copy of said
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ, notice was served on the recognized labor union of Rubberworld, the Bisig Pagkakaisa-
- versus - CORONA,
NAFLU, the union with which the corporation had a collective bargaining agreement.
AZCUNA, and
GARCIA, JJ.

On September 1, 1994, Bisig Pagkakaisa-NAFLU staged a strike. It set up a picket line in front of
Promulgated:
the premises of Rubberworld and even welded its gate. As a result, Rubberworld's premises closed
RUBBERWORLD (PHILS.) INC. and ANTONIO YANG, LAYA January 29, 2007
prematurely even before the date set for the start of its temporary partial shutdown.
MANANGHAYA SALGADO & CO., CPAs (In its capacity as
liquidator of Rubberworld (Phils., Inc.),
Respondents.
x------------------------------------------------------------------------------------------x On September 9, 1994, herein petitioner union, the Lingkod Manggagawa Sa

Rubberworld, Adidas-Anglo (Lingkod, for brevity), represented by its President, Sonia Esperanza,
DECISION
filed a complaint against Rubberworld and its Vice Chairperson, Mr. Antonio Yang, for unfair labor
GARCIA, J.:
practice (ULP), illegal shutdown, and non-payment of salaries and separation pay.

In its complaint, docketed as NLRC-NCR-Case No. 00-09-06637 (hereinafter referred to as ULP

Assailed and sought to be set aside in this petition for review under Rule 45 of the Rules of Court is
Case, for brevity), petitioner union alleged that it had filed a
the Decision[1] dated January 18, 2002 of the Court of Appeals (CA) in CA-G.R. SP No. 53356, as
petition for certification election during the freedom period, which petition was granted by the
reiterated in its Resolution[2] of June 5, 2002, denying the petitioners motion for reconsideration.
DOLE Regional Director. In the same complaint, petitioner union claimed that the strike staged
The assailed CA decision annulled and set aside anearlier decision of the Labor Arbiter, as well
by Bisig Pagkakaisa-NAFLU was company-instigated/supported. The said complaint was referred
as the resolution/order and writ of execution issued by the National Labor Relations Commission
to Labor Arbiter Ernesto Dinopol for appropriate action.
(NLRC) in a labor dispute between the petitioners and the respondents over which a suspension

order had been issued by the Securities and Exchange Commission (SEC).
On November 22, 1994, while the aforementioned complaint was pending with Labor

Petitioner Lingkod Manggagawa sa Rubberworld, Adidas-Anglo is a legitimate labor union whose Arbiter Dinopol, Rubberworld filed with the SEC a Petition for Declaration of a State of Suspension

members were employees of the principal respondent, Rubberworld Philippines, of Payments with Proposed Rehabilitation Plan. The petition, docketed as SEC Case No. 11-94-

Inc.(Rubberworld, for short), a domestic corporation engaged in the manufacture of footwear, 4920, was granted by the SEC in its Order[3] dated December 28, 1994, to wit:

bags and garments.

26
Accordingly, with the creation of the Management Committee, all actions for
claims against Rubberworld Philippines, Inc. pending before any court,

Page
tribunal, office, board, body, Commission or sheriff are hereby deemed
SUSPENDED.
 Consequently, all pending incidents for preliminary injunctions, writ of For purposes of any appeal, the appeal bond is tentatively set at P500,000.00.
attachments, foreclosures and the like are hereby rendered moot and
academic. SO ORDERED.

SO ORDERED.

On September 21, 1995, Rubberworld went on appeal to the NLRC, posting therefor a temporary

Notwithstanding the SEC's aforementioned suspension order and despite Rubberworld's appeal bond in the amount of P500,000.00 as tentatively fixed by the Labor Arbiter. Meanwhile,

submission on January 10, 1995 of a Motion to Suspend Proceedings,[4] Labor on October 10, 1995, Ricardo Atienza of the NLRCs Research and Information Unit submitted his

ArbiterDinopol went ahead with the ULP case and rendered his decision[5] thereon on August 16, report on the computation of the monetary awards, as ordered by the Labor Arbiter. He came out

1995, saying in part, thus: with the total amount of Twenty Seven Million Five Hundred Six Thousand and Two Hundred Fifty-

Five Pesos and 70/100 (P27,506,255.70). Despite Rubberworlds vigorous opposition, the First
x x x [I]t is crystal clear that the SEC Order notwithstanding, Labor Arbiters
and the National Labor Relations Commission should not abdicate the Division of the NLRC, in its Order[6] of January 22, 1996, required the corporation to post
jurisdiction which Article 217 of the Labor Code has conferred upon them
subject to the condition that awards, if any, should be presented to the an appeal bond in an amount equivalent to Mr. Atienzas computation, with a warning that failure
Management Committee for processing and payment,
to do so shall result in the dismissal of its appeal for non-perfection, thus:
and disposing as follows:
Accordingly, respondents-appellants are hereby directed to upgrade or
WHEREFORE, decision is hereby rendered: complete their Appeal Bond in the amount equivalent to Twenty Seven Million
Five Hundred Six Thousand Two Hundred Fifty-Five Pesos and 70/100
1) denying respondents motion to suspend (P27,506,255.70) pursuant to the award as computed by Ricardo O. Atienza
proceedings; within ten (10) days from receipt of this Order.
2) declaring respondent Rubberworld Phils., Inc. to
have committed unfair labor practice; Failure of the respondents-appellants to comply with this directive will give
this Commission no choice but to dismiss their appeal for non-perfection
3) declaring the temporary shutdown to have been thereof.
officially ended as of March 26, 1995;

4) ordering respondent Rubberworld Phils., Inc. to Its motion for reconsideration of the same Order having been denied by the NLRC in
reinstate complainant-Union's members who indicate
their intention to be so reinstated within one month from its Resolution[7] of March 29, 1996, Rubberworld directly went to this Court on a Petition
the receipt of this decision by complainants' counsel;
for Certiorari,[8] interposing the sole issue of whether or not the NLRC acted without or in
5) ordering respondent Rubberworld Phils., Inc. to pay
the members of the complainant-Union their backwages excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction
computed from April 26, 1995 and separation pay if
reinstatement is no longer possible plus 10% of the total in requiring the corporation to post the upgraded appeal bond of P27,506,255.70 based on the
award of attorney's.
computation of Mr. Atienza.
For purposes of quantifying the backwages and separation pay, and
identifying the recipients thereof, Mr. Ricardo Atienza of the Research and
Information Unit of this Commission is hereby directed to proceed to the Meanwhile, on account of Rubberworlds failure to upgrade or complete its appeal bond as

27
office of the respondent Rubberworld whose responsible officers are ordered
to allow Mr. Atienza or his representative access to such records as may be indicated in the NLRCs January 22, 1996 Order, the Commission, in a decision[9]dated June 28,
necessary and render a report thereon within 30 days from his receipt of this

Page
Decision. 1996, did dismiss Rubberworlds appeal. Owing to this development, Rubberworld filed with the
Court a Supplemental Petition for Certiorari,[10] thereinincorporating its challenge to For its part, the CA, in its Resolution[16] of May 11, 2000, over the vehement opposition

the said dismissal order of the NLRC, contending that the labor tribunal acted without or in excess of the petitioner union, resolved to admit Rubberworlds aforementioned amended petition and

of jurisdiction. the supplement thereto in the interest of justice.

Eventually, in the herein assailed Decision[17] dated January 18, 2002, the CA

On April 22, 1998, the SEC issued an Order[11] declaring Rubberworld as dissolved and lifting granted Rubberworlds petition in CAG.R. SP. No. 53356 on the finding that the Labor Arbiter had

its earlier suspension order, to wit: indeed committed grave abuse of discretion when it proceeded with

the ULP case despite the SECs suspension order of December 28, 1994, and accordingly declared
Finding that the continuance in business [of Rubberworld] would neither be
feasible/profitable nor work to the best of interest of the stockholders, the proceedings before it, including the subsequent orders by the NLRC dismissing Rubberworlds
parties-litigants, creditors, or the general public, xxx Rubberworld Philippines,
Inc. is hereby DISSOLVED under Section 6(d) of P.D. 902-A. Accordingly, appeal and the writ of execution, null and void.
the suspension Order is LIFTED.

The Laya Mananghaya Salgado & Co., CPAs is hereby appointed as liquidator
With their motion for reconsideration having been denied in the CA in its Resolution[18] of June 5,
to effect the dissolution of the petitioner.
2002, petitioners are now with the Court via the instant recourse, raising the following issues:
SO ORDERED.

1) Whether the CA had committed grave abuse of discretion amounting to

lack of jurisdiction or an excess in the exercise thereof when it gave
On August 18, 1995, a writ of execution[12] was issued by the NLRC in favor of the petitioner
due course to the petition filed by Rubberworld (Phils.), Inc. and
annulled and set aside the decisions rendered by the labor arbiter
union with a copy thereof served on the respondent corporation. Faced with this dilemma,
a quo and the NLRC, when the said decisions had become final and
Rubberworld filed with the Court an Urgent Omnibus Motion to declare null and void the executory warranting the outright dismissal of the aforesaid
petition;
execution/garnishment made pursuant to the same writ. The motion, however, was denied by the
2) Whether the CA had committed grave abuse of discretion and reversible
Court in its Resolution of November 18, 1998. error when it applied Section 5(d) and Section 6 (c) of P.D. No.
902-A, as amended, to the case at bar;

3) Whether the CA had committed reversible error when it adopted and

On February 8, 1999, Rubberworld filed with the Court a Motion to Admit its Amended Petition applied the rulings in the cases of Rubberworld (Phils.), Inc., or
Julie Yap Ong v. NLRC, Marilyn F.
for Certiorari[13] and its Supplement,[14] alleging therein that pursuant to the SEC Order Arellano, et. al.[19]and Rubberworld (Phils.), Inc. and Julie Y. Ong
v. NLRC, Aquino Magsalin, et. al.[20] to the case at bar.
dated December 28, 1994, supra, the proceedings before the Labor Arbiter should have been

suspended. Hence, since the Labor Arbiter disregarded the SECs suspension order, the

subsequent proceedings before it were null and void.

We DENY.

Consistent with its ruling in St. Martin Funeral Homes v. NLRC,[15] the Court, in its Resolution
It is the petitioners submission that the decision of the Labor Arbiter, the affirmatory decision of

28
of February 29, 1999, referred Rubberworlds amended petition for certiorari and its
the NLRC and the latters dismissal of Rubberworlds appeal, as well the writ of

Page
supplement to the CA for appropriate action, whereat it was docketed as CA- G.R. SP No. 53356.
execution subsequently issued, can no longer be annulled and set aside, the same
having all become final and executory. Additionally, petitioners argue that no appeal from the judgment is founded are equally worthless. It neither binds nor bars anyone. All acts performed

decision of the Labor Arbiter was ever perfected due to Rubberworld's failure to upgrade or post under it and all claims flowing out of it are void.[23] In other words, a void judgment is regarded

additional bond as ordered by the NLRC. Hence, they submit that the CA acted in grave abuse of as a nullity, and the situation is the same as it would be if there were no judgment. It

discretion in even giving due course to Rubberworlds petition in CA-G.R. SP No. 53356, let alone accordingly leaves the party-litigants in the same position they were in before the trial.[24]

rendering a decision thereon annulling and setting aside the proceedings before the Labor

Arbiter and the NLRCs dismissal of Rubberworlds appeal and the writ of execution issued In fact, it is immaterial whether an appeal from the Labor Arbiter's decision was perfected or not,

following the dismissal of said appeal. since a judgment void ab initio is non-existent and cannot acquire finality.[25]The judgment is

The Court disagrees. vulnerable to attack even when no appeal has been taken. Hence, such judgment does not

become final in the sense of depriving a party of his right to question its validity.[26] Hence, no

While posting an appeal bond is indeed a requirement for the perfection of an appeal from the grave abuse of discretion attended the CA's taking cognizance of the petition in CA-G.R. SP No.

decision of the Labor Arbiter to the NLRC, Rubberworlds failure to upgrade itsappeal bond cannot 53356.

bar, in this particular instance, the review by the CA of the lower court proceedings.

Besides, the Labor Arbiter, by simultaneously ruling in his decision of August 16, 1995 on both

Given the factual milieu obtaining in this case, it cannot be said the merits of the ULP case and the motion of Rubberworld to

that the decision of the Labor Arbiter, or the decision/dismissal order and writ of execution issued suspend the proceedings thereon, effectively required the respondent corporation to post a

by the NLRC, could ever attain final and executory status. The Labor Arbiter completely surety bond before the same respondent could have questioned the arbiters action in not

disregarded and violated Section 6(c) of Presidential Decree 902-A, as amended, which suspending the proceedings before him.

categorically mandates the suspension of all actions for claims against a corporation placed under

a management committee by the SEC. Thus, the proceedings before the Labor Arbiter and the

order and writ subsequently issued by the NLRC are all null and void for having been undertaken A bond is only mandatory from an appeal of the decision itself on the merits of the laborers' money

or issued in violation of the SEC suspension Order dated December 28, 1994. As such, the Labor claims to ensure payment thereof. Had the Labor Arbiter taken heed ofRubberworlds motion to
Arbiters decision, including the dismissal by the NLRC of Rubberworls appeal, could not have suspend proceedings when that motion was filed, and ruled upon it separately, no bond would

achieved a final and executory status. have been required for a review of his resolution thereon. As it were, the Labor Arbiter chose to

continue to decide the main case, then to incorporate in his decision the denial

of Rubberworlds motion to suspend proceedings, therebyeffectively requiring a bond on a

Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when question which would not have ordinarily required one.

the law itself authorizes their validity. [21]

The Labor Arbiter's decision in this case is void ab

29
initio, and therefore, non-existent.[22] A void judgment is in effect no judgment at all. No rights are We shall now address the more substantial issue in this case, namely, the applicability of the

Page
divested by it nor obtained from it. Being worthless in itself, all proceedings upon which the provisions of Section 5 (d) and Section 6 (c) of P.D. No. 902-A, as amended, reorganizing the

SEC, vesting it with additional powers and placing it under the Office of the President, which
respectively read:
Section 5. In addition to the regulatory adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other forms
of associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving:
xxx xxx xxx
d) Petitions of corporations, partnerships or associations to be declared in the
state of suspension of payments in cases where the corporation, partnership
or association possesses sufficient property to cover all its debts but foresees
the impossibility of meeting them when they respectively fall due or in cases
where the corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the management of a rehabilitation receiver
or management committee created pursuant to this Decree.
Section 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx
c) To appoint one or more receivers of the property, real or personal, which
is the subject of the action pending before the Commission in accordance
with the pertinent provisions of the Rules of Court in such other cases
whenever necessary in order to preserve the rights of the parties-litigants
and/or protect the interest of the investing public and creditors: x x
x Provided, finally, That upon appointment of a management
committee, the rehabilitation receiver, board or body, pursuant to
this Decree, all actions for claims against corporations,
partnerships, or associations under management or receivership
pending before any court, tribunal, board or body shall be
suspended accordingly. [Emphasis supplied]
As correctly ruled by the CA, the issue of applicability in labor cases of the aforequoted provisions
of PD 902-A, as amended, had already been resolved by this Court in
decisions in Rubberworld (Phils.), Inc., or Julie Yap Ong v. NLRC, Marilyn F. Arellano,
et. al.[27] and Rubberworld (Phils.), Inc. and Julie Y. Ong v. NLRC, Aquino,Magsalin,
et. al,[28] supra.
In the first Rubberworld case, the Court upheld the applicability of PD 902-A to labor cases
pursuant to Section 5(d) and Section 6(c) thereof, with the following pronouncements:
It is plain from the foregoing provisions of the law that upon the appointment
[by the SEC] of a management committee or a rehabilitation receiver, all
actions for claims against the corporation pending before any court, tribunal
or board shall ipso jure be suspended. The justification for the automatic stay
of all pending actions for claims is to enable the management committee or
the rehabilitation receiver to effectively exercise its/his powers free from any
judicial or extra-judicial interference that might unduly hinder or prevent the
rescue of the debtor company. To allow such other actions to continue would
only add to the burden of the management committee or rehabilitation
receiver, whose time, effort and resources would be wasted in defending
claims against the corporation instead of being directed toward its
restructuring and rehabilitation.[29]
xxx xxx xxx
x x x The law is clear: upon the creation of a management committee
or the appointment of a rehabilitation receiver, all claims for actions
shall be suspended accordingly. No exception in favor of labor
claims is mentioned in the law. Since the law makes no distinction
or exemptions, neither should this Court. Ubi lex non
distinguit nec nos distinguere debemos. Allowing labor cases to
proceed clearly defeats the purpose of the automatic stay and severely
encumbers the management committee's time and resources. The said
committee would need to defend against these suits, to the detriment of its
primary and urgent duty to work towards rehabilitating the corporation and
making it viable again. To rule otherwise would open the floodgates to other
similarly situated claimants and forestall if not defeat the
rescue efforts. Besides, even if the NLRC awards the claims of private
respondents, its ruling could not be enforced as long as the petitioner is under
the management committee.[30]
In Chua v. National Labor Relations Commission, we ruled that labor claims
cannot proceed independently of a bankruptcy liquidation proceeding, since
these claims would spawn needless controversy, delays, and
confusion.[31] With more reason, allowing labor claims to continue in spite of
a SEC suspension order in a rehabilitation case would merely lead to such
results.
xxx xxx xxx
Article 217 of the Labor Code should be construed not in isolation but in
harmony with PD 902-A, according to the basic rule in statutory construction
itsearlier that implied repeals are not favored.[32]Indeed, it is axiomatic that each and
every statute must be construed in a way that would avoid conflict with
existing laws. True, the NLRC has the power to hear and decide labor
disputes, but such authority is deemed suspended when PD 902-A
is put into effect by the Securities and Exchange
Commission. [Emphasis supplied]
30
The second Rubberworld case reiterates the above pronouncements of the Court:
Page
 Presidential Decree No. 902-A is clear that all actions for claims against
corporations, partnerships or associations under management or receivership For being well-grounded in fact and law, the assailed CA decision and resolution in CA-G.R. SP
pending before any court, tribunal, board or body shall be suspended
accordingly. The law did not make any exception in favor of labor claims. No. 53356 cannot be said to have been tainted with grave abuse of discretion or issued in excess

or want of jurisdiction. We find no reason to overturn such rulings.

xxx xxx xxx

Thus, when NLRC proceeded to decide the case despite the SEC
suspension order, the NLRC acted without or in excess of its WHEREFORE, the instant petition is DENIED and the assailed decision and resolution of
jurisdiction to hear and decide cases. As a consequence, any
resolution, decision or order that it rendered or issued without the CA are AFFIRMED.
jurisdiction is a nullity. [Emphasis supplied]

Costs against the petitioner.

Petitioners argue, however, that the doctrines laid down in the two aforecited cases cannot be

made to apply to the instant controversy because the SEC order therein only mandates that SO ORDERED.

all pending cases against Rubberworld Philippines, Inc. should be deemed

suspended. Petitioners contend that the decision of the Labor Arbiter in the present case, as

well the order of dismissal and writ of execution issued by NLRC, have become final and

executory by reason of Rubberworlds failure to perfect its appeal by not upgrading or completing

the required cash or surety bond as ordained by the NLRC. Petitioners thus conclude that the

doctrine of stare decisis cannot apply to the instant case.

Petitioners are in error.

It is incontrovertible that the denial of Rubberworlds motion to suspend proceedings in the

principal case was incorporated in the decision of the Labor Arbiter. Obviously, then, the

Labor Arbiters decision of August

16, 1995 was rendered at a time when Lingkods complaint against Rubberworld in NLRC-NCR-

Case No. 00-09-06637-94 ought to have been suspended.

In short, at the time the SEC issued its suspension Order of December 28, 1994,

the proceedings before the Labor Arbiter were still very much pending. As such, no final and

31
executory decision could have validly emanated therefrom. Like the CA, we do not see any reason

Page
why the doctrine of stare decisis will not apply to this case.
 GARCIA v. PAL
security personnel and law enforcers raided the PAL Technical Centers Toolroom Section on July
JUANITO A. GARCIA and ALBERTO J. G.R. No. 164856
DUMAGO, Present: 24, 1995.
Petitioners,
PUNO, C.J.,
QUISUMBING,
After due notice, PAL dismissed petitioners on October 9, 1995 for transgressing the PAL Code of
YNARES-SANTIAGO,
CARPIO, Discipline,[4] prompting them to file a complaint for illegal dismissal and damages which was, by
AUSTRIA-MARTINEZ,
- versus - CORONA, Decision of January 11, 1999,[5] resolved by the Labor Arbiter in their favor, thus ordering
CARPIO MORALES,
AZCUNA, PAL to, inter alia, immediately comply with the reinstatement aspect of the decision.
TINGA,
CHICO-NAZARIO, Prior to the promulgation of the Labor Arbiters decision, the Securities and Exchange Commission
PHILIPPINE AIRLINES, INC., VELASCO, JR.,
Respondent. NACHURA, (SEC) placed PAL (hereafter referred to as respondent), which was suffering from severe financial
LEONARDO-DE CASTRO, and
BRION, JJ. losses, under an Interim Rehabilitation Receiver, who was subsequently replaced by a Permanent

Rehabilitation Receiver on June 7, 1999.

Promulgated:

January 20, 2009

x-----------------------------------------------------------------------------------------x From the Labor Arbiters decision, respondent appealed to the NLRC which, by Resolution

DECISION of January 31, 2000, reversed said decision and dismissed petitioners complaint for lack of merit.[6]

CARPIO MORALES, J.:

Petitioners Motion for Reconsideration was denied by Resolution of April 28, 2000 and
Petitioners Juanito A. Garcia and Alberto J. Dumago assail the December 5, 2003 Decision and
Entry of Judgment was issued on July 13, 2000.[7]
April 16, 2004 Resolution of the Court of Appeals[1] in CA-G.R. SP No. 69540 which granted the

petition for certiorari of respondent, Philippine Airlines, Inc. (PAL), and denied petitioners Motion
Subsequently or on October 5, 2000, the Labor Arbiter issued a Writ of Execution (Writ) respecting
for Reconsideration, respectively. The dispositive portion of the assailed Decision reads:
the reinstatement aspect of his January 11, 1999 Decision, and on October 25, 2000, he issued a
WHEREFORE, premises considered and in view of the foregoing, the instant
petition is hereby GIVEN DUE COURSE. The assailed November 26, 2001 Notice of Garnishment (Notice). Respondent thereupon moved to quash the Writ and to lift the
Resolution as well as the January 28, 2002 Resolution of public respondent
Notice while petitioners moved to release the garnished amount.
National Labor Relations Commission [NLRC] is hereby ANNULLED and SET
ASIDE for having been issued with grave abuse of discretion amounting to lack
or excess of jurisdiction. Consequently, the Writ of Execution and the Notice
of Garnishment issued by the Labor Arbiter are hereby likewise ANNULLED and In a related move, respondent filed an Urgent Petition for Injunction with the NLRC which, by
SET ASIDE.
Resolutions of November 26, 2001 and January 28, 2002, affirmed the validity of the Writ and the
SO ORDERED.[2]
Notice issued by the Labor Arbiter but suspended and referred the action to the Rehabilitation

Receiver for appropriate action.

32
The case stemmed from the administrative charge filed by PAL against its employees-herein

Page
petitioners[3] after they were allegedly caught in the act of sniffing shabu when a team of company
 Amplification of the First Ground
Respondent elevated the matter to the appellate court which issued the herein challenged Decision
The appellate court counted on as its first ground the view that a subsequent finding of a valid
and Resolution nullifying the NLRC Resolutions on two grounds, essentially espousing that: (1) a
dismissal removes the basis for implementing the reinstatement aspect of a labor arbiters decision.
subsequent finding of a valid dismissal removes the basis for implementing the reinstatement

aspect of a labor arbiters decision (the first ground), and (2) the impossibility to comply with the
On this score, the Courts attention is drawn to seemingly divergent decisions concerning
reinstatement order due to corporate rehabilitation provides a reasonable justification for the
reinstatement pending appeal or, particularly, the option of payroll reinstatement. On the one
failure to exercise the options under Article 223 of the Labor Code (the second ground).
hand is the jurisprudential trend as expounded in a line of cases including Air Philippines Corp. v.

Zamora,[10] while on the other is the recent case of Genuino v. National Labor Relations
By Decision of August 29, 2007, this Court PARTIALLY GRANTED the present petition and
Commission.[11] At the core of the seeming divergence is the application of paragraph 3 of Article
effectively reinstated the NLRC Resolutions insofar as it suspended the proceedings, viz:
223 of the Labor Code which reads:
Since petitioners claim against PAL is a money claim for their wages during In any event, the decision of the Labor Arbiter reinstating a dismissed or
the pendency of PALs appeal to the NLRC, the same should have been separated employee, insofar as the reinstatement aspect is concerned,
suspended pending the rehabilitation proceedings. The Labor Arbiter, the shall immediately be executory, pending appeal. The employee shall
NLRC, as well as the Court of Appeals should have abstained from resolving either be admitted back to work under the same terms and conditions
petitioners case for illegal dismissal and should instead have directed them to prevailing prior to his dismissal or separation or, at the option of the employer,
lodge their claim before PALs receiver. merely reinstated in the payroll. The posting of a bond by the employer shall
However, to still require petitioners at this time to re-file their labor claim not stay the execution for reinstatement provided herein. (Emphasis and
against PAL under peculiar circumstances of the case that their dismissal was underscoring supplied)
eventually held valid with only the matter of reinstatement pending appeal
being the issue this Court deems it legally expedient to suspend the
proceedings in this case.
The view as maintained in a number of cases is that:
WHEREFORE, the instant petition is PARTIALLY GRANTED in that the instant
x x x [E]ven if the order of reinstatement of the Labor Arbiter is
proceedings herein are SUSPENDED until further notice from this
reversed on appeal, it is obligatory on the part of the employer to
Court. Accordingly, respondent Philippine Airlines, Inc. is hereby DIRECTED to
reinstate and pay the wages of the dismissed employee during the
quarterly update the Court as to the status of its ongoing rehabilitation. No
period of appeal until reversal by the higher court. On the other hand, if
costs.
the employee has been reinstated during the appeal period and such
reinstatement order is reversed with finality, the employee is not required to
SO ORDERED.[8] (Italics in the original; underscoring supplied)
reimburse whatever salary he received for he is entitled to such, more so if he
actually rendered services during the period.[12] (Emphasis in the original;
italics and underscoring supplied)

By Manifestation and Compliance of October 30, 2007, respondent informed the Court that the

SEC, by Order of September 28, 2007, granted its request to exit from rehabilitation In other words, a dismissed employee whose case was favorably decided by the Labor Arbiter is

proceedings. [9]
entitled to receive wages pending appeal upon reinstatement, which is immediately

In view of the termination of the rehabilitation proceedings, the Court now proceeds to resolve executory. Unless there is a restraining order, it is ministerial upon the Labor Arbiter to implement

the remaining issue for consideration, which is whether petitioners may collect their wages the order of reinstatement and it is mandatory on the employer to comply therewith.[13]

during the period between the Labor Arbiters order of reinstatement pending appeal

33
and the NLRC decision overturning that of the Labor Arbiter, now that respondent has

Page
exited from rehabilitation proceedings.

The opposite view is articulated in Genuino which states:
If the decision of the labor arbiter is later reversed on appeal upon the finding
that the ground for dismissal is valid, then the employer has the right to
require the dismissed employee on payroll reinstatement to refund
the salaries s/he received while the case was pending appeal, or it can be
deducted from the accrued benefits that the dismissed employee was entitled
to receive from his/her employer under existing laws, collective bargaining
agreement provisions, and company practices. However, if the employee was
reinstated to work during the pendency of the appeal, then the employee is
entitled to the compensation received for actual services rendered without
need of refund.
Considering that Genuino was not reinstated to work or placed on payroll
reinstatement, and her dismissal is based on a just cause, then she is not
entitled to be paid the salaries stated in item no. 3 of the fallo of the
September 3, 1994 NLRC Decision.[14] (Emphasis, italics and underscoring
supplied)
It has thus been advanced that there is no point in releasing the wages to petitioners since their
dismissal was found to be valid, and to do so would constitute unjust enrichment.
Prior to Genuino, there had been no known similar case containing a dispositive portion where
the employee was required to refund the salaries received on payroll reinstatement.In fact, in a
catena of cases,[15] the Court did not order the refund of salaries garnished or received by payroll-
reinstated employees despite a subsequent reversal of the reinstatement order.
The dearth of authority supporting Genuino is not difficult to fathom for it would otherwise render
inutile the rationale of reinstatement pending appeal.
x x x [T]he law itself has laid down a compassionate policy which, once more,
vivifies and enhances the provisions of the 1987 Constitution on labor and the
working man.
xxxx
These duties and responsibilities of the State are imposed not so much to
express sympathy for the workingman as to forcefully and meaningfully
underscore labor as a primary social and economic force, which the
Constitution also expressly affirms with equal intensity. Labor is an
indispensable partner for the nation's progress and stability.
xxxx
x x x In short, with respect to decisions reinstating employees, the law itself
has determined a sufficiently overwhelming reason for its execution pending
appeal.
xxxx
x x x Then, by and pursuant to the same power (police power), the State may
authorize an immediate implementation, pending appeal, of a decision
reinstating a dismissed or separated employee since that saving act is
designed to stop, although temporarily since the appeal may be decided in
favor of the appellant, a continuing threat or danger to the survival or even
the life of the dismissed or separated employee and his family.[16]
The social justice principles of labor law outweigh or render inapplicable the civil law
doctrine of unjust enrichment espoused by Justice Presbitero Velasco, Jr. in his Separate
Opinion. The constitutional and statutory precepts portray the otherwise unjust situation as a
condition affording full protection to labor.
Even outside the theoretical trappings of the discussion and into the mundane realities of human
experience, the refund doctrine easily demonstrates how a favorable decision by the Labor Arbiter
could harm, more than help, a dismissed employee. The employee, to make both ends meet,
would necessarily have to use up the salaries received during the pendency of the appeal, only to
end up having to refund the sum in case of a final unfavorable decision. It is mirage of a stop-
gap leading the employee to a risky cliff of insolvency.
Advisably, the sum is better left unspent. It becomes more logical and practical for the employee
to refuse payroll reinstatement and simply find work elsewhere in the interim, if any is
available. Notably, the option of payroll reinstatement belongs to the employer, even if the
employee is able and raring to return to work. Prior to Genuino, it is unthinkable for one to refuse
payroll reinstatement. In the face of the grim possibilities, the rise of concerned employees
declining payroll reinstatement is on the horizon.
34
Page

Further, the Genuino ruling not only disregards the social justice principles behind the rule, but
also institutes a scheme unduly favorable to management. Under such scheme, the salaries
dispensed pendente lite merely serve as a bond posted in installment by the employer. For in the
event of a reversal of the Labor Arbiters decision ordering reinstatement, the employer gets back
the same amount without having to spend ordinarily for bond premiums. This circumvents, if not
directly contradicts, the proscription that the posting of a bond [even a cash bond] by the
employer shall not stay the execution for reinstatement.[17]
In playing down the stray posture in Genuino requiring the dismissed employee on payroll
reinstatement to refund the salaries in case a final decision upholds the validity of the dismissal,
the Court realigns the proper course of the prevailing doctrine on reinstatement pending appeal
vis--vis the effect of a reversal on appeal.
Respondent insists that with the reversal of the Labor Arbiters Decision, there is no
more basis to enforce the reinstatement aspect of the said decision. In his Separate Opinion,
Justice Presbitero Velasco, Jr. supports this argument and finds the prevailing doctrine in Air
Philippines and allied cases inapplicable because, unlike the present case, the writ of execution
therein was secured prior to the reversal of the Labor Arbiters decision.
The proposition is tenuous. First, the matter is treated as a mere race against time. The discussion
stopped there without considering the cause of the delay. Second, it requires the issuance of a
writ of execution despite the immediately executory nature of the reinstatement aspect of the
decision. In Pioneer Texturing Corp. v. NLRC, [18]
which was cited in Panuncillo v. CAP Philippines,
Inc.,[19] the Court observed:
x x x The provision of Article 223 is clear that an award [by the Labor Arbiter]
for reinstatement shall be immediately executory even pending appeal and the
posting of a bond by the employer shall not stay the execution for
reinstatement. The legislative intent is quite obvious, i.e., to make an award
of reinstatement immediately enforceable, even pending appeal. To require
the application for and issuance of a writ of execution as prerequisites
for the execution of a reinstatement award would certainly betray and run
counter to the very object and intent of Article 223, i.e., the immediate
execution of a reinstatement order. The reason is simple. An application for a
writ of execution and its issuance could be delayed for numerous reasons. A
mere continuance or postponement of a scheduled hearing, for instance, or
an inaction on the part of the Labor Arbiter or the NLRC could easily delay the
issuance of the writ thereby setting at naught the strict mandate and noble
purpose envisioned by Article 223. In other words, if the requirements of
Article 224 [including the issuance of a writ of execution] were to govern, as
we so declared in Maranaw, then the executory nature of a reinstatement
order or award contemplated by Article 223 will be unduly circumscribed and
rendered ineffectual. In enacting the law, the legislature is presumed to have
ordained a valid and sensible law, one which operates no further than may be
necessary to achieve its specific purpose. Statutes, as a rule, are to be
construed in the light of the purpose to be achieved and the evil sought to be
remedied. x x x In introducing a new rule on the reinstatement aspect of a
labor decision under Republic Act No. 6715, Congress should not be considered
to be indulging in mere semantic exercise. x x x[20] (Italics in the original;
emphasis and underscoring supplied)
The Court reaffirms the prevailing principle that even if the order of reinstatement of the Labor
Arbiter is reversed on appeal, it is obligatory on the part of the employer to reinstate and pay the
wages of the dismissed employee during the period of appeal until reversal by the higher
court.[21] It settles the view that the Labor Arbiter's order of reinstatement
is immediately executory and the employer has to either re-admit them to work under the same
terms and conditions prevailing prior to their dismissal, or to reinstate them in the payroll, and
that failing to exercise the options in the alternative, employer must pay the employees salaries.[22]
Amplification of the Second Ground
The remaining issue, nonetheless, is resolved in the negative on the strength of the second ground
relied upon by the appellate court in the assailed issuances. The Court sustains the appellate
courts finding that the peculiar predicament of a corporate rehabilitation rendered it impossible
for respondent to exercise its option under the circumstances.
35
The spirit of the rule on reinstatement pending appeal animates the proceedings once the Labor
Arbiter issues the decision containing an order of reinstatement. The immediacy of its execution
Page
needs no further elaboration. Reinstatement pending appeal necessitates its immediate execution
during the pendency of the appeal, if the law is to serve its noble purpose. At the same time, any Arbiter. In that scenario where the delay was caused by the Labor Arbiter, it was ruled that the

attempt on the part of the employer to evade or delay its execution, as observed in Panuncillo and inaction of the Labor Arbiter who failed to act upon the employees motion for the issuance of a

as what actually transpired writ of execution may no longer adversely affect the cause of the dismissed employee in view of

in Kimberly,[23]Composite,[24] Air Philippines,[25] and Roquero,[26] should not be countenanced. the self-executory nature of the order of reinstatement.[28]

The new NLRC Rules of Procedure, which took effect on January 7, 2006, now require the
After the labor arbiters decision is reversed by a higher tribunal, the employee may be
employer to submit a report of compliance within 10 calendar days from receipt of the Labor
barred from collecting the accrued wages, if it is shown that the delay in enforcing the
Arbiters decision,[29] disobedience to which clearly denotes a refusal to reinstate. The employee
reinstatement pending appeal was without fault on the part of the employer.
need not file a motion for the issuance of the writ of execution since the Labor

Arbiter shall thereafter motu proprio issue the writ. With the new rules in place, there is
The test is two-fold: (1) there must be actual delay or the fact that the order of reinstatement
hardly any difficulty in determining the employers intransigence in immediately
pending appeal was not executed prior to its reversal; and (2) the delay must not be due to the
complying with the order.
employers unjustified act or omission. If the delay is due to the employers unjustified refusal, the
In the case at bar, petitioners exerted efforts[30] to execute the Labor Arbiters order of
employer may still be required to pay the salaries notwithstanding the reversal of the Labor
reinstatement until they were able to secure a writ of execution, albeit issued on October 5,
Arbiters decision.
2000 after the reversal by the NLRC of the Labor Arbiters decision. Technically, there was still

actual delay which brings to the question of whether the delay was due to
In Genuino, there was no showing that the employer refused to reinstate the employee, who was
respondents unjustified act or omission.
the Treasury Sales Division Head, during the short span of four months or from the promulgation

on May 2, 1994 of the Labor Arbiters Decision up to the promulgation on September 3, 1994 of
It is apparent that there was inaction on the part of respondent to reinstate them, but
the NLRC Decision. Notably, the former NLRC Rules of Procedure did not lay down a mechanism
whether such omission was justified depends on the onset of the exigency of corporate
to promptly effectuate the self-executory order of reinstatement, making it difficult to establish
rehabilitation.
that the employer actually refused to comply.

It is settled that upon appointment by the SEC of a rehabilitation receiver, all actions for claims
In a situation like that in International Container Terminal Services, Inc. v. NLRC[27] where it was
before any court, tribunal or board against the corporation shall ipso jure be suspended.[31] As
alleged that the employer was willing to comply with the order and that the employee opted not
stated early on, during the pendency of petitioners complaint before the Labor Arbiter, the SEC
to pursue the execution of the order, the Court upheld the self-executory nature of the
placed respondent under an Interim Rehabilitation Receiver.After the Labor Arbiter rendered his
reinstatement order and ruled that the salary automatically accrued from notice of the Labor
decision, the SEC replaced the Interim Rehabilitation Receiver with a Permanent Rehabilitation

36
Arbiter's order of reinstatement until its ultimate reversal by the NLRC. It was later discovered
Receiver.
that the employee indeed moved for the issuance of a writ but was not acted upon by the Labor

Page
Case law recognizes that unless there is a restraining order, the implementation of the order of the rehabilitation receiver may decide otherwise, not to mention the subsistence of the injunction

reinstatement is ministerial and mandatory.[32] This injunction or suspension of claims by on claims.

legislative fiat[33] partakes of the nature of a restraining order that constitutes a legal justification

for respondents non-compliance with the reinstatement order.Respondents failure to exercise the In sum, the obligation to pay the employees salaries upon the employers failure to exercise the

alternative options of actual reinstatement and payroll reinstatement was thus justified. Such alternative options under Article 223 of the Labor Code is not a hard and fast rule, considering

being the case, respondents obligation to pay the salaries pending appeal, as the normal effect the inherent constraints of corporate rehabilitation.

of the non-exercise of the options, did not attach.

WHEREFORE, the petition is PARTIALLY DENIED. Insofar as the Court of Appeals

While reinstatement pending appeal aims to avert the continuing threat or danger to the survival Decision of December 5, 2003 and Resolution of April 16, 2004 annulling the NLRC Resolutions

or even the life of the dismissed employee and his family, it does not contemplate the period affirming the validity of the Writ of Execution and the Notice of Garnishment are concerned, the

when the employer-corporation itself is similarly in a judicially monitored state of being Court finds no reversible error.

resuscitated in order to survive.

SO ORDERED.
The parallelism between a judicial order of corporation rehabilitation as a justification for the non-

exercise of its options, on the one hand, and a claim of actual and imminent substantial losses as

ground for retrenchment, on the other hand, stops at the red line on the financial

statements. Beyond the analogous condition of financial gloom, as discussed by Justice Leonardo

Quisumbing in his Separate Opinion, are more salient distinctions. Unlike the ground of substantial

losses contemplated in a retrenchment case, the state of corporate rehabilitation was judicially

pre-determined by a competent court and not formulated for the first time in this case by

respondent.

More importantly, there are legal effects arising from a judicial order placing a corporation under

rehabilitation. Respondent was, during the period material to the case, effectively deprived of the

alternative choices under Article 223 of the Labor Code, not only by virtue of the statutory

injunction but also in view of the interim relinquishment of management control to give way to

the full exercise of the powers of the rehabilitation receiver. Had there been no need to

37
rehabilitate, respondent may have opted for actual physical reinstatement pending appeal to

Page
optimize the utilization of resources. Then again, though the management may think this wise,
 PANLILIO v. RTC
The facts of the case are as follows:

JOSE MARCEL PANLILIO, ERLINDA PANLILIO, NICOLE G.R. No. 173846

MORRIS and MARIO T. CRISTOBAL,

Petitioners, On October 15, 2004, Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris and Marlo
Present:
-versus- Cristobal (petitioners), as corporate officers of Silahis International Hotel, Inc. (SIHI), filed with

the Regional Trial Court (RTC) of Manila, Branch 24, a petition for Suspension of Payments and

REGIONAL TRIAL COURT, BRANCH 51, CITY OF Rehabilitation[4] in SEC Corp. Case No. 04-111180.
MANILA, represented by HON. PRESIDING JUDGE CORONA,* C.J.,
ANTONIO M. ROSALES; PEOPLE OF THE PHILIPPINES;
CARPIO, J., Chairperson,
and the SOCIAL SECURITY SYSTEM,
PERALTA,
Respondents. On October 18, 2004, the RTC of Manila, Branch 24, issued an Order[5] staying all claims
PEREZ,** and
against SIHI upon finding the petition sufficient in form and substance. The pertinent portions of
MENDOZA, JJ.
the Order read:

Promulgated: Finding the petition, together with its annexes, sufficient in form
and substance and pursuant to Section 6, Rule 4 of the Interim Rules on
Corporate Rehabilitation, the Court hereby:

February 2, 2011 xxxx

x -------------------------------------------------------------------------------x 2) Stays the enforcement of all claims, whether for money or

otherwise and whether such enforcement is by court action or otherwise,
against the debtor, its guarantors and sureties not solidarily liable with the
DECISION debtor.[6]

PERALTA, J.:

At the time, however, of the filing of the petition for rehabilitation, there were a number

of criminal charges[7] pending against petitioners in Branch 51 of the RTC of Manila. These criminal
Before this Court is a petition for review on certiorari [1]
under Rule 45 of the Rules of
charges were initiated by respondent Social Security System (SSS) and involved charges of
Court, seeking to set aside the April 27, 2006 Decision [2]
and August 2, 2006 Resolution[3] of the
violations of Section 28 (h)[8] of Republic Act 8282, or the Social Security Act of 1997 (SSS law),
Court of the Appeals (CA) in CA-G.R. SP No. 90947.

38
in relation to Article 315 (1) (b)[9] of the Revised Penal Code, or Estafa. Consequently, petitioners

filed with the RTC of Manila, Branch 51, a Manifestation and Motion to Suspend

Page

Proceedings.[10] Petitioners argued that the stay order issued by Branch 24 should also apply to
the criminal charges pending in Branch 51. Petitioners, thus, prayed that Branch 51 suspend its
proceedings until the petition for rehabilitation was finally resolved.
On December 13, 2004, Branch 51 issued an Order [11]
denying petitioners motion to
suspend the proceedings. It ruled that the stay order issued by Branch 24 did not cover criminal
proceedings, to wit:
xxxx
Clearly then, the issue is, whether the stay order issued by the RTC
commercial court, Branch 24 includes the above-captioned criminal cases.
The Court shares the view of the private complainants and the SSS
that the said stay order does not include the prosecution of criminal offenses.
Precisely, the law criminalizes the non-remittance of SSS contributions by an
employer to protect the employees from unscrupulous employers. Clearly, in
these cases, public interest requires that the said criminal acts be immediately
investigated and prosecuted for the protection of society.
From the foregoing, the inescapable conclusion is that the stay
order issued by RTC Branch 24 does not include the above-captioned cases
which are criminal in nature.[12]
Branch 51 denied the motion for reconsideration filed by petitioners.
On August 19, 2005, petitioners filed a petition for certiorari[13] with the CA assailing the
Order of Branch 51.
On April 27, 2006, the CA issued a Decision denying the petition, the dispositive portion
of which reads:
WHEREFORE, premises considered, the Petition is hereby DENIED
and is accordingly DISMISSED. No costs.[14]
The CA discussed that violation of the provisions of the SSS law was a criminal liability
and was, thus, personal to the offender. As such, the CA held that the criminal proceedings against
the petitioners should not be considered a claim against the corporation and, consequently, not
covered by the stay order issued by Branch 24.
Petitioners filed a Motion for Reconsideration,[15] which was, however, denied by the CA
in a Resolution dated August 2, 2006.
Hence, herein petition, with petitioners raising a lone issue for this Courts resolution, to
wit:
x x x WHETHER OR NOT THE STAY ORDER ISSUED BY BRANCH 24,
REGIONAL TRIAL COURT OF MANILA, IN SEC CORP. CASE NO. 04-111180
COVERS ALSO VIOLATION OF SSS LAW FOR NON-REMITTANCE OF
PREMIUMS AND VIOLATION OF [ARTICLE] [3] 515 OF THE REVISED PENAL
CODE.[16]
The petition is not meritorious.
To begin with, corporate rehabilitation connotes the restoration of the debtor to a
position of successful operation and solvency, if it is shown that its continued operation is
economically feasible and its creditors can recover more, by way of the present value of payments
39
projected in the rehabilitation plan, if the corporation continues as a going concern than if it is
Page
immediately liquidated.[17] It 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,
the purpose being to enable the company to gain a new lease on life and allow its creditors to be
paid their claims out of its earnings.[18]
A principal feature of corporate rehabilitation is the suspension of claims against the
distressed corporation. Section 6 (c) of Presidential Decree No. 902-A, as amended, provides for
suspension of claims against corporations undergoing rehabilitation, to wit:
Section 6 (c). x x x
x x x Provided, finally, that upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this Decree, all actions
for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or
body, shall be suspended accordingly.[19]
In November 21, 2000, this Court En Banc promulgated the Interim Rules of Procedure
on Corporate Rehabilitation,[20] Section 6, Rule 4 of which provides a stay order on all claims
against the corporation, thus:
Stay Order. - If the court finds the petition to be sufficient in form
and substance, it shall, not later than five (5) days from the filing of the
petition, issue an Order x x x; (b) staying enforcement of all claims,
whether for money or otherwise and whether such enforcement is by court
action or otherwise, against the debtor, its guarantors and sureties not
solidarily liable with the debtor; x x x[21]
In Finasia Investments and Finance Corporation v. Court of Appeals,[22] the term "claim"
has been construed to refer to debts or demands of a pecuniary nature, or the assertion to have
money paid. The purpose for suspending actions for claims against the corporation in a
rehabilitation proceeding is to enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor company.[23]
The issue to be resolved then is: does the suspension of all claims as an incident to a
corporate rehabilitation also contemplate the suspension of criminal charges filed against the
corporate officers of the distressed corporation?
This Court rules in the negative.
In Rosario v. Co[24] (Rosario), a case of recent vintage, the issue resolved by this Court
was whether or not during the pendency of rehabilitation proceedings, criminal charges for
violation of Batas Pambansa Bilang 22 should be suspended, was disposed of as follows:
x x x the gravamen of the offense punished by B.P. Blg. 22 is the act of
making and issuing a worthless check; that is, a check that is dishonored
upon its presentation for payment. It is designed to prevent damage to trade,
commerce, and banking caused by worthless checks. In Lozano v.
Martinez, this Court declared that it is not the nonpayment of an obligation
which the law punishes. The law is not intended or designed to coerce a
debtor to pay his debt. The thrust of the law is to prohibit, under pain of
penal sanctions, the making and circulation of worthless checks. Because of
its deleterious effects on the public interest, the practice is proscribed by the
law. The law punishes the act not as an offense against property, but an
offense against public order. The prime purpose of the criminal action is to
punish the offender in order to deter him and others from committing the
same or similar offense, to isolate him from society, to reform and rehabilitate
him or, in general, to maintain social order. Hence, the criminal prosecution
is designed to promote the public welfare by punishing offenders and
deterring others.
Consequently, the filing of the case for violation of B.P. Blg.
22 is not a "claim" that can be enjoined within the purview of P.D.
No. 902-A. True, although conviction of the accused for the alleged
crime could result in the restitution, reparation or indemnification
of the private offended party for the damage or injury he sustained
by reason of the felonious act of the accused, nevertheless,
prosecution for violation of B.P. Blg. 22 is a criminal action.
A criminal action has a dual purpose, namely, the punishment of
the offender and indemnity to the offended party. The dominant and
primordial objective of the criminal action is the punishment of the offender.
The civil action is merely incidental to and consequent to the conviction of
40
the accused. The reason for this is that criminal actions are primarily intended
to vindicate an outrage against the sovereignty of the state and to impose
Page
the appropriate penalty for the vindication of the disturbance to the social
 order caused by the offender. On the other hand, the action between the
private complainant and the accused is intended solely to indemnify the consequence of violation of the SSS law, in relation to the revised penal code can therefore be
former.[25]
implemented if petitioners are found guilty after trial. However, any civil indemnity awarded as a

Rosario is at fours with the case at bar. Petitioners are charged with violations of Section 28 (h) result of their conviction would be subject to the stay order issued by the rehabilitation court. Only

of the SSS law, in relation to Article 315 (1) (b) of the Revised Penal Code, or Estafa. The SSS law to this extent can the order of suspension be considered obligatory upon any court, tribunal,

clearly criminalizes the non-remittance of SSS contributions by an employer to protect the branch or body where there are pending actions for claims against the distressed corporation.[29]

employees from unscrupulous employers. Therefore, public interest requires that the said criminal

acts be immediately investigated and prosecuted for the protection of society.

On a final note, this Court would like to point out that Congress has recently enacted

Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010.[30] Section 18

The rehabilitation of SIHI and the settlement of claims against the corporation is not a thereof explicitly provides that criminal actions against the individual officer of a corporation are

legal ground for the extinction of petitioners criminal liabilities. There is no reason why criminal not subject to the Stay or Suspension Order in rehabilitation proceedings, to wit:

proceedings should be suspended during corporate rehabilitation, more so, since the prime

purpose of the criminal action is to punish the offender in order to deter him and others from
committing the same or similar offense, to isolate him from society, reform and rehabilitate him
or, in general, to maintain social order.[26] As correctly observed in Rosario,[27] it would be absurd
for one who has engaged in criminal conduct could escape punishment by the mere filing of a
petition for rehabilitation by the corporation of which he is an officer.
The prosecution of the officers of the corporation has no bearing on the pending
The Stay or Suspension Order shall not apply:
xxxx
(g) any criminal action against individual debtor or owner, partner, director
or officer of a debtor shall not be affected by any proceeding commenced
under this Act.
Withal, based on the foregoing discussion, this Court rules that there is no legal
impediment for Branch 51 to proceed with the cases filed against petitioners.

rehabilitation of the corporation, especially since they are charged in their individual capacities.

Such being the case, the purpose of the law for the issuance of the stay order is not compromised,
WHEREFORE, premises considered, the petition is DENIED. The April 27, 2006
since the appointed rehabilitation receiver can still fully discharge his functions as mandated by
Decision and August 2, 2006 Resolution of the Court of Appeals in CA-G.R. SP No. 90947
law. It bears to stress that the rehabilitation receiver is not charged to defend the officers of the
are AFFIRMED. The Regional Trial Court of Manila, Branch 51, is ORDERED to proceed with the
corporation. If there is anything that the rehabilitation receiver might be remotely interested in is
criminal cases filed against petitioners.
whether the court also rules that petitioners are civilly liable. Such a scenario, however, is not a

reason to suspend the criminal proceedings, because as aptly discussed in Rosario, should the

court prosecuting the officers of the corporation find that an award or indemnification is SO ORDERED.

41
warranted, such award would fall under the category of claims, the execution of which would be

Page
subject to the stay order issued by the rehabilitation court.[28] The penal sanctions as a
 SOBREJUANITE v. ASB DEVT
G.R. No. 165675 September 30, 2005
SPOUSES EDUARDO SOBREJUANITE and FIDELA SOBREJUANITE, Petitioners,
vs.
ASB DEVELOPMENT CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the June 29, 2004 Decision of the Court of Appeals
in CA-G.R. SP No. 79420 which reversed and set aside the Decision of the Office of the
President; and its October 18, 2004 Resolution denying reconsideration thereof.
The antecedent facts show that on March 7, 2001, spouses Eduardo and Fidela Sobrejuanite
(Sobrejuanite) filed a Complaint1 for rescission of contract, refund of payments and damages,
against ASB Development Corporation (ASBDC) before the Housing and Land Use Regulatory
Board (HLURB).
Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a condominium
unit and a parking space in the BSA Twin Tower-B Condominum located at Bank Drive, Ortigas
Center, Mandaluyong City. They averred that despite full payment and demands, ASBDC failed
to deliver the property on or before December 1999 as agreed. They prayed for the rescission of
the contract; refund of payments amounting to P2,674,637.10; payment of moral and
exemplary damages, attorney’s fees, litigation expenses, appearance fee and costs of the suit.
ASBDC filed a motion to dismiss or suspend proceedings in view of the approval by the
Securities and Exchange Commission (SEC) on April 26, 2001 of the rehabilitation plan of ASB
Group of Companies, which includes ASBDC, and the appointment of a rehabilitation receiver.
The HLURB arbiter however denied the motion and ordered the continuation of the proceedings.
The arbiter found that under the Contract to Sell, ASBDC should have delivered the property to
Sobrejuanite in December 1999; that the latter had fully paid their obligations except the
P50,000.00 which should be paid upon completion of the construction; and that rescission of the
contract with damages is proper.
The dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing judgment is rendered ordering the rescission of the
contracts to sell between the parties, and further ordering the respondent [ASBDC] to pay the
complainants [Sobrejuanite] the following:
a) all amortization payments by the complainants amounting to P2,674,637.10 plus 12%
interest from the date of actual payment of each amortization;
b) moral damages amounting to P200,000.00;
c) exemplary damages amounting to P100,000.00;
d) attorney’s fees amounting to P100,000.00;
e) litigation expenses amounting to P50,000.00.
All other claims and all counter-claims are hereby dismissed.
IT IS SO ORDERED.2
The HLURB Board of Commissioners3 affirmed the ruling of the arbiter that the approval of the
rehabilitation plan and the appointment of a rehabilitation receiver by the SEC did not have the
effect of suspending the proceedings before the HLURB. The board held that the HLURB could
properly take cognizance of the case since whatever monetary award that may be granted by it
will be ultimately filed as a claim before the rehabilitation receiver. The board also found that
ASBDC failed to deliver the property to Sobrejuanite within the prescribed period. The
dispositive portion of the Decision reads:
Wherefore the petition for review is denied and the decision of the office below is affirmed. It
shall be understood that all monetary awards shall still be filed as claims before the
rehabilitation receiver.4
ASBDC filed an appeal5 before the Office of the President which was dismissed6 for lack of merit.
Hence, ASBDC filed a petition7 under Section 1, Rule 43 of the Rules of Court before the Court
of Appeals, docketed as CA-G.R. SP No. 79420.
On June 29, 2004, the Court of Appeals rendered its assailed Decision,8 the dispositive portion of
which reads:
WHEREFORE, premises considered, the instant petition is GRANTED. The impugned decision
dated June 27, 2003 of the Office of the President is hereby REVERSED AND SET ASIDE. No
pronouncement as to costs.
SO ORDERED.9
The Court of Appeals held that the approval by the SEC of the rehabilitation plan and the
appointment of the receiver caused the suspension of the HLURB proceedings. The appellate
court noted that Sobrejuanite’s complaint for rescission and damages is a claim under the
contemplation of Presidential Decree (PD) No. 902-A or the SEC Reorganization Act and A.M.
No. 00-8-10-SC or the Interim Rules of Procedure on Corporate Rehabilitation,because it sought
to enforce a pecuniary demand. Therefore, jurisdiction lies with the SEC and not HLURB. It also
ruled that ASBDC was obliged to deliver the property in December 1999 but its financial reverses
warranted the extension of the period.
Sobrejuanite’s motion for reconsideration was denied10 hence the instant petition which raises
42
the following issues:
Page
1. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED ITS [T]he word ‘claim’ as used in Sec. 6(c) of P.D. 902-A refers to debts or demands of a pecuniary
DISCRETION IN RULING THAT THE SEC, NOT THE HLURB, HAS JURISDICTION OVER nature. It means "the assertion of a right to have money paid. It is used in special proceedings
PETITIONER’S COMPLAINT, IN CONTRAVENTION TO LAW AND THE RULING OF THIS like those before administrative court, on insolvency."
HONORABLE COURT IN THE ARRANZA CASE.
The word "claim" is also defined as:
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED ITS
DISCRETION WHEN IT RULED THAT THE APPROVAL OF THE CORPORATE REHABILITATION
Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
PLAN AND THE APPOINTMENT OF A RECEIVER HAD THE EFFECT OF SUSPENDING THE
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
PROCEEDING IN THE HLURB, AND THAT THE MONETARY AWARD GIVEN BY THE HLURB
unsecured; or right to an equitable remedy for breach of performance if such breach gives rise
COULD NOT [BE] FILED IN THE SEC FOR PROPER DISPOSITION, NOT BEING IN ACCORDANCE
to a right to payment, whether or not such right to an equitable remedy is reduced to judgment,
WITH LAW AND JURISPRUDENCE.
fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.

3. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED ITS
In conflicts of law, a receiver may be appointed in any state which has jurisdiction over the
DISCRETION IN RULING THAT RESPONDENT "IS JUSTIFIED IN EXTENDING THE AGREED DATE
defendant who owes a claim.
OF DELIVERY BY INVOKING AS GROUND THE FINANCIAL CONSTRAINTS IT EXPERIENCED,"
BEING CONTRARY TO LAW AND IN EEFECT AN UNLAWFUL NOVATION OF THE AGREEMENT OF
THE DATE OF DELIVERY ENTERED INTO BY PETITIONERS AND RESPONDENT.11 As used in statutes requiring the presentation of claims against a decedent’s estate, "claim" is
generally construed to mean debts or demands of a pecuniary nature which could have been
enforced against the deceased in his lifetime and could have been reduced to simple money
The petition lacks merit.
judgments; and among these are those founded upon contract.

Section 6(c) of PD No. 902-A empowers the SEC:

In Arranza v. B.F. Homes, Inc.,16 claim is defined as referring to actions involving monetary
considerations.
c) To appoint one or more receivers of the property, real and personal, which is the subject of
the action pending before the Commission … whenever necessary in order to preserve the rights
Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes, Inc. were
of the parties-litigants and/or protect the interest of the investing public and creditors: …
promulgated prior to the effectivity of the Interim Rules of Procedure on Corporate
Provided, finally, That upon appointment of a management committee, rehabilitation receiver,
Rehabilitation on December 15, 2000. The interim rules define a claim as referring to all claims
board or body, pursuant to this Decree, all actions for claims against corporations,
or demands, of whatever nature or character against a debtor or its property, whether for
partnerships or associations under management or receivership pending before any
money or otherwise. The definition is all-encompassing as it refers to all actions whether for
court, tribunal, board or body shall be suspended accordingly. [Emphasis added]
money or otherwise. There are no distinctions or exemptions.

The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of party litigants as
well as the interest of the investing public or creditors.12 Such suspension is intended to give
enough breathing space for the management committee or rehabilitation receiver to make the
business viable again, without having to divert attention and resources to litigations in various
fora.13 The suspension would enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extra-judicial interference that might
unduly hinder or prevent the "rescue" of the debtor company. To allow such other action to
continue would only add to the burden of the management committee or rehabilitation receiver,
whose time, effort and resources would be wasted in defending claims against the corporation
instead of being directed toward its restructuring and rehabilitation.14
Thus, in order to resolve whether the proceedings before the HLURB should be suspended, it is
necessary to determine whether the complaint for rescission of contract with damages is
a claim within the contemplation of PD No. 902-A.
In Finasia Investments and Finance Corp. v. Court of Appeals,15 we construed claim to refer only
Incidentally, although the petition for rehabilitation with prayer for suspension of actions and
proceedings was filed before the SEC on May 2, 2000,17 or prior to the effectivity of the interim
rules, the same would still apply pursuant to Section 1, Rule 1 thereof which provides:
Section 1. Scope – These Rules shall apply to petitions for rehabilitation filed by corporations,
partnerships, and associations pursuant to Presidential Decree No. 902-A, as amended.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim Rules of
Procedure on Corporate Rehabilitation. Even under our rulings in Finasia Investments and
Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes, Inc., the complaint for rescission
with damages would fall under the category of claimconsidering that it is for pecuniary
considerations.
In their complaint, Sobrejuanite pray for the rescission of the contract and the refund of
P2,674,637.10 representing their total payments to ASBDC; P200,000.00 as moral damages;
P100,000.00 as exemplary damages; P100,000.00 as attorney’s fees; P50,000.00 as litigation

43
to debts or demands pecuniary in nature. Thus: expenses; P1,500.00 per hearing as appearance fees; and costs of the suit.

Page
In the decision of the HLURB arbiter, ASBDC was ordered to pay P2,674,637.10 plus 12%
interest from the date of actual payment of each amortization, representing the refund of all the
amortization payments made by Sobrejuanite; P200,000.00 as moral damages; P100,000.00 as
exemplary damages; P100,000.00 as attorney’s fees; and P50,000.00 as litigation expenses.
As such, the HLURB arbiter should have suspended the proceedings upon the approval by the
SEC of the ASB Group of Companies’ rehabilitation plan and the appointment of its rehabilitation
receiver. By the suspension of the proceedings, the receiver is allowed to fully devote his time
and efforts to the rehabilitation and restructuring of the distressed corporation.
of respondent’s alleged failure to observe its statutory and contractual obligations to provide
petitioners a "decent human settlement" and "ample opportunities for improving their quality of
life." The HLURB, not the SEC, is equipped with the expertise to deal with that matter.21
Finally, we agree with the Court of Appeals that under the Contract to Sell, ASBDC was obliged
to deliver the property to Sobrejuanite on or before December 1999. Nonetheless, the same was
deemed extended due to the financial reverses experienced by the company. Section 7 of the
Contract to Sell allows the developer to extend the period of delivery on account of causes
beyond its control, such as financial reverses.

It is well to note that even the execution of final judgments may be held in abeyance when a WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals dated
corporation is under rehabilitation.18 Hence, there is more reason in the instant case for the June 29, 2004 in CA-G.R. SP No. 79420 and its Resolution dated October 18, 2004,
HLURB arbiter to order the suspension of the proceedings as the motion to suspend was filed are AFFIRMED.
soon after the institution of the complaint. By allowing the proceedings to proceed, the HLURB
arbiter unwittingly gave undue preference to Sobrejuanite over the other creditors and claimants
SO ORDERED.
of ASBDC, which is precisely the vice sought to be prevented by Section 6(c) of PD 902-A. Thus:

As between creditors, the key phrase is "equality is equity." When a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not
anyone of them should be given any preference by paying one or some of them ahead of the
others. This is precisely the reason for the suspension of all pending claims against the
corporation under receivership. Instead of creditors vexing the courts with suits against the
distressed firm, they are directed to file their claims with the receiver who is a duly appointed
officer of the SEC.19

Petitioners’ reliance on Arranza v. B.F. Homes, Inc.20 is misplaced. In that case, we held that the
HLURB retained its jurisdiction despite the rehabilitation proceedings since the claim filed by the
homeowners did not involve pecuniary considerations. The claim therein was for specific
performance to enforce the homeowners’ rights as regards right of way, open spaces, road and
perimeter wall repairs, and security. However, it can also be deduced therefrom that if the claim
was for monetary awards, the proceedings before the HLURB should be suspended during the
rehabilitation. Thus:

No violation of the SEC order suspending payments to creditors would result as far as
petitioners’ complaint before the HLURB is concerned. To reiterate, what petitioners seek to
enforce are respondent’s obligations as a subdivision developer. Such claims are basically not
pecuniary in nature although it could incidentally involve monetary considerations. All that
petitioners’ claims entail is the exercise of proper subdivision management on the part of the
SEC-appointed Board of Receivers towards the end that homeowners shall enjoy the ideal
community living that respondent portrayed they would have when they bought real estate from
it.

Neither may petitioners be considered as having "claims" against respondent within the context
of the following proviso of Section 6 (c) of P.D. No. 902-A, …to warrant suspension of the
HLURB proceedings.

.…

44
In this case, under the complaint for specific performance before the HLURB, petitioners do not

Page
aim to enforce a pecuniary demand. Their claim for reimbursement should be viewed in the light
 MWSS v. DAWAY
G.R. No. 160732 June 21, 2004
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial
Court of Quezon City, Branch 90 and Maynilad Water Services, Inc., respondents
DECISION
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a
determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and
Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the
provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation
(Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was
thereby:
xxx xxx xxx
2. Staying enforcement of all claims, whether for money or otherwise and whether
such enforcement is by court action or otherwise, against the petitioner, its
guarantors and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in
any manner any of its properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as
at the date of the filing of the petition;
xxx xxx xxx
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex
Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 which stated
that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the
process for the payment by the banks of US$98 million out of the US$120 million
standby letter of credit so the banks have to make good such call/drawing of payment
of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any
similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the
dispositive portion of this Court’s Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt
the written certification/notice of draw to Citicorp International Limited dated
November 24, 2003 and DECLARES void any payment by the banks to MWSS in the
event such written certification/notice of draw is not withdrawn by MWSS and/or
MWSS receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this
petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the
legality of said order as having been issued without or in excess of the lower court’s jurisdiction
or that the court a quo acted with grave abuse of discretion amounting to lack or excess of
jurisdiction.4
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year
period to manage, operate, repair, decommission and refurbish the existing MWSS water
delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to
pay the corresponding concession fees on the dates agreed upon in said agreement5 which,
among other things, consisted of payments of petitioner’s mostly foreign loans.
To secure the concessionaire’s performance of its obligations under the Concession Agreement,
Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or
other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility
with a number of foreign banks, led by Citicorp International Limited, for the issuance of an
Irrevocable Standby Letter of Credit6 in the amount of US$120,000,000 in favor of MWSS for the
full and prompt performance of Maynilad’s obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which
it hoped to recover the losses it had allegedly incurred and would be incurring as a result of the
depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad
issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the
concession fees. In an effort to salvage the Concession Agreement, the parties entered into a
Memorandum of Agreement (MOA)7 on June 8, 2001 wherein Maynilad was allowed to recover
foreign exchange losses under a formula agreed upon between them. Sometime in August 2001
Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the
terms of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel for
arbitration. This resulted in the parties agreeing to resolve the issues through an amendment of
the Concession Agreement on October 5, 2001, known as Amendment No. 1,8which was based
on the terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by
MWSS Board of Trustees Resolution No. 487-2001,9 which provided inter alia for a formula that
would allow Maynilad to recover foreign exchange losses it had incurred or would incur under
the terms of the Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its
stockholders;
45
b) resume payment of the concession fees; and
Page
 c) mutually seek the dismissal of the cases pending before the Court of Appeals and
with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination,
claiming that MWSS failed to comply with its obligations under the Concession Agreement and
Amendment No. 1 regarding the adjustment mechanism that would cover Maynilad’s foreign
exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the
concession, which was challenged by MWSS. This matter was eventually brought before the
Appeals Panel on January 7, 2003 by MWSS.10 On November 7, 2003, the Appeals Panel ruled
that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the concession fees that had
fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter,
submitted a written notice11 on November 24, 2003, to Citicorp International Limited, as agent
for the participating banks, that by virtue of Maynilad’s failure to perform its obligations under
the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and
thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation
before the court a quowhich resulted in the issuance of the Stay Order of November 17, 2003
and the disputed Order of November 27, 2003.12
PETITIONER’S CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY
WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
CONSIDERING THE PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS
PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD
SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF
JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE
PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY IN
NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD
TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION
OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million
Standby Letter of Credit and Performance Bond are not property of the estate of the debtor
Maynilad and, therefore, not subject to the in remrehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of
Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit
cannot also be considered a "claim" falling under the purview of the stay order as alleged by
respondent as it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the
commencement of the process for the payment of US$98 million is a violation of the order
issued on November 17, 2003.
RESPONDENT MAYNILAD’S CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued after carefully
considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to
admissions, pleadings and/or pertinent records13 and that public respondent had the
authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets
of the issuing banks are part or property of the estate of respondent Maynilad subject
to rehabilitation and which respondent Maynilad has not and has never claimed to
be;14
c) what is relevant is not whether the performance bond or assets of the issuing
banks are part of the estate of respondent Maynilad but whether the act of petitioner
in commencing the process for the payment by the banks of US$98 million out of the
US$120 million performance bond is covered and/or prohibited under sub-paragraphs
2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent
Maynilad but also over persons and assets of "all those affected by the proceedings x
x x upon publication of the notice of commencement;15" and
e) the obligations under the Standby Letter of Credit are not solidary and are not
exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up
the main issue of the petition before us which is, did the rehabilitation court sitting as such, act
in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the
payment of the concession fees from the banks that issued the Irrevocable Standby Letter of
Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation
to support its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that
46
issued it. The section reads in part "that jurisdiction over those affected by the proceedings is
considered acquired upon the publication of the notice of commencement of proceedings in a
newspaper of general circulation" and goes further to define rehabilitation as an in
Page
rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings,
where jurisdiction is acquired by publication and where it is necessary that the assets of the
debtor come within the court’s jurisdiction to secure the same for the benefit of creditors. The
reference to "all those affected by the proceedings" covers creditors or such other persons or
entities holding assets belonging to the debtor under rehabilitation which should be reflected in
its audited financial statements. The banks do not hold any assets of respondent Maynilad that
would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this
point.
Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the
Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent
Maynilad’s own admission it is not. In issuing the clarificatory order of November 27, 2003,
enjoining petitioner from claiming from an asset that did not belong to the debtor and over
which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that
supports its claim that the commencement of the process to draw on the Standby Letter of
Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of
public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the
conclusion that such an enforcement is prohibited by said section because it is a "claim against
the debtor, its guarantors and sureties not solidarily liable with the debtor" and that there is
nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would
show or require the obligation of the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad has
procured to answer for its non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims
against guarantors and sureties, but only those claims against guarantors and sureties
who are not solidarily liable with the debtor. Respondent Maynilad’s claim that the banks
are not solidarily liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of guarantee vis-
à-vis the concept of an irrevocable letter of credit are inconsistent with each other. The
guarantee theory destroys the independence of the bank’s responsibility from the contract upon
which it was opened and the nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the
bank undertakes a primary obligation. We have also defined a letter of credit as an engagement
by a bank or other person made at the request of a customer that the issuer shall honor drafts
or other demands of payment upon compliance with the conditions specified in the credit.17
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents18 and is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in the letter.19 They are in
effect absolute undertakings to pay the money advanced or the amount for which credit is
given on the faith of the instrument. They are primary obligations and not accessory contracts
and while they are security arrangements, they are not converted thereby into contracts of
guaranty.20 What distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and other required shipping
documents are presented to it.21 They are definite undertakings to pay at sight once the
documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credits of the International Chamber of Commerce. In
the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s) and Standby
Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting
at the request and on instructions of a customer or on its own behalf is to make payment
against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on
an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the
stipulated documents are presented to the nominated bank or the issuing bank and the terms
and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight
payment."22
We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of America
NT & SA v. Court of Appeals,24 to the extent that they are pertinent, the application in our
jurisdiction of the international credit regulatory set of rules known as the Uniform Customs and
Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce,
which we said in Bank of the Philippine Islands v. Nery25 was justified under Art. 2 of the Code
of Commerce, which states:
"Acts of commerce, whether those who execute them be merchants or not, and
whether specified in this Code or not should be governed by the provisions contained
in it; in their absence, by the usages of commerce generally observed in each place;
and in the absence of both rules, by those of the civil law."
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein
petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor. The participating banks’
obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s
assets. These are the same characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and independently of
the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated
in Philippine Blooming Mills, Inc. v. Court of Appeals,27 where we said that property of the surety
cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued
separately to enforce his liability as surety for the debts or obligations of the debtor. The debts
or obligations for which a surety may be liable include future debts, an amount which may not
be known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
47
banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the
request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full and prompt performance of the
Page
obligations by the concessionaire under the Concession Agreement28 and herein petitioner is
authorized by the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex "B" of the Letter of Credit. It provides further in Sec.
6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor
any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of
Credit regardless of the date on which the event giving rise to such Written Certification arose.29
Taking into consideration our own rulings on the nature of letters of credit and the customs and
usage developed over the years in the banking and commercial practice of letters of credit, we
hold that except when a letter of credit specifically stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to
act on the obligation of the banks under the Letter of Credit under the argument that this was
not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is
excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner
from proceeding against the Standby Letters of Credit to which it had a clear right under the law
and the terms of said Standby Letter of Credit, public respondent acted in excess of his
jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the
parties’ memoranda:
of certiorari but that such remedy be an adequate remedy which is equally beneficial,
speedy and sufficient, not only a remedy which at some time in the future may offer
relief but a remedy which will promptly relieve the petitioner from the injurious acts of
the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal
remedies and the danger of failure of justice without the writ, that must usually
determine the propriety of certiorari.34
2. Respondent Maynilad argues that by commencing the process for payment under
the Standby Letter of Credit, petitioner violated an immediately executory order of the
court and, therefore, comes to Court with unclean hands and should therefore be
denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that
the Standby Letter of Credit and the banks that issued it were not within the
jurisdiction of the rehabilitation court. The call on the Standby Letter of Credit,
therefore, could not be considered a violation of the Stay Order.
3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction
of the lower court is without merit. The purpose of the initial hearing is to determine
whether the petition for rehabilitation has merit or not. The propriety of the stay order
as well as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the public respondent
was correct in enjoining the petitioner from drawing on the Standby Letter of Credit
will have no bearing on the determination to be made by public respondent whether
the petition for rehabilitation has merit or not. Our decision on the instant petition
does not pre-empt the original jurisdiction of the rehabilitation court.

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate
WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the
remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court
Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET
may on motion or motu proprio, terminate, modify or set conditions for the
ASIDE. The status quo Order herein previously issued is hereby LIFTED. In view of the
continuance of the stay order or relieve a claim from coverage thereof. We find,
urgency attending this case, this decision is immediately executory.
however, that the public respondent had already accomplished this during the hearing
set for the two Urgent Ex Parte motions filed by respondent Maynilad on November 21
and 24, 2003,30 where the parties including the creditors, Suez and Chinatrust No costs.
Commercial "presented their respective arguments."31 The public respondent then
ruled, "after carefully considering/evaluating the import of the arguments and
SO ORDERED.
documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial
Bank and Suez in relation to the admissions, the pleadings, and/or pertinent portions
of the records, this court is of the considered and humble view that the issue must
perforce be resolved in favor of Maynilad."32 Hence to pursue their opposition before
the same court would result in the presentation of the same arguments and issues
passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective
remedy questioning the orders of the rehabilitation court since they are immediately
executory and a petition for review or an appeal therefrom shall not stay the
execution of the order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through this petition

48
for certiorari.

Page
In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is
available to prevent a party from making use of the extraordinary remedy
 BIR v. LEPANTO
April 24, 2017
G.R. No. 224764
BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO V.
MISAJON, GROUP SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER REYNANTE
DP. MARTIREZ, Petitioners,
vs.
LEPANTO CERAMICS, INC., Respondent.
DECISION
PERLAS-BERNABE,, J.:
This is a direct recourse to the Court from the Regional Trial Court (RTC) of Calamba City,
Province of Laguna, Branch 35 (RTC Br. 35), through a petition for review on certiorari, 1 raising
a pure question of law. In particular, petitioners Bureau of Internal Revenue (BIR), Assistant
Commissioner Alfredo V. Misajon (Misajon), Group Supervisor Rolando M. Balbido (Balbido ),
and Examiner Reynante DP. Martirez (Martirez; collectively, petitioners) assail the
Decision2 dated June 1, 2015 and the Order3 dated October 26, 2015 of the RTC Br. 35 in Civil
Case No. 4813- 2014-C, which found Misajon, Balbido, and Martirez (Misajon, et al.) guilty of
indirect contempt and, accordingly, ordered them to pay a fine of ₱5,000.00 each.
The Facts
On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) - a corporation duly organized
and existing under Philippine Laws with principal office address in Calamba City, Laguna - filed a
petition 4 for corporate rehabilitation pursuant to Republic Act No. (RA) 10142, 5 otherwise
known as the "Financial Rehabilitation and Insolvency Act (FRIA) of 2010," docketed before the
RTC ofCalamba City, Branch 34, the designated Special Commercial Court in Laguna
(Rehabilitation Court). Essentially, LCI alleged that due to the financial difficulties it has been
experiencing dating back to the Asian financial crisis, it had entered into a state of insolvency
considering its inability to pay its obligations as they become due and that its total liabilities
amounting to ₱4,213 ,682, 715. 00 far exceed its total assets worth ₱1,112,723,941.00. Notably,
LCI admitted in the annexes attached to the aforesaid Petition its tax liabilities to the national
government in the amount of at least ₱6,355,368.00.6
On January 13, 2012, the Rehabilitation Court issued a Commencement Order,7 which, inter
alia: (a) declared LCI to be under corporate rehabilitation; (b) suspended all actions or
proceedings, in court or otherwise, for the enforcement of claims against LCI; (c) prohibited LCI
from making any payment of its liabilities outstanding as of even date, except as may be
provided under RA 10142; and (d) directed the BIR to file and serve on LCI its comment or
opposition to the petition, or its claims against LCI. 8 Accordingly, the Commencement Order
was published in a newspaper of general circulation and the same, together with the petition for
corporate rehabilitation, were personally served upon LCI's creditors, including the BIR.9
Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group Supervisor, and
Examiner, respectively, of the BIR's Large Taxpayers Service, sent LCI a notice of informal
conference10 dated May 27, 2013, informing the latter of its deficiency internal tax liabilities for
the Fiscal Year ending June 30, 2010. In response, LCI's court-appointed receiver, Roberto L.
Mendoza, sent BIR a letter-reply, reminding the latter of the pendency of LCI's corporate
rehabilitation proceedings, as well as the issuance of a Commencement Order in connection
therewith. Undaunted, the BIR sent LCI a Formal Letter of Demand11 dated May 9, 2014,
requiring LCI to pay deficiency taxes in the amount of P567,519,348.39. 12 This prompted LCI to
file a petition 13 for indirect contempt dated August 13, 2014 against petitioners before RTC Br.
35. In said petition, LCI asserted that petitioners' act of pursuing the BIR's claims for deficiency
taxes against LCI outside of the pending rehabilitation proceedings in spite of the
Commencement Order issued by the Rehabilitation Court is a clear defiance of the aforesaid
Order. As such, petitioners must be cited for indirect contempt in accordance with Rule 71 of the
Rules of Court in relation to Section 16 of RA 10142.14
For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to cite them in
contempt as it is only the Rehabilitation Court, being the one that issued the Commencement
Order, which has the authority to determine whether or not such Order was defied; (b) the
instant petition had already been mooted by the Rehabilitation Court's Order15 dated August 28,
2014 which declared LCI to have been successfully rehabilitated resulting in the termination of
the corporate rehabilitation proceedings; (c) their acts do not amount to a defiance of the
Commencement Order as it was done merely to toll the prescriptive period in collecting
deficiency taxes, and thus, sanctioned by the Rules of Procedure of the FRIA; (d) their acts of
sending a Notice of Informal Conference and Formal Letter of Demand do not amount to a
"legal action or other recourse" against LCI outside of the rehabilitation proceedings; and (e) the
indirect contempt proceedings interferes with the exercise of their functions to collect taxes due
to the govemment.16
The RTC Br. 35 Ruling
In a Decision17 dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of indirect
contempt and, accordingly, ordered them to pay a fine of ₱5,000.00 each. 18 Preliminarily, the
RTC Br. 35 ruled that it has jurisdiction over LCI's petition for indirect contempt as it is
docketed, heard, and decided separately from the principal action. 19 Going to petitioners' other
contentions, the RTC found that: (a) the supervening termination of the rehabilitation
proceedings and the consequent lifting of the Commencement Order did not render moot the
petition for indirect contempt as the acts complained of were already consummated;
(b) petitioners' acts of sending LCI a notice of informal conference and Formal Letter of Demand
are covered by the Commencement Order as they were for the purpose of pursuing and
enforcing a claim for deficiency taxes, and thus, are in clear defiance of the Commencement
Order; and (c) petitioners could have tolled the prescriptive period to collect deficiency taxes
without violating the Commencement Order by simply ventilating their claim before the
rehabilitation proceedings, which they were adequately notified of. In this relation, the RTC Br.
35 held that while the BIR is a juridical entity which can only act through its authorized
intermediaries, it cannot be concluded that it authorized the latter to commit the contumacious
acts complained of, i.e., defiance of the Commencement Order. Thus, absent any contrary
evidence, only those individuals who performed such acts, namely, Misajon, et al., should be
cited for indirect contempt of court.20
Aggrieved, Misaj on, et al. moved for reconsideration, 21
which was, however, denied in an
49
Order22 dated October 26, 2015; hence, this petition.
Page
 The Issue Before the Court
The issue for the Court's resolution is whether or not the RTC Br. 35 correctly found Misajon, et
al. to have defied the Commencement Order and, accordingly, cited them for indirect contempt.
The Court's Ruling
The petition is without merit.
Section 4 (gg) of RA 10142 states:
Section 4. Definition of Terms. - As used in this Act, the term:
xxxx
(gg) 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 debtor continues as a going concern than if it is immediately liquidated.
xxxx
"[C]ase law has defined corporate rehabilitation as an attempt to conserve and administer the
assets of an insolvent corporation in the hope of its eventual return from financial stress to
solvency. It contemplates the continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and liquidity."23
Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the
expenses of the distressed corporation during the rehabilitation period by providing the best
possible framework for the corporation to gradually regain or achieve a sustainable operating
form. 24 "[It] enable[s] the company to gain a new lease in life and thereby allow creditors to be
paid [t]heir claims from its earnings. Thus, rehabilitation shall be undertaken when it is shown
that the continued operation of the corporation is economically more feasible and its creditors
can recover, by way of the present value of payments projected in the plan, more, if the
corporation continues as a going concern than if it is immediately liquidate d.25
In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that upon the
issuance of a Commencement Order - which includes a Stay or Suspension Order - all actions or
proceedings, in court or otherwise, for the enforcement of "claims" against the distressed
company shall be suspended.26 Under the same law, claim "shall refer to all claims or demands
of whatever nature or character against the debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, including, but not limited to; (1) all claims of the government, whether
national or local, including taxes, tariffs and customs duties; and (2) claims against
directors and officers of the debtor arising from acts done in the discharge of their functions
falling within the scope of their authority: Provided, That, this inclusion does not prohibit the
creditors or third parties from filing cases against the directors and officers acting in their
personal capacities."27
To clarify, however, creditors of the distressed corporation are not without remedy as they may
still submit their claims to the rehabilitation court for proper consideration so that they may
participate in the proceedings, keeping in mind the general policy of the law "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."28 In other words, the creditors must
ventilate their claims before the rehabilitation court, and any "[a]ttempts to seek legal or other
resource against the distressed corporation shall be sufficient to support a finding of indirect
contempt of court."29
In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation. Finding
the same to be sufficient in form and substance, the Rehabilitation Court issued a
Commencement Order30 dated January 13, 2012 which, inter alia: (a) declared LCI to be under
corporate rehabilitation; (b) suspended all actions or proceedings, in court or otherwise, for the
enforcement of claims against LCI; (c) prohibited LCI from making any payment of its
outstanding liabilities as of even date, except as may be provided under RA 10142; and (d)
directed the BIR to file and serve on LCI its comment or opposition to the petition, or its claims
against LCI. It is likewise undisputed that the BIR - personally and by publication - was notified
of the rehabilitation proceedings involving LCI and the issuance of the Commencement Order
related thereto. Despite the foregoing, the BIR, through Misajon, et al., still opted to send LCI:
(a) a notice of informal conference31 dated May 27, 2013, informing the latter of its deficiency
internal tax liabilities for the Fiscal Year ending June 30, 2010; and (b) a Formal Letter of
Demand32 dated May 9, 2014, requiring LCI to pay deficiency taxes in the amount of P567,5 l
9,348.39, notwithstanding the written reminder coming from LCI's court-appointed receiver of
the pendency of rehabilitation proceedings concerning LCI and the issuance of a
commencement order. Notably, the acts of sending a notice of informal conference and a
Formal Letter of Demand are part and parcel of the entire process for the assessment and
collection of deficiency taxes from a delinquent taxpayer,33 - an action or proceeding for the
enforcement of a claim which should have been suspended pursuant to the Commencement
Order. Unmistakably, Misajon, et al. 's foregoing acts are in clear defiance of the
Commencement Order.
Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the prescriptive
period for the collection of deficiency taxes; and (b) to cite them in indirect contempt would
unduly interfere with their function of collecting taxes due to the government, cannot be given
any credence. As aptly put by the RTC Br. 35, they could have easily tolled the running of such
prescriptive period, and at the same time, perform their functions as officers of the BIR, without
defying the Commencement Order and without violating the laudable purpose of RA 10142 by
simply ventilating their claim before the Rehabilitation Court.34 After all, they were adequately
notified of the LCI's corporate rehabilitation and the issuance of the corresponding
Commencement Order. In sum, it was improper for Misajon, et al. to collect, or even attempt to
collect, deficiency taxes from LCI outside of the rehabilitation proceedings concerning the latter,
and in the process, willfully disregard the Commencement Order lawfully issued by the
Rehabilitation Court. Hence, the RTC Br. 35 correctly cited them for indirect contempt.35
WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the Order dated
October 26, 2015 of the Regional Trial Court of Calamba City, Province of Laguna, Branch 35 in
Civil Case No. 4813-2014- C are hereby AFFIRMED.
50
SO ORDERED.
Page
 UMALE v. ASB
In 1996, Amethyst Pearl executed a Deed of Assignment in Liquidation of the subject premises in favor of ASB
LEONARDO S. UMALE, [deceased] represented G.R. No. 181126
by CLARISSA VICTORIA, JOHN LEO, GEORGE Realty in consideration of the full redemption of Amethyst Pearls outstanding capital stock from ASB
LEONARD, KRISTINE, MARGUERITA ISABEL, Present:
AND MICHELLE ANGELIQUE, ALL SURNAMED Realty.[5] Thus, ASB Realty became the owner of the subject premises and obtained in its name Transfer
UMALE, VELASCO, JR.,
Certificate of Title No. PT-105797,[6] which was registered in 1997 with the Registry of Deeds of Pasig City.
Petitioners, Acting Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,⃰
DEL CASTILLO, and Sometime in 2003, ASB Realty commenced an action in the Metropolitan Trial Court (MTC) of Pasig City for
- versus - PEREZ, JJ.
unlawful detainer[7] of the subject premises against petitioner Leonardo S. Umale (Umale). ASB Realty alleged
ASB REALTY CORPORATION, Promulgated:
Respondent. June 15, 2011 that it entered into a lease contract[8] with Umale for the period June 1, 1999-May 31, 2000. Their agreement
x--------------------------------------------------------x
was for Umale to conduct a pay-parking business on the property and pay a monthly rent of P60,720.00 to
DECISION
ASB Realty.

DEL CASTILLO, J.:

Upon the contracts expiration on May 31, 2000, Umale continued occupying the premises and paying rentals
Being placed under corporate rehabilitation and having a receiver appointed to carry out the rehabilitation plan
albeit at an increased monthly rent of P100,000.00. The last rental payment made by Umale to ASB Realty
do not ipso facto deprive a corporation and its corporate officers of the power to recover its unlawfully detained
was for the June 2001 to May 2002 period, as evidenced by the Official Receipt No. 56511[9] dated November
property.
19, 2001.

Petitioners filed this Petition for Review on Certiorari[1] assailing the October 15, 2007 Decision[2] of the Court

of Appeals (CA) in CA-G.R. SP No. 91096, as well as its January 2, 2008 Resolution.[3] The dispositive portion On June 23, 2003, ASB Realty served on Umale a Notice of Termination of Lease and Demand to Vacate and

of the assailed Decision reads: Pay.[10] ASB Realty stated that it was terminating the lease effective midnight of June 30, 2003; that Umale

should vacate the premises, and pay to ASB Realty the rental arrears amounting to P1.3 million by July 15,
WHEREFORE, the Decision dated March 28, 2005 of the trial court is affirmed in toto.
SO ORDERED.[4] 2003. Umale failed to comply with ASB Realtys demands and continued in possession of the subject premises,

even constructing commercial establishments thereon.

Factual Antecedents
Umale admitted occupying the property since 1999 by virtue of a verbal lease contract but vehemently denied

that ASB Realty was his lessor. He was adamant that his lessor was the original owner, Amethyst Pearl. Since
This case involves a parcel of land identified as Lot 7, Block 5, Amethyst Street, Ortigas Center, Pasig City
there was no contract between himself and ASB Realty, the latter had no cause of action to file the unlawful
which was originally owned by Amethyst Pearl Corporation (Amethyst Pearl), a company that is, in turn,
detainer complaint against him.
wholly-owned by respondent ASB Realty Corporation (ASB Realty).

51
Page
In asserting his right to remain on the property based on the oral lease contract with Amethyst Pearl, Umale Amethyst Pearl. The MTC then concluded from such inconsistency that Amethyst Pearl was the real lessor,

interposed that the lease period agreed upon was for a long period of time.[11] He then allegedly paid P1.2 who can seek Umales ejectment from the subject property.[17]

million in 1999 as one year advance rentals to Amethyst Pearl.[12]

Umale further claimed that when his oral lease contract with Amethyst Pearl ended in May 2000, they both Likewise, the MTC agreed with Umale that only the rehabilitation receiver could file suit to recover ASB Realtys

agreed on an oral contract to sell. They agreed that Umale did not have to pay rentals until the sale over the property.[18] Having been placed under receivership, ASB Realty had no more personality to file the complaint

subject property had been perfected between them.[13] Despite such agreement with Amethyst Pearl for unlawful detainer.

regarding the waiver of rent payments, Umale maintained that he continued paying the annual rent of P1.2

million. He was thus surprised when he received the Notice of Termination of Lease from ASB Realty.[14] Ruling of the Regional Trial Court

Umale also challenged ASB Realtys personality to recover the subject premises considering that ASB Realty ASB Realty appealed the adverse MTC Decision to the Regional Trial Court (RTC),[19] which then

had been placed under receivership by the Securities and Exchange Commission (SEC) and a rehabilitation reversed[20] the MTC ruling.

receiver had been duly appointed. Under Section 14(s), Rule 4 of the Administrative Memorandum No. 00-8-

10SC, otherwise known as the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules), it is the The RTC held that the MTC erred in dismissing ASB Realtys complaint for lack of cause of action. It found

rehabilitation receiver that has the power to take possession, control and custody of the debtors assets. Since sufficient evidence to support the conclusion that it was indeed ASB Realty that entered into a lease contract

ASB Realty claims that it owns the subject premises, it is its duly-appointed receiver that should sue to recover with Umale, hence, the proper party who can assert the corresponding right to seek Umales ouster from the

possession of the same.[15] leased premises for violations of the lease terms. In addition to the written lease contract, the official receipt

evidencing Umales rental payments for the period June 2001 to May 2002 to ASB Realty adequately

ASB Realty replied that it was impossible for Umale to have entered into a Contract of Lease with Amethyst established that Umale was aware that his lessor, the one entitled to receive his rent payments, was ASB

Pearl in 1999 because Amethyst Pearl had been liquidated in 1996. ASB Realty insisted that, as evidenced by Realty, not Amethyst Pearl.

the written lease contract, Umale contracted with ASB Realty, not with Amethyst Pearl. As further proof

thereof, ASB Realty cited the official receipt evidencing the rent payments made by Umale to ASB Realty. ASB Realtys positive assertions, supported as they are by credible evidence, are more compelling than Umales

bare negative assertions. The RTC found Umales version of the facts incredible. It was implausible that a

Ruling of the Metropolitan Trial Court businessman such as Umale would enter into several transactions with his alleged lessor a lease contract,

payment of lease rentals, acceptance of an offer to sell from his alleged lessor, and an agreement to waive

In its August 20, 2004 Decision, [16]

the MTC dismissed ASB Realtys complaint against Umale without rentals sans a sliver of evidence.

prejudice. It held that ASB Realty had no cause to seek Umales ouster from the subject property because it

was not Umales lessor. The trial court noted an inconsistency in the written lease contract that was presented With the lease contract between Umale and ASB Realty duly established and Umales failure to pay the monthly

52
by ASB Realty as basis for its complaint. Its whereas clauses cited ASB Realty, with Eden C. Lin as its rentals since June 2002 despite due demands from ASB Realty, the latter had the right to terminate the lease

Page
representative, as Umales lessor; but its signatory page contained Eden C. Lins name under the heading contract and seek his eviction from the leased premises. Thus, when the contract expired on June 30, 2003
(as stated in the Notice of Termination of Lease), Umale lost his right to remain on the premises and his

continued refusal to vacate the same constituted sufficient cause of action for his ejectment.[21] In its July 26, 2005 Order, the RTC denied reconsideration of its Decision and granted ASB Realtys Motion for

Issuance of a Writ of Execution.[27]

With respect to ASB Realtys personality to file the unlawful detainer suit, the RTC ruled that ASB Realty retained

all its corporate powers, including the power to sue, despite the appointment of a rehabilitation receiver. Citing Umale then filed his appeal[28] with the CA insisting that the parties did not enter into a lease

the Interim Rules, the RTC noted that the rehabilitation receiver was not granted therein the power to file contract.[29] Assuming that there was a lease, it was at most an implied lease. Hence its period depended on

complaints on behalf of the corporation.[22] the rent payments. Since Umale paid rent annually, ASB Realty had to respect his lease for the entire year. It

cannot terminate the lease at the end of the month, as it did in its Notice of Termination of Lease.[30] Lastly,

Moreover, the retention of its corporate powers by the corporation under rehabilitation will advance the Umale insisted that it was the rehabilitation receiver, not ASB Realty, that was the real party-in-interest.[31]

objective of corporate rehabilitation, which is to conserve and administer the assets of the corporation in the

hope that it may eventually be able to go from financial distress to solvency. The suit filed by ASB Realty to Pending the resolution thereof, Umale died and was substituted by his

recover its property and back rentals from Umale could only benefit ASB Realty.[23] widow and legal heirs, per CA Resolution dated August 14, 2006.[32]

The dispositive portion of the RTC Decision reads as follows: Ruling of the Court of Appeals

WHEREFORE, premises considered, the appealed decision is hereby reversed and set
aside. Accordingly, judgment is hereby rendered in favor of the plaintiff-appellant The CA affirmed the RTC Decision in toto.[33]
ordering defendant-appellee and all persons claiming rights under him:

1) To immediately vacate the subject leased premises located at Lot 7, Block 5,

Amethyst St., Pearl Drive, Ortigas Center, Pasig City and deliver possession thereof to According to the appellate court, ASB Realty fully discharged its burden to prove the existence of a lease
the plaintiff-appellant;
contract between ASB Realty and Umale,[34] as well as the grounds for eviction.[35]The veracity of the terms of
2) To pay plaintiff-appellant the sum of P1,300,000.00 representing rentals in arrears the lease contract presented by ASB Realty was further bolstered, instead of demolished, by Umales admission
from June 2002 to June 2003;
that he paid monthly rents in accordance therewith.[36]
3) To pay plaintiff-appellant the amount of P100,000.00 a month starting from July
2003 and every month thereafter until they finally vacate the subject premises as
reasonable compensation for the continued use and occupancy of the same;
The CA found no merit in Umales claim that in light of Article 1687 of the Civil Code the lease should be
4) To pay plaintiff-appellant the sum of P200,000.00 as and by way of attorneys fees;
and the costs of suit. extended until the end of the year. The said provision stated that in cases where the lease period was not

SO ORDERED.[24] fixed by the parties, the lease period depended on the payment periods. In the case at bar, the rent payments

were made on a monthly basis, not annually; thus, Umales failure to pay the monthly rent gave ASB Realty

the corresponding right to terminate the lease at the end of the month.[37]

53
Umale filed a Motion for Reconsideration[25] while ASB Realty moved for the issuance of a writ of execution

pursuant to Section 21 of the 1991 Revised Rules on Summary Procedure.[26]

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The CA then upheld ASB Realtys, as well as its corporate officers, personality to recover an unlawfully withheld Appeals,[45] and Abacus Real Estate Development Center, Inc. v. The Manila Banking Corporation,[46] as

corporate property. As expressly stated in Section 14 of Rule 4 of the Interim Rules, the rehabilitation receiver authorities for the rule that the appointment of a receiver suspends the authority of the corporation and its

does not take over the functions of the corporate officers.[38] officers over its property and effects.[47]

Petitioners filed a Motion for Reconsideration,[39] which was denied in the ASB Realty counters that there is no provision in PD 902-A, the Interim Rules, or in Rule 59 of the Rules of

Court that divests corporate officers of their power to sue upon the appointment of a rehabilitation

assailed January 2, 2008 Resolution.[40] receiver.[48] In fact, Section 14 , Rule 4 of the Interim Rules expressly limits the receivers power by providing

that the rehabilitation receiver does not take over the management and control of the corporation but shall

Issues closely oversee and monitor the operations of the debtor.[49] Further, the SEC Rules of Procedure on Corporate

Recovery (SEC Rules), the rules applicable to the instant case, do not include among the receivers powers the

The petitioners raise the following issues for resolution:[41] exclusive right to file suits for the corporation.[50]

1. Can a corporate officer of ASB Realty (duly authorized by the Board of Directors) file suit to recover an
unlawfully detained corporate property despite the fact that the corporation had already been placed under The Court resolves the issue in favor of ASB Realty and its officers.
rehabilitation?

2. Whether a contract of lease exists between ASB Realty and Umale; and
There is no denying that ASB Realty, as the owner of the leased premises, is the real party-in-interest in the
3. Whether Umale is entitled to avail of the lease periods provided in Article 1687 of the Civil Code.
unlawful detainer suit.[51] Real party-in-interest is defined as the party who stands to be benefited or injured

by the judgment in the suit, or the party entitled to the avails of the suit.[52]
Our Ruling

What petitioners argue is that the corporate officer of ASB Realty is incapacitated to file this suit to recover a
Petitioners ask for the dismissal of the complaint for unlawful detainer on the ground that it was not brought
corporate property because ASB Realty has a duly-appointed rehabilitation receiver. Allegedly, this
by the real party-in-interest.[42] Petitioners maintain that the appointment of a rehabilitation receiver for ASB
rehabilitation receiver is the only one that can file the instant suit.
Realty deprived its corporate officers of the power to recover corporate property and transferred such power

to the rehabilitation receiver. Section 6, Rule 59 of the Rules of Court states that a receiver has the power to Corporations, such as ASB Realty, are juridical entities that exist by operation of law.[53] As a creature of law,

bring actions in his own name and to collect debts due to the corporation. Under Presidential Decree (PD) No. the powers and attributes of a corporation are those set out, expressly or impliedly, in the law. Among the

902-A and the Interim Rules, the rehabilitation receiver has the power to take custody and control of the general powers granted by law to a corporation is the power to sue in its own name.[54] This power is granted

assets of the corporation. Since the receiver for ASB Realty did not file the complaint for unlawful detainer, the to a duly-organized corporation, unless specifically revoked by another law. The question becomes: Do the

trial court did not acquire jurisdiction over the subject property.[43] laws on corporate rehabilitation particularly PD 902-A, as amended,[55] and its corresponding rules of procedure

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forfeit the power to sue from the corporate officers and Board of Directors?

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Petitioners cite Villanueva v. Court of Appeals,[44] Yam v. Court of
Corporate rehabilitation is defined as the restoration of the debtor to a position of successful operation and Indeed, PD 902-A, as amended, provides that the receiver shall have the powers enumerated under Rule 59

solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover of the Rules of Court. But Rule 59 is a rule of general application. It applies to different kinds of receivers

by way of the present value of payments projected in the plan more if the corporation continues as a going rehabilitation receivers, receivers of entities under management, ordinary receivers, receivers in liquidation

concern than if it is immediately liquidated.[56] It was first introduced in the Philippine legal system through PD and for different kinds of situations. While the SEC has the discretion[65] to authorize the rehabilitation receiver,

902-A, as amended.[57] The intention of the law is to effect a feasible and viable rehabilitation by preserving a as the case may warrant, to exercise the powers in Rule 59, the SECs exercise of such discretion cannot simply

floundering business as a going concern, because the assets of a business are often more valuable when so be assumed. There is no allegation whatsoever in this case that the SEC gave ASB Realtys rehabilitation

maintained than they would be when liquidated.[58] This concept of preserving the corporations business as a receiver the exclusive right to sue.

going concern while it is undergoing rehabilitation is called debtor-in-possession or debtor-in-place. This means Petitioners cite Villanueva,[66] Yam,[67] and Abacus Real Estate[68] as authorities for their theory that the

that the debtor corporation (the corporation undergoing rehabilitation), through its Board of Directors and corporate officers of a corporation under rehabilitation is incapacitated to act. In Villanueva,[69] the

corporate officers, remains in control of its business and properties, subject only to the monitoring of Court nullified the sale contract entered into by the Philippine Veterans Bank on the ground that the banks

the appointed rehabilitation receiver.[59] The concept of debtor-in-possession, is carried out more particularly insolvency restricted its capacity to act. Yam,[70] on the other hand, nullified the compromise agreement that

in the SEC Rules, the rule that is relevant to the instant case.[60] It states therein that the interim rehabilitation Manphil Investment Corporation entered into while it was under receivership by the Central Bank. In Abacus

receiver of the debtor corporation does not take over the control and management of the debtor Real Estate,[71] it was held that Manila Banks president had no authority to execute an option to purchase

corporation.[61] Likewise, the rehabilitation receiver that will replace the interim receiver is tasked only to contract while the bank was under liquidation.

monitor the successful implementation of the rehabilitation plan.[62] There is nothing in the concept of

corporate rehabilitation that would ipso facto deprive[63] the Board of Directors and corporate officers of a These jurisprudence are inapplicable to the case at bar because they involve

debtor corporation, such as ASB Realty, of control such that it can no longer enforce its right to recover its banking and financial institutions that are governed by different laws.[72] In the cited cases, the applicable

property from an errant lessee. banking law was Section 29[73] of the Central Bank Act.[74] In stark contrast to rehabilitation where the

corporation retains control and management of its affairs, Section 29 of the Central Bank Act, as amended,

To be sure, corporate rehabilitation imposes several restrictions on the debtor corporation. The rules expressly forbids the bank or the quasi-bank from doing business in the Philippines.

enumerate the prohibited corporate actions and transactions[64] (most of which involve some kind of Moreover, the nullified transactions in the cited cases involve dispositions of assets and claims, which are

disposition or encumbrance of the corporations assets) during the pendency of the rehabilitation proceedings prohibited transactions even for corporate rehabilitation[75] because these may be prejudicial to creditors and

but none of which touch on the debtor corporations right to sue. The implication therefore is that our concept contrary to the rehabilitation plan. The instant case, however, involves the recovery of assets and collection of

of rehabilitation does not restrict this particular power, save for the caveat that all its actions are monitored receivables, for which there is no prohibition in PD 902-A.

closely by the receiver, who can seek an annulment of any prohibited or anomalous transaction or agreement

entered into by the officers of the debtor corporation. While the Court rules that ASB Realty and its corporate officers retain their power to sue to recover its property

and the back rentals from Umale, the necessity of keeping the receiver apprised of the proceedings and its

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Petitioners insist that the rehabilitation receiver has the power to bring and defend actions in his own name as results is not lost upon this Court. Tasked to closely monitor the assets of ASB Realty, the rehabilitation receiver

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this power is provided in Section 6 of Rule 59 of the Rules of Court.
has to be notified of the developments in the case, so that these assets would be managed in accordance Petitioners then try to turn the table on ASB Realty with their third argument. They say that under Article 1687

with the approved rehabilitation plan. of the New Civil Code, the period for rent payments determines the lease period. Judging by the official receipt

presented by ASB Realty, which covers the 12-month period from June 2001 to May 2002, the lease period

Coming to the second issue, petitioners maintain that ASB Realty has no should be annual because of the annual rent payments.[79] Petitioners then conclude that ASB Realty violated

cause of action against them because it is not their lessor. They insist that Umale entered into a verbal lease Article 1687 of the New Civil Code when it terminated the lease on June 30, 2003, at the beginning of the new

agreement with Amethyst Pearl only. As proof of this verbal agreement, petitioners cite their possession of the period. They then implore the Court to extend the lease to the end of the annual period, meaning until May

premises, and construction of buildings thereon, sans protest from Amethyst Pearl or ASB Realty.[76] 2004, in accordance with the annual rent payments.[80]

Petitioners concede that they may have raised questions of fact but insist nevertheless on their review as the In arguing for an extension of lease under Article 1687, petitioners lost sight of the restriction provided in

appellate courts ruling is allegedly grounded entirely on speculations, surmises, and conjectures and its Article 1675 of the Civil Code. It states that a lessee that commits any of the grounds for ejectment cited in

conclusions regarding the termination of the lease contract are manifestly absurd, mistaken, and impossible.[77] Article 1673, including non-payment of lease rentals and devoting the leased premises to uses other than

those stipulated, cannot avail of the periods established in Article 1687.[81]

Petitioners arguments have no merit. Ineluctably, the errors they raised involve factual findings,[78] the review

of which is not within the purview of the Courts functions under Rule 45, particularly when there is adequate Moreover, the extension in Article 1687 is granted only as a matter of equity. The law simply recognizes that

evidentiary support on record. there are instances when it would be unfair to abruptly end the lease contract causing the eviction of the

lessee. It is only for these clearly unjust situations that Article 1687 grants the court the discretion to

While petitioners assail the authenticity of the written lease contract by pointing out the inconsistency in the extend the lease.[82]

name of the lessor in two separate pages, they fail to account for Umales actions which are consistent with

the terms of the contract the payment of lease rentals to ASB Realty (instead of his alleged lessor Amethyst The particular circumstances of the instant case however, do not inspire granting equitable relief. Petitioners

Pearl) for a 12-month period. These matters cannot simply be brushed off as sheer happenstance especially have not paid, much less offered to pay, the rent for 14 months and even had the temerity to disregard the

when weighed against Umales incredible version of the facts that he entered into a verbal lease contract with pay-and-vacate notice served on them. An extension will only benefit the wrongdoer and punish the long-

Amethyst Pearl; that the term of the lease is for a very long period of time; that Amethyst Pearl offered to sell suffering property owner.[83]

the leased premises and Umale had accepted the offer, with both parties not demanding any written

documentation of the transaction and without any mention of the purchase price; and that finally, Amethyst WHEREFORE, the petition is DENIED. The October 15, 2007 Decision and January 2, 2008 Resolution of

Pearl agreed that Umale need not pay rentals until the perfection of the sale. The Court is of the same mind the Court of Appeals in CA-G.R. SP No. 91096 are hereby AFFIRMED. ASB Realty Corporation is ordered

as the appellate court that it is simply inconceivable that a businessman, such as petitioners predecessor-in- to FURNISH a copy of the Decision on its incumbent Rehabilitation Receiver and to INFORM the Court of

interest, would enter into commercial transactions with and pay substantial rentals to a corporation nary a its compliance therewith within 10 days.

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single documentation.

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SO ORDERED.