Insolvency Law

PILIPINAS SHELL PETROLEUM CORPORATION vs. ROYAL FERRY SERVICES, INC.

G.R. No. 188146, February 1, 2017, J. Leonen

Facts:

On August 28, 2005, Royal Ferry filed a verified Petition for Voluntary Insolvency before the
Regional Trial Court of Manila. According to its Articles of Incorporation, Royal Ferry's
principal place of business is located at 2521 A. Bonifacio Street, Bangkal, Makati City.
However, it currently holds office at Room 203, BF Condominium Building, Andres Soriano
comer Solano Streets, Intramuros, Manila. Pilipinas Shell filed a Motion to Dismiss on the
ground of improper venue. It argued that the Insolvency Law provides that a petition for
insolvency should be filed before the court with territorial jurisdiction over the corporation's
residence. Since Royal Ferry's Articles of Incorporation stated that the corporation's
principal office is located at 2521 A. Bonifacio St., Bangkal, Makati City, the Petition should
have been filed before the Regional Trial Court of Makati and not before the Regional Trial
Court of Manila.

Initially, RTC Manila denied Pilipinas Shell's Motion to Dismiss for lack of merit. It found
Royal Ferry to have sufficiently shown full compliance with the requirements of the
Insolvency Law on venue and that it had abandoned its Makati office and moved to Manila.

However, the RTC reconsidered the denial of the Motion holding that a corporation cannot
change its place of business without amending its Articles of Incorporation.

Aggrieved, Royal Ferry appealed to the CA. The CA granted the appeal and reinstated the
insolvency proceedings.

Hence, this petition.

Issue:

Whether or not the Petition for Insolvency was properly filed before RTC Manila?

Ruling:

Yes, the Petition for Insolvency was properly filed before the Regional Trial Court of Manila.

The first insolvency law, Republic Act No. 1956, was entitled "An Act Providing for the
Suspension of Payments, the Relief of Insolvent Debtors, the Protection of Creditors, and the
Punishment of Fraudulent Debtors (Insolvency Law)". It was derived from the Insolvency
Act of California (1895), with few provisions taken from the United States Bankruptcy Act of
1898. With the enactment of Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA), the Insolvency Law was expressly
repealed on July 18, 2010. The FRIA is currently the special law that governs insolvency.
However, because the relevant proceedings in this case took place before the enactment of
the FRIA, the case needs to be resolved under the provisions of the Insolvency Law.

Insolvency proceedings are defined as the statutory procedures by which a debtor obtains
financial relief and undergoes judicially supervised reorganization or liquidation of its assets
for the benefit of its creditors.

Respondent argues that the Regional Trial Court of Manila obtained jurisdiction because in
its Petition for Voluntary Insolvency, respondent alleged that its principal office was then
found in Manila. On the other hand, petitioner argues that filing the petition before the
Regional Trial Court of Manila was a patent jurisdictional defect as the Regional Trial Court
of Manila did not have territorial jurisdiction over respondent's residence.

Section 14 of the Insolvency Law specifies that the proper venue for a petition for voluntary
insolvency is the Regional Trial Court of the province or city where the insolvent debtor has
resided in for six (6) months before the filing of the petition. In this case, the issue of which
court is the proper venue for respondent's Petition for Voluntary Insolvency comes from the
confusion on an insolvent corporation's residence.

To determine the venue of an insolvency proceeding, the residence of a corporation should

be the actual place where its principal office has been located for six (6) months before the
filing of the petition. If there is a conflict between the place stated in the articles of
incorporation and the physical location of the corporation's main office, the actual place of
business should control.

Requiring a corporation to go back to a place it has abandoned just to file a case is the very
definition of inconvenience. There is no reason why an insolvent corporation should be
forced to exert whatever meager resources it has to litigate in a city it has already left.

Respondent is a resident of Manila. The law should be read to lay the venue of the insolvency
proceeding in the actual location of the debtor's activities. If it is uncontroverted that
respondent's address in its Articles of Incorporation is no longer accurate, legal fiction
should give way to fact. Thus, the Petition was correctly filed before the Regional Trial Court
of Manila.
P.D. 902-A, as amended (suspension of payment)
Interim Rules of Procedure on Corporate Rehabilitation

BANK OF THE PHILIPPINE ISLANDS vs. SARABIAMANOR HOTEL CORPORATION

G.R. No. 175844, July 29, 2013, J. Perlas-Bernabe

Facts:

Sarabiamanor Hotel Corporation (“Sarabia”)” is a corporation duly organized and existing

under Philippine laws with an authorized capital stock of P10,000,000.00, fully subscribed
and paid-up, for the primary purpose of owning, leasing, managing and/or operating hotels,
restaurants, barber shops, beauty parlors, sauna and steam baths, massage parlors and such
other businesses incident to or necessary in the management or operation of hotels.

In 1997, Sarabia obtained a P150,000,000.00 special loan package from Far East Bank and
Trust Company (“FEBTC”) in order to finance the construction of a five-storey hotel building
(“New Building”) for the purpose of expanding its hotel business. An additional
P20,000,000.00 stand-by credit line was approved by FEBTC. The foregoing debts were
secured by real estate mortgages over several parcels of land and a comprehensive
agreement by its stockholders. By virtue of a merger, Bank of the Philippine Islands (“BPI”)
assumed all of FEBTC’s rights against Sarabia.

Unfortunately, because of the delayed completion of the New Building it significantly skewed
its projected revenues and led to various cash flow difficulties, resulting in its incapacity to
meet its maturing obligations. Hence, Sarabia filed a petition for rehabilitation.

In an Order, the RTC approved the rehabilitation plan as recommended by the Receiver,
finding the same to be feasible. In this accord, it observed that the rehabilitation plan was
realistic since, based on Sarabia’s financial history, it was shown that it has the inherent
capacity to generate funds to pay its loan obligations given the proper perspective. BPI
appealed to the CA but the latter affirmed the RTC’s ruling with the modification of
reinstating the surety obligations of Sarabia’s stockholders.

Issue:

Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as approved by the
RTC, with the modification on the reinstatement of the surety obligations of Sarabia’s
stockholders.

Ruling:

Yes, the CA correctly affirmed Sarabia’s rehabilitation plan as approved by the RTC, with the
modification on the reinstatement of the surety obligations of Sarabia’s stockholders.

Recognizing the volatile nature of every business, the rules on corporate rehabilitation have
been crafted in order to give companies sufficient leeway to deal with debilitating financial
predicaments in the hope of restoring or reaching a sustainable operating form if only to best
accommodate the various interests of all its stakeholders, may it be the corporation’s
stockholders, its creditors and even the general public. In this light, case 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. Verily,
the purpose of rehabilitation proceedings is to enable the company to gain a new lease on
life and thereby allow creditors to be paid their 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 liquidated.

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 to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.

It is within the parameters of the aforesaid provision that the Court examines the approval
of Sarabia’s rehabilitation.

i. Feasibility of Sarabia’s rehabilitation.

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. As further
guidance on the matter, the Court’s pronouncement in Wonder Book Corporation v. Philippine
Bank of Communications proves instructive:

Rehabilitation is x x x available to a corporation [which], 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. (Emphasis and underscoring
supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, Sarabia’s financial history shows that it has the inherent
capacity to generate funds to repay its loan obligations if applied through the proper
financial framework. The Receiver’s examination and analysis of Sarabia’s financial data
reveals that the latter’s business is not only an on-going but also a growing concern. Despite
its financial constraints, Sarabia likewise continues to be profitable with its hotelier business
as its operations have not been disrupted. Hence, given its current fiscal position, the
prospect of substantial and continuous revenue generation is a realistic goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-on-year
growth from the time that it applied for rehabilitation until the end of its rehabilitation plan
in 2018, albeit with decreasing growth rates (growth rate is at 26% in 2003, 5% in 2004-
2007, 3% in 2008-2018). Should such projections come through, Sarabia would have the
ability not just to pay off its existing debts but also to carry on with its intended expansion.
The projected sustainability of its business, as mapped out in the approved rehabilitation
plan, makes Sarabia’s rehabilitation a more viable option to satisfy the interests of its
stakeholders in the long run as compared to its immediate liquidation.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved
rehabilitation plan, namely: (a) any deficiency in the required minimum payments to
creditors based on the presented amortization schedule shall be paid personally by Sarabia’s
stockholders; (b) the conversion of the advances from stockholders amounting to
₱18,748,306.00 and deferred credits amounting to ₱42,688,734 as of the December 31, 2002
tentative audited financial statements to stockholder’s equity was granted; (c) all capital
expenditures which are over and above what is provided in the cash flow of the approved
rehabilitation plan which will materially affect the cash position of the hotel but which are
deemed necessary in order to maintain the hotel’s competitiveness in the industry shall be
subject to the approval by the Court prior to implementation; (d) the formation of Sarabia’s
new management team and the requirement that the latter shall be required to submit a
comprehensive business plan to support the generation of revenues as reported in the
Rehabilitation Plan, both short term and long term; (e) the maintenance of all Sarabia’s
existing real estate mortgages over hotel properties as collaterals and securities in favor of
BPI until the former’s full and final liquidation of its outstanding loan obligations with the
latter; and (f) the reinstatement of the comprehensive surety agreement of Sarabia’s
stockholders regarding the former’s debt to BPI. With these terms and conditions in place,
the subsisting obligations of Sarabia to its creditors would, more likely than not, be satisfied.

Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation to be
feasible.
Rules of Procedure on Corporate Rehabilitation

ROBINSON'S BANK CORPORATION vs. HON. SAMUEL H. GAERLAN, HON. HAKIM S.

ABDULWAHID and HON. RICARDO R. ROSARIO, in their capacity as Associate Justices
respectively of the Tenth Division of the Court of Appeals, and TRADE AND
INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES,
G.R. No. 195289, September 24, 2014, J. Del Castillo

Facts:

Nation Granary, Inc. (now World Granary Corporation, or WGC) filed a Petition for
Rehabilitation with Prayer for Suspension of Payments, Actions and Proceedings before the
RTC.

WGC is engaged in the business of mechanized bulk handling, transport and storage,
warehousing, drying, and milling of grains. It incurred loans amounting to P2.66 billion from
RBC and other banks and entities such as Trade and Investment Development Corporation
of the Philippines (TIDCORP). It appears that RBC is both a secured and unsecured creditor,
while TIDCORP is a secured creditor.

The RTC issued a Stay Order staying the enforcement of creditors’ claims and prohibiting
WGC from disposing its properties and paying its outstanding liabilities. The RTC gave due
course to the Petition for Rehabilitation. Accordingly, the receiver submitted his Report with
a proposal of a pari passu– or equal – sharing between the secured and unsecured creditors
of the proceeds from WGC’s cash flow made available for debt servicing.

In its Comment, TIDCORP among others took exception to the proposed pari passu sharing,
insisting that as a secured creditor, it should enjoy preference over unsecured creditors,
citing law and jurisprudence to the effect that the law on preference of credits shall be
observed in resolving claims against corporations under rehabilitation. It likewise claimed
that WGC violated its Indemnity Agreement with TIDCORP – which required that while the
agreement subsisted, WGC shall not incur new debts without TIDCORP’s approval – by
obtaining additional loans without the knowledge and consent of the latter.

RBC filed an Opposition to TIDCORP’s Comment, arguing that giving preference to TIDCORP
would violate the Stay Order and impair the powers of the receiver; and that any change in
the contractual relations between TIDCORP and WGC relative to their Indemnity Agreement
comes as a necessary consequence of rehabilitation, which TIDCORP may not be heard to
complain.

The RTC approved WGC’s rehabilitation plan. TIDCORP filed a Petition for review before the
CA praying that the order directing that all WGC obligations be settled on a pari passu basis
be reversed and set aside. RBC filed an Urgent Motion for Intervention with attached
Comment in Intervention, which is anchored on its original claim and objection to TIDCORP’s
position.

In its Opposition, TIDCORP maintained that intervention is not allowed in rehabilitation

proceedings, citing Rule 3, Section 1 of the Interim Rules of Procedure on Corporate
Rehabilitation. It argued that a final determination of the appeal does not depend on RBC’s
participation since rehabilitation proceedings are in remand binding on all interested and
affected parties even if they did not participate in the proceedings.

Issue:

Whether or not RBC should be allowed to participate in the petition for review
Ruling:

Under Rule 3, Section 5 of the Rules of Procedure on Corporate Rehabilitation, the review
of any order or decision of the rehabilitation court or on appeal therefrom shall be in
accordance with the Rules of Court, unless otherwise provided. This being the case, there is
no visible objection to RBC’s participation in CA-G.R. SP No. 104141 as it stands to be injured
or benefited by the outcome of TIDCORP’s Petition for Review – being both a secured and
unsecured creditor of WGC.

To recall, TIDCORP’s Petition for Review in CA-G.R. SP No. 104141 sought to 1) nullify the
pari passu sharing scheme directed by the trial court; 2) declare RBC and the other creditor
banks– which granted additional loans to WGC after the latter executed its Indemnity
Agreement with TIDCORP – guilty of violating TIDCORP’s rights; and 3) grant preferential
and special treatment to TIDCORP over other WGC creditors. These remedies would
undoubtedly affect not merely the rights of RBC, but of all the other WGC creditors as well,
as their standing or status as creditors would be somewhat downgraded, and the manner of
recovery of their respective credits will be altered if TIDCORP’s prayer is granted. Thus, the
nature of TIDCORP’s Petition in CA-G.R. SP No. 104141 is such that the other creditors like
RBC must be allowed to participate in the proceedings. They have an interest in the
controversy where a final decree would necessarily affect their rights.

To disallow the participation of RBC constitutes an evasion of the appellate court’s positive
duty to observe due process, a gross and patent error that can be considered as grave abuse
of discretion. Likewise, when an adverse effect on the substantial rights of a litigant results
from the exercise of the court’s discretion, certiorari may issue. If not, this Court possesses
the prerogative and initiative to take corrective action when necessary to prevent a
substantial wrong or to do substantial justice.
Financial Rehabilitation and Insolvency Act of 2010

PHILIPPINE BANK OF COMMUNICATIONS vs.

BASIC POLYPRINTERS AND PACKAGING CORPORATION
G.R. No. 187581, FIRST DIVISION, October 20, 2014, BERSAMIN, J.

FACTS:

Basic Polyprinters and Packaging Corporation was a domestic corporation engaged in the
business of printing greeting cards, gift wrappers, gift bags, calendars, posters, labels and
other novelty items.

Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group
of Companies, filed a joint petition for suspension of payments with approval of the proposed
rehabilitation in the RTC. The RTC issued a stay order, and eventually approved the
rehabilitation plan, but the CA reversed the RTC on October 25, 2005, and directed the
petitioning corporations to file their individual petitions for suspension of payments and
rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, 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 P264,000,000.00,
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, EPCIBank and AUB via repayment over 15 years with moratorium of two-years
for the interest and five years for the principal at 5% interest per annum and a dacion
en pago of its affiliate property in favor of EPCI Bank; and
f. its assets worth P15,374,654.00 with net liabilities amounting to P13,031,438.00.

RTC issued the stay order and appointed Manuel N. Cacho III as the rehabilitation receiver,
and required all creditors and interested parties, including the SEC.

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.

After the rehabilitation receiver submitted his report recommending the approval of the
rehabilitation plan, the RTC issued an order approving the rehabilitation plan which was
affirmed by the CA 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.

PBCOM consistently opposed the rehabilitation from RTC to the CA and to the SC arguing
mainly that Basic Polyprinters’ liquidity was material in proceedings for corporate
rehabilitation and 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 than its outstanding obligations. Likewise,
it averred that the rehabilitation plan did not contain the material financial commitments
required by Section 5, Rule 4 of the Interim Rules of Procedure for Corporate Rehabilitation.

ISSUES:

1. Whether or not liquidity is an issue in a petition for rehabilitation

2. Whether or not material financial commitment is required in a rehabilitation plan

RULING:

1. No, liquidity is not an issue in a petition for rehabilitation.

Rehabilitation is the process of restoring “the debtor to a position of successful operation

and solvency, if it is shown that its continuance of operation is economically feasible ad 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 that if it is immediately liquidated.” 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.

In Asiatrust Development Bank v. First Aikka Development, Inc., we said that rehabilitation
proceedings have a two-pronged purpose, namely: (a) to efficiently and equitably distribute
the assets of the insolvent debtor to its creditors; and (b) to provide the debtor with a fresh
start.

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

Republic Act No. 10142 (FRIA of 2010), a law that is applicable hereto, has defined a
corporate debtor as a corporation duly organized and existing under Philippine laws that
has become insolvent. The term insolvent is defined in said law as “the financial condition of
a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary
course of business or has liabilities that are greater than its or his assets.” As such, the
contention that rehabilitation becomes inappropriate because of the perceived insolvency of
Basic Polyprinters was incorrect.

2. Yes, material financial commitment is required in a 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.

The financial commitments presented by Basic Polyprinters were insufficient for the
purpose of rehabilitation. The commitment to add P10,000,000.00 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.
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.

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.

Basic Polyprinters’s proposal to enter into the dacion en pago to 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.

Hence, the Court held that the rehabilitation plan for Basic Polyprinters cannot be said to be
genuine and made in good faith, for it was, in fact, unilateral and detrimental to its creditors
and the public.