Select Jurisprudential Pronouncements and Rulings in FRIA

Prepared By: Alimar Mohammad Malabad

“CRAM-DOWN” POWER OF THE REHABILITATION COURT

The court may approve a rehabilitation plan 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. 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 consists of two things: (i) approval despite opposition; and (ii) binding effect of the approved
plan.
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 in the proceedings or opposed the plan
or whether or not their claims have been scheduled."
RECOMMENDATORY POWER AND OBLIGATION OF REHABILITATION RECEIVER
The Rehabilitation Receiver has the duty and authority to recommend any modification of an
approved rehabilitation plan as he may deem appropriate and for the purpose of achieving the
desired targets or goals set forth therein.
ILLUSTRATION OF FEASIBILITY OF REHABILITATION
A careful reading of the records will show that respondent’s liquidity problems were mostly caused
by the deregulation of the education sector, which triggered sharp increases in tuition fees of
schools and universities beyond what was projected by pre-need companies dealing with
traditional educational plans. Surely, we are mindful of the financial distress in 1997, which has
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
circumstances of the time was peculiar and may no longer be pertinent at present.
Thus, pointing fingers to respondent at this point for its alleged mismanagement of assets would
be irrational, and even counter-productive, because the feasibility of respondent’s rehabilitation
has already been duly established by the Rehabilitation Court. By virtue of the corporate
rehabilitation, respondent will have enough breathing room to improve its operations in order to
sustain its business operations and at the same time, settle all its outstanding obligations in a just
and fair manner, in accordance with the MRP.
MODIFICATION OF REHABILITATION PLAN PENDENTE LITE ALLOWED
The Rehabilitation Rules allow the modification and alteration of the rehabilitation plan because of
conditions that may supervene or affect the implementation thereof subsequent to its approval.
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
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

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. (Victorio-Aquino vs Pacific Plans, Inc., per Peralta, J.)

RESTORATION CENTRAL IDEA BEHIND CORPORATE REHABILITATION

Restoration is the central idea behind the remedy of corporate rehabilitation. To "restore" means
"to bring back to or put back into a former or original state." Corporate 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, 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.
REHABILITATION PRESUPPOSES THAT CORPORATION HAS BEEN OPERATIONAL
Rehabilitation assumes that the corporation has been operational but for some reasons like
economic crisis or mismanagement had become distressed or insolvent, i.e., that it is generally
unable to pay its debts as they fall due in the ordinary course of business or has liability that are
greater than its assets. The basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the distressed corporation, all with a view of
effectively restoring it to a state of solvency or to its former healthy financial condition through
the adoption of a rehabilitation plan.
In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a position of
successful operation and solvency at the time the Rehabilitation Petition was filed on August 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 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.
Perforce, the remedy of corporate rehabilitation is improper.
LACK OF MATERIAL FINANCIAL COMMITMENT; ILLUSTRATION
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.
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 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
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

investment commitment/s from third parties is required to qualify as a material financial

commitment. However, no such binding investment was presented in this case.
LACK OF LIQUIDATION ANALYSIS; ILLUSTRATION
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 position is just
enough to meet its own maturing obligations. While it has substantial total assets, a large portion
thereof is comprised of fixed assets, while its current assets consist mostly of inventory. 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. (BPI Family Savings Bank,
Inc. vs St. Michael Medical Center, Inc., per Perlas-Bernabe, J.)

LIQUIDITY NOT AN ISSUE IN A PETITION FOR REHABILITATION; TWO-PRONGED

PURPOSE
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, 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 of an insolvent
debtor's remaining assets to its creditors; and on the other, to provide debtors with a "fresh 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 paid their claims from its earnings.
The basic issues in rehabilitation proceedings concern the viability and desirability of continuing
the business operations of the petitioning corporation. (Philippine Bank of Communications
vs Basic Polyprinters and Packaging Corporation, per Bersamin, J.)

REHABILITATION DOES NOT COMPLETELY DIVEST COPORATE OFFICERS OF THEIR

POWERS
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.
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."
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

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.
To be sure, corporate rehabilitation imposes several restrictions on the debtor corporation. The
rules enumerate the prohibited corporate actions and transactions (most of which involve some
kind of disposition or encumbrance of the corporation’s assets) during the pendency of the
rehabilitation proceedings but none of which touch on the debtor corporation’s right to sue. The
implication therefore is that our concept of rehabilitation does not restrict this particular power,
save for the caveat that all its actions are monitored 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. (Umale vs ASB Realty Corp., per Del Castillo, J.)

SUSPENSION OF "ALL CLAIMS" AS AN INCIDENT TO A CORPORATE REHABILITATION

DOES NOT CONTEMPLATE THE SUSPENSION OF CRIMINAL CHARGES FILED AGAINST
THE CORPORATE OFFICERS OF THE DISTRESSED CORPORATION
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.
The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground
for the extinction of petitioners’ criminal liabilities. There is no reason why criminal 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.
The prosecution of the officers of the corporation has no bearing on the pending 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, since the
appointed rehabilitation receiver can still fully discharge his functions as mandated by law. It bears
to stress that the rehabilitation receiver is not charged to defend the officers of the corporation.
If there is anything that the rehabilitation receiver might be remotely interested in is 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 warranted, such
award would fall under the category of claims, the execution of which would be subject to the stay
order issued by the rehabilitation court. (Panlilio vs RTC Branch 51 City of Manila, per
Peralta, J.)

REASON BEHIND SUSPENSION OF CLAIMS

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
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

well as the interest of the investing public or creditors. 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. 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.
AS BETWEEN CREDITORS, EQUALITY IS EQUITY
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.
MEANING OF “CLAIM”; RESCISSION OF CONTRACT WITH DAMAGES INCLUDED
The interim rules define a claim as referring to all claims or demands, of whatever nature or
character against 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.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim Rules of
Procedure on Corporate Rehabilitation. The complaint for rescission with damages would fall under
the category of claim considering 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 expenses; P1,500.00 per
hearing as appearance fees; and costs of the suit.
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. (Sps. Sobrejuanite vs ASB
Development Corp., per Ynares-Santiago, J.)

NO EXCEPTION FOR LABOR CLAIM

The actions that are suspended cover all claims against the corporation whether for damages
founded on a breach of contract of carriage, labor cases, collection suits or any other claims of a
pecuniary nature.
Since petitioners’ claim against PAL is a money claim for their wages during the pendency of PAL’s
appeal to the NLRC, the same should have been suspended pending the rehabilitation proceedings.
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

The Labor Arbiter, the NLRC, as well as the Court of Appeals should have abstained from resolving
petitioners’ case for illegal dismissal and should instead have directed them to lodge their claim
before PAL’s receiver.
However, to still require petitioners at this time to re-file their labor claim against PAL under the
peculiar circumstances of the case – that their dismissal was 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. (Garcia vs PAL, per Quisumbing, J.)

JUSTIFICATION FOR THE SUSPENSION OF LABOR CLAIMS

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.
Labor claims cannot proceed independently of a bankruptcy liquidation proceeding, since these
claims "would spawn needless controversy, delays, and confusion." 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. (Lingkod Manggagawa sa Rubberworld vs Rubberworld (Phils.) Inc.,
per Garcia, J.)

IRREVOCABLE LETTER OF CREDIT A SOLIDARY UNDERTAKING THAT CAN BE PURSUED

AGAINST SOLIDARY CO-DEBTOR OF CORPORATION UNDER REHABILITATION
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 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. Property of the surety cannot be taken into custody by the rehabilitation
receiver 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. (MWSS vs Daway,
per Azcuna, J.)
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

REHABILITATIVE AND EQUITABLE PURPOSES OF CORPORATE REHABILITATION

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."
Rehabilitation assumes that assets are still serviceable to meet the purposes of the 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 attending to the
interest of its creditors to be paid equitably.
WHEN LIQUIDATION MUST BE RESORTED TO
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, the more appropriate remedy
is liquidation. t 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.
Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at the same
time. 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.
CREDITORS INDISPENSABLE PARTIES TO A REHABILITATION CASE EVEN IF
PROCEEDINGS ARE NON-ADVERSARIAL
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.
TEST TO EVALUATE 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.
REHABILITATION PLAN INFEASIBLE IF 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.
 Select Jurisprudential Pronouncements and Rulings in FRIA
Prepared By: Alimar Mohammad Malabad

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. (Viva Shipping Lines, Inc. vs Keppel Philippines
Mining, Inc., per Leonen, J.)

CREDITORS OF DISTRESSED CORPORATION, INCLUDING GOVERNMENT, NOT WITHOUT

REMEDY
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." 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."
DEFIANCE OF STAY ORDER CONSTITUTES INDIRECT CONTEMPT
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, - 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. 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. (BIR vs
Lepanto Ceramics, Inc., per Perlas-Bernabe, J.)