Financial Rehabilitation and Insolvency Act

Meaning of Rehabilitation

Rehabilitation is 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. The purpose of rehabilitation proceedings is
precisely to enable the company to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings.

The law governing rehabilitation and suspension of actions for claims

against corporations is PD 902-A, as amended. On December 15, 2000, the
Court promulgated A.M. No. 00-8-10-SC or the Interim Rules of Procedure on
Corporate Rehabilitation, which applies to petitions for rehabilitation filed by
corporations, partnerships and associations pursuant to PD 902-A.

In January 2004, Republic Act No. 8799 (RA 8799), otherwise known as
the Securities Regulation Code, amended Section 5 of PD 902-A, and
transferred to the Regional Trial Courts the jurisdiction of the Securities and
Exchange Commission (SEC) over 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 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 a management committee.

Basic Procedure of Rehabilitation Cases

In New Frontier Sugar Corporation v. Regional Trial Court, Branch 39, Iloilo City,
the Court enumerated the basic procedure in corporate rehabilitation cases.
The Court held:

As provided in the Interim Rules, the basic procedure is as follows:

1. The petition is filed with the appropriate Regional Trial Court;

2. If the petition is found to be sufficient in form and substance, the trial

court shall issue a Stay Order, which shall provide, among others, for the
appointment of a Rehabilitation Receiver; the fixing of the initial hearing
on the petition; a directive to the petitioner to publish the Order in a
newspaper of general circulation in the Philippines once a week for two
 (2) consecutive weeks; and a directive to all creditors and all interested
parties (including the Securities and Exchange Commission) to file and
serve on the debtor a verified comment on or opposition to the petition,
with supporting affidavits and documents[;]

3. Publication of the Stay Order;

4. Initial hearing on any matter relating to the petition or on any

comment and/or opposition filed in connection therewith. If the trial
court is satisfied that there is merit in the petition, it shall give due
course to the petition;

5. Referral for evaluation of the rehabilitation plan to the

rehabilitation receiver who shall submit his recommendations to the
court;

6. Modifications or revisions of the rehabilitation plan as necessary;

7. Submission of final rehabilitation plan to the trial court for

approval;

8. Approval/disapproval of rehabilitation plan by the trial court

Suspension/Stay Order

Under Section 6, Rule 4 of the Interim Rules, if the court finds the
petition to be sufficient in form and substance, it shall issue, not later than five
(5) days from the filing of the petition, an Order with the following pertinent
effects:

(a) appointing a Rehabilitation Receiver and fixing his bond;

(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;

(c) prohibiting the debtor from selling, encumbering, transferring, or

disposing in any manner any of its properties except in the ordinary
course of business;

(d) prohibiting the debtor from making any payment of its liabilities
outstanding as at the date of filing of the petition;
 The stay order shall be effective from the date of its issuance until the
dismissal of the petition or the termination of the rehabilitation proceedings.
Under the Interim Rules, the petition shall be dismissed if no rehabilitation
plan is approved by the court upon the lapse of 180 days from the date of the
initial hearing. The court may grant an extension beyond this period only if it
appears by convincing and compelling evidence that the debtor may
successfully be rehabilitated. In no instance, however, shall the period for
approving or disapproving a rehabilitation plan exceed 18 months from the
date of filing of the petition.

Rationale of Suspension order

The justification for suspension of actions for claims 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. It 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 litigation in various fora.

GR: Equity is Equality “Pari Passu” “Equal Treatment of Creditors during

Rehabilitation. No preference of payment.

Exns:

Under the Interim Rules, the only pertinent reference to creditor security
is found in Section 12, Rule 4 on relief from, modification or termination of stay
order. Said provision states that the creditor is regarded as lacking adequate
protection if it can be shown that:

(a) the debtor fails or refuses to honor a pre-existing agreement with the
creditor to keep the property insured;

(b) the debtor fails or refuses to take commercially reasonable steps to

maintain the property; or

(c) the property has depreciated to an extent that the creditor is

undersecured.

Upon a showing that the creditor is lacking in protection, the court shall
order the rehabilitation receiver to take steps to ensure that the property is
insured or maintained or to make payment or provide replacement security
such that the obligation is fully secured. If such arrangements are not feasible,
the court may allow the secured creditor to enforce its claim against the debtor.
Nonetheless, the court may deny the creditor the foregoing remedies if allowing
so would prevent the continuation of the debtor as a going concern or
otherwise prevent the approval and implementation of a rehabilitation plan.

The commitment embodied in the pari passu principle only goes so far as
to ensure that the assets of the distressed corporation are held in trust for the
equal benefit of all creditors. It does not espouse absolute equality in all
aspects of debt restructuring.

Case 1: Express Investment III vs. Bayan Telecom (687 SCRA 50 2012)

Facts

Bayantel is a duly organized domestic corporation engaged in the

business of providing telecommunication services. It is 98.6% owned by Bayan
Telecommunications Holdings Corporation (BTHC), which in turn is 85.4%
owned by the Lopez Group of Companies and Benpres Holdings Corporation.

On various dates between the years 1995 and 2001, Bayantel entered
into several credit agreements with different financial institutions with a
security of mortgages and Omnibus Agreement (Assignment Agreement of
certain properties).

Foreseeing the impossibility of further meeting its obligations, Bayantel

sent, in October 2001, a proposal for the restructuring of its debts to the Bank
Creditors and the Holders of Notes. To facilitate the negotiations between
Bayantel and its creditors, an Informal Steering Committee was formed.
However, disagreement ensued for other creditors reject the idea of “pari passu
treatment” or equal treatment of creditors because it will violate the
Assignment Agreement entered into by Bayantel with the latter.

Due to the failure of Bayantel to settle its obligation, the Bank of New
York filed a petition for the corporate rehabilitation of Bayantel upon the
instructions of the Informal Steering Committee. Bayantel submitted a
rehabilitation plan to the court. The RTC issued a stay order and upholding the
pari passu treatment for the rehabilitation of Bayantel.

Issue:

1. WON the the creditors (w/n secured or unsecured) will be treated in

“pari passu” as stated in its rehabilitation plan as opposed to the
contractual agreement giving preference to the secured creditors
and the provision stating “with due regard to the interest of
secured creditors” in the Interim Rules.
 2. WON in a creditor-initiated petition for rehabilitation, the debtor
may only submit either a comment or opposition but not its own
rehabilitation plan.

Ruling

First Issue: Yes, the principle of equality in equity has been cited as the
basis for placing secured and unsecured creditors in equal footing or in pari
passu with each other during rehabilitation. In legal parlance, pari passu is
used especially of creditors who, in marshaling assets, are entitled to receive
out of the same fund without any precedence over each other.

Section 24(d), Rule 4 of the Interim Rules states that contracts and other
arrangements between the debtor and its creditors shall be interpreted as
continuing to apply, this holds true only to the extent that they do not conflict
with the provisions of the plan. Here, the stipulation in the Assignment
Agreement to the effect that respondent Bayantel shall pay petitioners in full
and ahead of other creditors out of its cash flow during rehabilitation directly
impinges on the provision of the approved Rehabilitation Plan that “[t]he
creditors of Bayantel, whether secured or unsecured, should be treated equally
and on the same footing or pari passu until the rehabilitation proceedings is
terminated in accordance with the Interim Rules.”

Neither the “due regard provision” nor contractual arrangements can

shackle the Rehabilitation Court in determining the best means of
rehabilitating a distressed corporation. Truth be told, the Rehabilitation Court
may 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.

Further, the non-impairment of contracts under the Constitution is a

limitation on the exercise of legislative power and not of judicial or quasi-
judicial power. Verily, the Decision dated June 28, 2004 (upholding the pari
passu) of the Rehabilitation Court is not a proper subject of the Non-
impairment Clause.

Second Issue: NO. Rule 4 of the Interim Rules treats of rehabilitation in

general, without distinction as to who between the debtor and the creditor
initiated the petition. Nowhere in said Rule is there any provision that prohibits
the debtor in a creditor-initiated petition to file its own rehabilitation plan for
consideration by the court. Quite the reverse, one of the functions and powers
of the rehabilitation receiver under Section 14(m) of said Rule is to study the
rehabilitation plan proposed by the debtor or any rehabilitation plan submitted
during the proceedings, together with any comments made thereon. This
provision makes particular reference to a debtor-initiated proceeding in which
the debtor principally files a rehabilitation plan. In such case, the receiver is
tasked, among other things, to study the rehabilitation plan presented by the
debtor along with any rehabilitation plan submitted during the proceedings.
This implies that the creditors of the distressed corporation, and even the
receiver, may file their respective rehabilitation plans. We perceive no good
reason why the same option should not be available, by analogy, to a debtor in
creditor-initiated proceedings, which is also found in Rule 4 of the Interim
Rules.

Case 2: Umale vs. ASB Realty Corp. 652 SCRA 215 2011

Being placed under corporate rehabilitation and having a receiver appointed to

carry out the rehabilitation plan do not ipso facto deprive a corporation and its
corporate officers of the power to recover its unlawfully detained property.

Facts

This case involves a parcel of land owned by Amethyst a company that is, in
turn, wholly-owned by respondent ASB Realty Corporation (ASB Realty). Amethyst
Pearl executed a Deed of Assignment in Liquidation of the subject premises in favor
of ASB Realty in consideration of the full redemption of Amethyst Pearls outstanding
capital stock from ASB Realty. ASB and Umale entered into a contract of lease to the
same property. However, upon the expiration of the contract, and upon demand of
ASB to pay and vacate the premise, Umale, left the demand unheeded and even
constructed a commercial building thereon. This prompted ASB to file a unlawful
detainer case.

On the other hand, Umale challenged ASB Realtys personality to recover the
subject premises considering that ASB Realty had been placed under receivership by
the Securities and Exchange Commission (SEC) and a rehabilitation 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 rehabilitation receiver that has the
power to take possession, control and custody of the debtors assets. Since ASB
Realty claims that it owns the subject premises, it is its duly-appointed receiver that
should sue to recover possession of the same.

Issue:
WON a corporation placed under receivership has no cause of action in
an unlawful detainer case

Ruling
There is no denying that ASB Realty, as the owner of the leased premises, is the real
party-in-interest in the unlawful detainer suit. 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.

Corporate rehabilitation is defined as the restoration of the debtor to a position

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 corporation continues as a going concern
than if it is immediately liquidated. It was first introduced in the Philippine legal
system through PD 902-A, as amended. The intention of the law is to effect a feasible
and viable rehabilitation by preserving a floundering business as a going concern,
because the assets of a business are often more valuable when so maintained than
they would be when liquidated. This concept of preserving the corporations business
as a going concern while it is undergoing rehabilitation is called debtor-in-possession
or debtor-in-place. This means that the debtor corporation (the corporation
undergoing rehabilitation), through its Board of Directors and corporate officers,
remains in control of its business and properties, subject only to the monitoring
of the appointed rehabilitation receiver. The concept of debtor-in-possession, is
carried out more particularly in the SEC Rules, the rule that is relevant to the instant
case. It states therein that the interim rehabilitation receiver of the debtor
corporation does not take over the control and management of the debtor
corporation. Likewise, the rehabilitation receiver that will replace the interim receiver
is tasked only to monitor the successful implementation of the rehabilitation
plan. There is nothing in the concept of corporate rehabilitation that would ipso
facto deprive the Board of Directors and corporate officers of a debtor corporation,
such as ASB Realty, of control such that it can no longer enforce its right to recover
its property from an errant lessee.

Indeed, PD 902-A, as amended, provides that the receiver shall have the
powers enumerated under Rule 59 of the Rules of Court. But Rule 59 is a rule of
general application. It applies to different kinds of receivers rehabilitation receivers,
receivers of entities under management, ordinary receivers, receivers in liquidation
and for different kinds of situations. While the SEC has the discretion to authorize
the rehabilitation receiver, as the case may warrant, to exercise the powers in Rule
59, the SECs exercise of such discretion cannot simply be assumed. There is no
allegation whatsoever in this case that the SEC gave ASB Realtys rehabilitation
receiver the exclusive right to sue.

Case 3: Wonderbook Corp. vs. PBC 676 SCRA 489 2012

Facts

Wonder Book and eight (8) other corporations, collectively known as the
Limtong Group of Companies (LGC), filed a joint petition for rehabilitation with
the RTC. Thereafter, a stay order was issued.
 Equitable PCI Bank (EPCI Bank), one of the creditors of LGC, filed an
opposition raising, among others, the impropriety of nine (9) corporations with
separate and distinct personalities seeking joint rehabilitation under one
proceeding. However, the petition for rehabilitation was approved. On appeal,
the decision was reversed, denying the petition of LGC for rehabilitation.

On the other hand, Wonder Book filed a separate petition for

rehabilitation. Subsequently, the court issued a stay order. PBCOM opposed
the rehabilitation and the proposed rehabilitation plan alleging that Wonder
Book is already in the state of insolvency. But the court, approved the plan.

Issue:
WON the rehabilitation plan is feasible and the opposition entered
by the creditors holding a majority of the total liabilities is unreasonable.

Ruling

In determining whether the objections to the approval of a rehabilitation

plan are reasonable or otherwise, the court has the following to consider: (a)
that the opposing creditors would receive greater compensation under the plan
than if the corporate assets would be sold; (b) that the shareholders would lose
their controlling interest as a result of the plan; and (c) that the receiver has
recommended approval.

Rehabilitation is therefore available to a corporation who, while illiquid,

has assets that can generate more cash if used in its daily operations than
sold. Its liquidity issues can be addressed by a practicable business plan that
will generate enough cash to sustain daily operations, has a definite source of
financing for its proper and full implementation, and anchored on realistic
assumptions and goals. This remedy should be denied to corporations whose
insolvency appears to be irreversible and whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is rendered obvious by
the following: (a) the absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets and goals; (c) speculative
capital infusion or complete lack thereof for the execution of the business plan;
(d) cash flow cannot sustain daily operations; and (e) negative net worth and
the assets are near full depreciation or fully depreciated.

This Court finds no reason to accord a different treatment to Wonder

Book. The figures appearing on Wonder Book’s financial documents and the
nature and value of its assets are indeed discouraging. In other words,
rehabilitation is not the proper remedy for Wonder Book’s dire financial
condition. Given that it is actually insolvent and not just suffering from
temporary liquidity problems, rehabilitation is not a viable option.
Case 4: Rubberworld Inc. vs. NLRC et al (305 SCRA 721 1999) –
Suspension Order

Facts

Petitioner Rubber is a domestic corporation which used to be in the

business of manufacturing footwear, bags and garments. It filed with the
Securities and Exchange Commission on November 24, 1994 a petition for
suspension of payments praying that it be declared in a state of suspension of
payments and that the SEC accordingly issue an order restraining its creditors
from enforcing their claims against petitioner corporation. It further prayed for
the creation of a management committee as well as for the approval of the
proposed rehabilitation plan and memorandum of agreement between
petitioner corporation and its creditors. The SEC granted petition.

Private respondents who claim to be employees of petitioner corporation,

filed against petitioners before the NLRC their respective complaints for illegal
dismissal, unfair labor practice, damages and payment of separation pay,
retirement benefits, 13th month pay and service incentive pay. Rubberworld
seek to suspend the proceeding by virtue of the SEC order.

The Labor Arbiter held that the order of the SEC suspending all actions
for claims against petitioners does not cover the claims of private respondents
in the labor cases because said claims and the concomitant liability of
petitioners still had to be determined, thus carrying no dissipation of the assets
of petitioners.

Issue
WON the proceeding in labor for employees claim will be suspended
by virtue of suspension order issued by the SEC.

Ruling

The law is clear: upon the creation of a management committee or the

appointment of 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, as
it did, its ruling could not be enforced as long as the petitioner is under the
management committee.

Case 5: Phil. Veterans Bank Employees Union vs. Vega (360 SCRA 33)
2001

Facts

The Central Bank of the Philippines (Central Bank, for brevity) filed with
the Regional Trial Court of Manila a Petition for Assistance in the Liquidation of
the Philippine Veterans Bank. Thereafter, the Philipppine Veterans Bank
Employees Union-N.U.B.E., herein petitioner, represented by petitioner Perfecto
V. Fernandez, filed claims for accrued and unpaid employee wages and benefits
with said court.

After years, the Congress enacted Republic Act No. 7169 providing for
the rehabilitation of the Philippine Veterans Bank. Despite the legislative
mandate for rehabilitation and reopening of PVB, respondent judge continued
with the liquidation proceedings of the bank. Moreover, petitioners learned that
respondents were set to order the payment and release of employee benefits
upon motion of another lawyer, while petitioners’ claims have been frozen to
their prejudice.

Issue

May a liquidation court continue with liquidation proceedings of the

Philippine Veterans Bank (PVB) when Congress had mandated its
rehabilitation and reopening?

Ruling

The enactment of Republic Act No. 7169, as well as the subsequent

developments (opening of the bank for the public) has rendered the liquidation
court functus officio. Consequently, respondent judge has been stripped of the
authority to issue orders involving acts of liquidation.

Liquidation, in corporation law, connotes a winding up or settling with

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

On the opposite end of the spectrum is rehabilitation which connotes a

reopening or reorganization. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation
to its former position of successful operation and solvency.

It is crystal clear that the concept of liquidation is diametrically opposed

or contrary to the concept of rehabilitation, such that both cannot be
undertaken at the same time. To allow the liquidation proceedings to continue
would seriously hinder the rehabilitation of the subject bank.

Case 6: Veterans Philippine Scout Security Agency Inc. vs. First Dominion
Prime Holdings 678 SCRA 168 (2012)

Facts

Respondent FDPHI and its aforementioned subsidiaries jointly filed

before the RTC a Petition for Rehabilitation. Attached to the petition was a
Schedule of Debts and Liabilities showing that Clearwater Tuna Corporation
(Clearwater) had an outstanding indebtedness to petitioner in the total amount
of ₱ 356,842.42. Said amount represents the security services rendered by
petitioner to Clearwater pursuant to a Contract of Guard Services between
petitioner and Inglenook Food Corporation (Clearwater’s former name) for the
latter’s manufacturing facility at the Navotas Fish Port Complex.

The Rehabilitation court issued a stay order. After its publication, the
rehabilitation plan was approved. Subsequently, petitioner filed a Complaint for
Sum of Money and Damages against Clearwater and/or Atty. Jacob in his
capacity as appointed Receiver before the Metropolitan Trial Court to recover
the same amount.

Veterans on the other hand instituted a complaint for sum of money

against the respondent for the unpaid amount for the security services
rendered. FDPH filed a motion to dismiss alleging that it is bared by res
judicata by reason of the approved Rehabilitation plan. The trial court granted
the motion to dismiss, ruling that the Rehabilitation plan already attained
finality and is now binding to the petitioner.

Issue
WON the petitioner’s action to enforce the payment of the unpaid
security services is covered by the Amended Rehabilitation Plan such
that petitioner can no longer institute a separate action to collect the
same.

Ruling
 YES. An essential function of corporate rehabilitation is the mechanism
of suspension of all actions and claims against the distressed corporation upon
the due appointment of a management committee or rehabilitation
receiver. Section 6(c) of PD 902-A mandates that upon appointment of a
management committee, rehabilitation receiver, board, or body, all actions for
claims against corporations, partnerships or associations under management
or receivership pending before any court, tribunal, board, or body shall be
suspended. The actions to be suspended cover all claims against a distressed
corporation whether for damages founded on a breach of contract of carriage,
labor cases, collection suits or any other claims of pecuniary nature.
Jurisprudence is settled that the suspension of proceedings referred to in the
law uniformly applies to "all actions for claims" filed against the corporation,
partnership or association under management or receivership, without
distinction, except only those expenses incurred in the ordinary course of
business. The stay order is effective on all creditors of the corporation without
distinction, whether secured or unsecured.

Thus, petitioner’s action to collect the sum owed to it is not exempted

from the coverage of the stay order. The enforcement of petitioner’s claim
through court action is likewise suspended to give way to the speedy and
effective rehabilitation of the FDPHI Group of Companies.

To stress, the rehabilitation plan, once approved, is binding upon the

debtor and all persons who may be affected by it, including the creditors,
whether such persons have or have not participated in the proceedings or have
opposed the plan or whether their claims have or have not been scheduled.
With the approval by the Rehabilitation Court of the plan for the FDPHI Group
of Companies, there is nothing left to be done but to enforce the terms and
schedule of payment as provided in the said plan.

Case 7: Metropolitan Waterworks vs. Daway

Facts

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 agreement[ which, among other things, consisted of
payments of petitioners mostly foreign loans.

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 Credit in the amount of US$120,000,000 in
favor of MWSS for the full and prompt performance of Maynilads obligations to
MWSS as aforestated.

Maynilad was put in rehabilitation, the bank which provides for the
irrevocable letters of credit seek the rehabilitation court to enjoin any action
against it. The Rehabilitation Court by virtue of suspension order, suspended
any action that MWSS may have against the foreign banks. MWSS opposed the
suspension claiming that the said suspension is not applicable in the case at
hand.

Issue

WON the Rehabilitation Court has the power to suspend action or

claims against guarantors and sureties in an irrevocable letters of
credit.

Ruling

NO. 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 Maynilads 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 Appeals[ that the
concept of guarantee vis--vis the concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee theory destroys the independence
of the banks 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 guarantors 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.
Letters of credit were developed for the purpose of insuring to a seller
payment of a definite amount upon the presentation of documentsand 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. 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. 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. 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.
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
debtors 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 Appeals]and reiterated in Philippine Blooming Mills, Inc. v. Court of
Appeals, 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.

Case 8: Sobrejuanite vs. ASB Dev. Corp

Facts

Spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite) filed a

Complaint for rescission of contract, refund of payments and damages, against
ASB Development Corporation (ASBDC) before the Housing and Land Use
Regulatory Board by reason of the failure of ASB to deliver the condominium in
the contract of sale entered into between them.

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
HLURB ruled that only action or claims which are pecuniary in nature may be
suspended, in the case at hand, it is a rescission of contract, incapable of
pecuniary estimation.

Issue
WON the approval by the SEC of the rehabilitation plan and the
appointment of the receiver caused the suspension of the HLURB
proceedings with respect to a rescission of contract.

Ruling

YES. In Arranza v. B.F. Homes, Inc., claim is defined as referring to

actions involving monetary considerations.

Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v.

B.F. Homes, Inc. were promulgated prior to the effectivity of the Interim Rules of
Procedure on Corporate Rehabilitation on December 15, 2000. The interim rules
define a claim as referring to all claims or demands, of whatever nature or
characteragainst a debtor or its property, whether for money or otherwise. The
definition is all-encompassing as it refers to all actions whether for money or
otherwise. There are no distinctions or exemptions.

Incidentally, although the petition for rehabilitation with prayer for

suspension of actions and proceedings was filed before the SEC on May 2,
2000, 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 claim considering that it is for
pecuniary considerations.

It is well to note that even the execution of final judgments may be held
in abeyance when a corporation is under rehabilitation. Hence, there is more
reason in the instant case for the HLURB arbiter to order the suspension of the
proceedings as the motion to suspend was filed 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 of ASBDC, which is precisely the vice sought to be prevented by
Section 6(c) of PD 902-A.

Case 9 : Jacinto vs. First Women Credit 410 SCRA 140

Facts

Shig Katayama, in his capacity as director and minority stockholder of

FWCC, instituted a derivative suit before the SEC against petitioners Ramon P.
Jacinto and Jaime J. Colayco, President and Vice President, respectively, of
FWCC. Katayama claimed that petitioners Jacinto and Colayco committed
company plunder when they raided FWCCs coffers and diverted the staggering
amount of P720,333,266.00 to RJ Group of Companies.

Katayama moved for the appointment of of an interim management

committee. After presentation of evidence, Hearing Officer Palmares issued an
order creating an Interim Management Committee composed of three (3)
members to oversee the administration of FWCC pending resolution of the
dispute. Hearing Officer Palmares explained that the massive diversion of funds
and the constant bickering among stockholders demanded the immediate
creation of a management committee pendente lite.

Petitioners moved for reconsideration but were denied. Forthwith, they

went to the SEC en banc which nevertheless upheld the creation of the
Committee. According to the SEC, while the appointment of a management
committee is a drastic remedy and may only be employed in cases of urgent
necessity, the creation of the Committee in the present case was within the
authoritative discretion of Hearing Officer Palmares considering the imminent
danger of dissipation, loss and wastage of assets and property of FWCC.
Issue:

WON the appointment of an interim management committed to is

viable in the case at hand.

Ruling

In exercising the discretion to appoint a management committee, the

officer or tribunal before whom the application was made must take into
account all the circumstances and facts of the case, the presence of conditions
and grounds justifying the relief, the ends of justice, the rights of all the parties
interested in the controversy and the adequacy and effectiveness of other
available remedies. The discretion must be exercised with great caution and
circumspection and only for a reason strongly appealing to the tribunal or
officer exercising jurisdiction. At any rate, once the discretion has been
exercised, the presumption to be considered is that the officer or tribunal has
fairly weighed and appraised the evidence submitted by the parties.

In determining whether Hearing Officer Palmares correctly exercised his

judgment when he ordered the creation of the IMC, it is necessary to refer to
Sec. 6, par. (d), of PD 902-A -

Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall

possess the following powers: x x x x d) To create and appoint a management
committee, board, or body upon petition or motu propio when there is
imminent danger of dissipation, loss, wastage or destruction of assets or
other properties or paralization of business operations of such
corporations or entities which may be prejudicial to the interest of
minority stockholders, parties-litigants or the general public

A reading of the aforecited legal provision reveals that for a minority

stockholder to obtain the appointment of an interim management committee,
he must do more than merely make a prima facie showing of a denial of his
right to share in the concerns of the corporation; he must show that the
corporate property is in danger of being wasted and destroyed; that the
business of the corporation is being diverted from the purpose for which it has
been organized; and that there is serious paralization of operations all to his
detriment. It is only in a strong case where there is a showing that the majority
are clearly violating the chartered rights of the minority and putting their
interests in imminent danger that a management committee may be created.
In this regard, mere disagreement among stockholders as to the affairs of
the corporation would not in itself suffice as a ground for the appointment of a
management committee. At least where there is no imminent danger of loss of
corporate property or of any other injury to stockholders, management of
corporate business should not be wrested away from duly elected officers, who
are prima facie entitled to administer the affairs of the corporation, and placed
in the hands of the management committee. However, where the dissension
among stockholders is such that the corporation cannot successfully carry on
its corporate functions the appointment of a management committee becomes
imperative.
After a review of the records, we are convinced that the appointment of
the Interim Management Committee is fully warranted by the
circumstances. The findings of Hearing Officer Palmares relative to the transfer
of funds from FWCC to RJ Group of Companies without the corresponding
Board resolutions, the drastic reduction of the number of FWCC branch offices
all over the country, the suspension of lending operations, the limitation of
FWCCs operations to mere collection of receivables as well as the inability of
FWCC to pay its pressing obligations amply support the conclusion that there
is imminent danger of dissipation, loss, wastage or destruction of
corporate assets.

Case 10: Tyson’s Super Concrete vs CA (Exception to suspension of

claim/action)

Facts

Romana Dela Cruz is the registered owner of several parcels of land in

Caloocan City. Dela Cruz entered into a contract of lease with Tysons Super
Concrete, Inc. (Tysons for brevity) where it was agreed that the latter shall
occupy the property as lessee for a period of twenty (20) years. Subsequently,
Tysons introduced various permanent improvements over the property to be
turned over to Dela Cruz after the lapse of the twenty-year period of lease.

Due to internal squabbling of the stockholders of Tyson, a joint motion

with the Securities and Exchange Commission (SEC) praying for the
appointment of a receiver to oversee the functions of the corporation was filed.

A management committee was created. A complaint for ejectment was

filed by Dela Cruz against Tysons with the Metropolitan Trial Court (MeTC) of
Caloocan City for the alleged failure of Tysons to pay its rentals despite
repeated written demands for such payment. Tysons failed to file the required
answer to the Complaint. The MTC decided in favor of Dela Cruz. When the
judgment is to be executed, it was opposed by Tyson for failure to acquire
jurisdiction over the corporation for there was no valid summon (not served to
the management committee). The MTC decided on the motion in favor of Dela
Cruz, so Tyson elevated the case to RTC seeking for the injunction for the
execution. The RTC also ruled in favor of Dela Cruz.
 Petitioner averred that the proceeding in the lower should have been
suspended by virtue of the appointment of management committee.

Issue

WON the proceeding should have been suspended by virtue of the

appointment of Management Committee

Ruling
While there may be merit in petitioners contention that the action for
ejectment filed with the MeTC should have been suspended on the ground that
the SEC has already created a management committee under P.D. No. 902-A,
considering the peculiar circumstances of the case and in the higher interest of
substantial justice, we do not find any cogent reason or useful purpose to
nullify all the proceedings taken in the courts below and order the suspension
of the complaint for ejectment at this stage of the proceedings.
As to petitioner’s contention that the MeTC was ousted of its jurisdiction
when the SEC created the management committee, settled is the rule that the
jurisdiction of a court is conferred by the Constitution and by the laws in force
at the time of the commencement of the action. Under the amendatory
provisions of Republic Act 7691, which is the law in force at the time Dela Cruz
filed the ejectment case, it is clearly provided that Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts have exclusive
original jurisdiction over cases of forcible entry and unlawful detainer. The fact
that a management committee had already been created by the SEC does not
divest the first level courts of their exclusive jurisdiction. Under P.D. No. 902-A,
the existence of an executive committee merely suspends the proceedings in
civil actions.
The avowed objective of suspending all actions against a distressed
corporation when a management committee or rehabilitation receiver is
appointed, as enunciated by this Court in Rubberworld (Phils.) Inc. vs. NLRC
and in Rizal Commercial Banking Corporation vs. Intermediate Appellate
Court, is to enable such management committee or rehabilitation receiver to
effectively exercise its powers free from any judicial or extra-judicial
interference that might unduly hinder or prevent the rescue of the distressed
company. However, this purpose can no longer be effectively met in the present
case as the proceedings herein have already been pending for almost ten years
and have already reached this Court. The management committee has been
unduly burdened enough, its time and resources wasted by the proceedings
that took place before the RTC and the appellate court. Hence, to decree the
annulment of the previous proceedings in the lower courts will only result in
further delay. The greater interest of justice demands that we now dispose of
the issues raised in the present petition.
 Furthermore, we agree with the pronouncement of the CA in its assailed
decision that nothing in the order of the SEC creating the management
committee nor in the language of P.D. No. 902-A, provides that only the
chairman of the Committee is authorized to receive summons. We likewise
agree with the CA that even if the SEC or the Committee has adopted a rule to
the effect that only the chairman of the latter may receive summons, such rule
cannot amend or alter the Rules of Court promulgated by the Supreme Court,
pursuant to Section 5(5), Article VIII of the Constitution, which allows officers
of a corporation to receive summons on its behalf.

Case 11: Metropolitan Bank and Trust Company vs. ASB Holdings Inc.

Facts

The Metropolitan Bank and Trust Company, petitioner, is a creditor bank

of respondent corporations, collectively known as the ASB Group of
Companies, owner and developer of condominium and real estate projects.
Specifically, the loans extended by petitioner bank to respondents ASB Realty
Corporation and ASB Development Corporation amounted to ₱523.5 million
and ₱1.073 billion, respectively. These loans were secured by real estate
mortgages.

ASB Group of Companies filed with the Securities and Exchange

Commission (SEC) a Petition For Rehabilitation With Prayer For Suspension Of
Actions And Proceedings Against Petitioners. A 60-day suspension order was
granted by the Hearing officer. Subsequently, Cruz was appointed as interim
Rehabilitation Receiver.

ASB submitted its proposed Rehabilitation Plan, however, it was opposed

by the Petitioners alleging that the proposed dacion is not acceptable to the
bank for it violates its rights to the lien on the mortgaged properties and
violates its right against non-impairment of contracts.. But the Sec ruled that
the opposition is unreasonable, and appointed Cruz as the Receiver.

Issue:

WON the proposed dacion en pago for the debt of ASB

violates/impairs the right of the Bank (creditor) as to its lien on the
mortgaged property, and contractual rights.

Ruling
 No. We are not convinced that the approval of the Rehabilitation Plan
impairs petitioner bank’s lien over the mortgaged properties. Section 6 [c] of
P.D. No. 902-A provides 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."

By that statutory provision, it is clear that the approval of the

Rehabilitation Plan and the appointment of a rehabilitation receiver merely
suspend the actions for claims against respondent corporations. Petitioner
bank’s preferred status over the unsecured creditors relative to the mortgage
liens is retained, but the enforcement of such preference is suspended. The
loan agreements between the parties have not been set aside and petitioner
bank may still enforce its preference when the assets of ASB Group of
Companies will be liquidated. Considering that the provisions of the loan
agreements are merely suspended, there is no impairment of contracts,
specifically its lien in the mortgaged properties.

Case 12: Siochi Fishery Enterprises Inc. vs. BPI

Facts

Petitioners Siochi Fishery Enterprises, Inc., Jun-Jun Fishing

Corporation, Dede Fishing Corporation, Blue Crest Aqua-Farms, Inc. and Iloilo
Property Ventures, Inc. (petitioners) are domestic corporations of the Siochi
family. Petitioners are engaged in various businesses and have interlocking
stockholders and directors. The petitioner obtained loan from BPI and Ayala
Life amounting to 85million.

Petitioners filed with the RTC a petition for corporate rehabilitation.

Petitioners prayed that the RTC (1) issue a stay order; (2) declare petitioners in
a state of suspension of payments; (3) approve petitioners' proposed
rehabilitation plan; and (4) appoint a rehabilitation receiver.

A suspension order was issued, and Mr. Cruz was appointed as Receiver.
However, despite the opposition of BPI in its comment as to the rehabilitation
plan of the petitioner, the court approved the same. In the present case, the
RTC hastily approved the rehabilitation plan in the same order giving due
course to the petition. The RTC confined the initial hearing to the issue of
jurisdiction and failed to address other more important matters relating to the
petition and comment. The RTC also failed to refer for evaluation the
rehabilitation plan to the rehabilitation receiver. Thus, the rehabilitation
receiver was unable to submit his recommendations and make modifications or
revisions to the rehabilitation plan as necessary. Moreover, the RTC denied the
rehabilitation receiver's motion to issue an order directing petitioners and their
creditors to attend a meeting.

Issue

1. WON the failure of the Rehabilitation Court to tackle some

important matter relation to the petition and other facts such as
denial of the motion of the receiver for the meeting of debtor and
the creditors regarding the rehabilitation plan, and modification
and recommendations of the receiver constitutes procedural
infirmity.

2. WON the failure to provide liquidation analysis is fatal to the

Rehabilitation plan

Ruling

YES. As an officer of the court and an expert, the rehabilitation receiver

plays an important role in corporate rehabilitation proceedings. In Pryce
Corporation v. Court of Appeals, the Court held that, "the purpose of the law in
directing the appointment of receivers is to protect the interests of the
corporate investors and creditors." Section 14 of the Interim Rules of Procedure
on Corporate Rehabilitation enumerates the powers and functions of the
rehabilitation receiver.

Yes. The rehabilitation plan is an indispensable requirement in corporate

rehabilitation proceedings. Section 5 of the Rules enumerates the essential
requisites of a 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; (c) the
material financial commitments to support the rehabilitation plan; (d) the
means for the execution of the rehabilitation plan, which may include
conversion of the debts or any portion thereof to equity, restructuring of the
debts, dacion en pago, or sale of assets or of the controlling interest; (e) a
liquidation analysis that estimates the proportion of the claims that the
creditors and shareholders would receive if the debtor's properties were
liquidated; and (f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the rehabilitation
plan.
 The Court notes that petitioners failed to include a liquidation analysis in
their rehabilitation plan.