1. Advent Capital and Finance Corp. v. Alcantara, 664
Advent Capital merely held
SCRA 224 (2012)
Doctrine: Rehabilitation proceedings are summary and non-
adversarial in nature, and do not contemplate adjudication of
claims that must be threshed out in ordinary court
proceedings.
The Interim Rules do not exempt a company under
rehabilitation from availing of proper legal procedure for
collecting debt that may be due it.
Facts: Advent Capital filed a petition for rehabilitation with
RTC-Makati. The RTC named Atty. Concepcion as
rehabilitation receiver. Upon audit of Advent Capital’s books,
Atty. Concepcion found that respondents Alcantaras owed
Advent Capital trust fees earned for managing the several trust
accounts of the Alcantaras’. Atty. Concepcion then requested
Belson Securities, Inc. (Belson) to deliver to him as the
receiver, cash dividends Belson has under the Alcantaras’
Trust Account. Atty. Concepcion claimed that the dividends, as
trust fees, formed part of Advent Capital’s assets. Belson
refused citing the Alcantaras’ objections and absence of an
appropriate order from the rehabilitation court.
Due to this, Atty. Concepcion filed a Motion before the
Rehabilitation Court to direct Belson to release the cash
dividends. Atty. Concepcion argued that has rehabilitation
receiver, he had the duty to take custody and control of Advent
Capital’s assets including the sum of money Belson has on
behalf of Advent Capital’s Trust Department.
The Alcantaras argued that the money in the trust account
belongs to them under their Trust Agreement with Advent
Capital. Thus, Advent Capital has no right to claim dividends
generated from such investment.
the dividends in trust for the Alcantaras, the trustors-
beneficiaries. The Alcantaras thereafter concluded that the
rehabilitation court had no jurisdiction over the subject
dividends.
Rehabilitation Court: granted Atty. Concepcion’s Motion
citing R. 59, Sec. 6 of the Rules of Court stating that a receiver
has the duty to immediately take possession of all of the
corporation’s assets and administer the same for the benefit of
corporate creditors. He has the duty to collect debts owing to
the corporation, which debts form part of its assets.
Benson thereafter turned over the dividends to Atty.
Concepcion. The Alcantaras, on the other hand, filed a Special
Civil Action of Certiorari before the CA seeking to annul the
rehabilitation court’s order.
CA: The Alcantaras owned the dividends. The dividends do
not form part of Advent Capital’s assets as contemplated
under the Interim Rules of Procedure on Corporate
Rehabilitation. (Interim Rules).
CA opined that the rehabilitation proceedings
referred only to assets and liabilities of the company
proper, not of its Trust Department which held
assets belonging to other people.
Issues:
1. WON the cash dividends are corporate assets of
Advent or not?
2. WON Rehabilitation Court has jurisdiction over the
case?
Held:
CSPRI | 1
 1. No, they are not corporate assets of Advent. The real
owner of the trust property is the trustor-beneficiary.
The practice in banks is that they automatically collect
management fees from the funds that their clients entrust to
them for investment or lending to others. If the depositor
contests the deduction, his remedy is to bring an action to
recover the amount he claims to have been illegally deducted
from his account. But in this case, Advent Capital does not
allege that Belson had already deducted the management fees
owing to it from the Alcantaras’ portfolio at the end of the each
calendar quarter. It did not exercise its right to cause
automatic deduction at the end of every quarter as provided in
the Trust Agreement. That was its fault. Thus, based on the
Trust Agreement, the Alcantaras had the right to presume that
Advent Capital had deducted its fees in the manner stated in
the contract. The burden of proving that the fees were not in
fact collected lies with Advent Capital.
Advent Capital could not dispose of Alcantaras’ portfolio on its
own. The income and principal of the portfolio could only be
withdrawn upon the Alcantaras’ written instruction or order to
Advent Capital. Advent Capital could neither assign or
encumber the portolio or its income without the consent of the
Alcantaras as stipulated in the Trust Agreement.
2. No, the Rehabilitation Court does not have jurisdiction
over the case since the cash dividends are not owned
by Advent Capital.
Advent Capital’s recourse is to file a separate action for
collection to recover the trust fees it earned. Having failed to
collect the trust fees at the end of each calendar quarter as
stated in the contract, all it had against the Alcantaras was a
claim for payment which is a proper subject for an ordinary
action for collection.
Rehabilitation proceedings are summary and non- adversarial
in nature, and do not contemplate adjudication of claims that
must be threshed out in ordinary court proceedings.
Adversarial proceedings similar to that in ordinary courts are
inconsistent with the commercial nature of a rehabilitation
case. The latter must be resolved quickly and expeditiously for
the sake of the corporate debtor, its creditors and other
interested parties. Thus, the Interim Rules “incorporate the
concept of prohibited pleadings, affidavit evidence in lieu of
oral testimony, clarificatory hearings instead of the traditional
approach of receiving evidence, and the grant of authority to
the court to decide the case, or any incident, on the basis of
affidavits and documentary evidence.”
Advent Capital’s claim is disputed and requires a full trial on
the merits. It must be resolved in a separate action where the
Alcantaras’ claim and defenses may also be presented and
heard. Advent Capital cannot say that the filing of a separate
action would defeat the purpose of corporate rehabilitation. In
the first place, the Interim Rules do not exempt a company
under rehabilitation from availing of proper legal procedure for
collecting debt that may be due it. Secondly, Court records
show that Advent Capital had in fact sought to recover one of
its assets by filing a separate action for replevin involving a car
that was registered in its name.
2. METROPOLITAN BANK & TRUST COMPANY v. ASB
HOLDINGS, INC.,
G.R. No. 166197 February 27, 2007
Topic: Purpose of Corporate Rehabiliation
DOCTRINE: The purpose of rehabilitation proceedings is to
enable the company to gain new lease on life and thereby
CSPRI | 2
allows creditors to be paid their claims from its
earnings. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate
the financially distressed corporation to its former position of
successful operation and solvency. This is in consonance with
the State’s objective to promote a wider and more meaningful
equitable distribution of wealth to protect investments and the
public.
FACTS:
The Metropolitan Bank and Trust Company is a creditor bank
of respondent corporations, collectively known as the ASB
Group of Companies, owner and developer of condominium
and real estate projects. Petitioner bank extended loans
secured by real estate mortgages to respondent corporations,
specifically, to ASB Realty Corporation and ASB Development
Corporation amounting to ₱523.5 million and ₱1.073 billion,
respectively.
The ASB Group of Companies filed with the SEC a Petition
For Rehabilitation With Prayer For Suspension Of Actions And
Proceedings pursuant to P.D. No. 902-A. The Hearing Panel
of the SEC, finding the petition sufficient in form and
substance, issued a 60-day Suspension Order. Thereafter,
respondent corporations submitted to SEC for its approval a
Rehabilitation Plan.
Petitioner bank objected to the said Rehabilitation Plan,
specifically the arrangement concerning the mode of payment
by respondent corporations. Petitioner bank claimed that the
arrangement "is not acceptable" because: (1) it does not agree
with the valuation of the properties offered for dacion; (2) the
waiver of interests, penalties and charges after April 30, 2000
is not feasible; and (3) since the proposed dacion is not
acceptable to the bank, there is no basis to release the
properties which serve as collateral for the loans.
The SEC Hearing Panel, finding petitioner bank’s objections
unreasonable, issued an Order approving the Rehabilitation
Plan and appointing Mr. Fortunato Cruz as rehabilitation
receiver
Petitioner bank filed with the SEC En Banc a Petition for
Certiorari praying for the issuance of a temporary restraining
order and/or a writ of preliminary injunction to enjoin its
implementation. The SEC En Banc denied the petition and
affirmed the SEC Hearing Panel’s Order. Petitioner bank then
filed with the Court of Appeals a Petition for Review which was
denied by the appellate court. Petitioner bank’s Motion for
Reconsideration was likewise denied.
ISSUE: Whether the approval of the Rehabilitation Plan
violates petitioner bank’s constitutional right against
impairment of contracts and right to due process:
(1) by impairing its lien over the mortgaged properties; and
(2) by compelling it to accept a dacion en pago arrangement of
the mortgaged properties based on ASB Group of Companies’
transfer values and and to waive the interest, penalties and
other charges after the SEC issued its Stay Order.
HELD:
(1) The Court is 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
CSPRI | 3
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.
(2) Likewise, there is no compulsion on the part of petitioner
bank to accept a dacion en pago arrangement of the
mortgaged properties based on ASB Group of Companies’
transfer values and to condone interests and penalties. Based
on the explanation in the Rehabilitation Plan, the dacion en
pago program and the intent of respondent ASB Group of
Companies to ask creditors to waive the interests, penalties
and related charges are not compulsory in nature. They are
merely proposals for the creditors to accept. In fact, there was
already an initial discussion on these proposals and the
majority of the secured creditors showed their desire to
complete dacion en pago transactions, but they must be
"based on MUTUALLY AGREED UPON TERMS."
Therefore, the approval of the Rehabilitation Plan by the SEC
Hearing Panel, affirmed by both the SEC En Banc and the
Court of Appeals, is valid and in furtherance of the rationale
behind P.D. No. 902-A, as amended, which is "to effect a
feasible and viable rehabilitation" of ailing corporations which
affect the public welfare.
WHEREFORE, we DENY the instant petition for review on
certiorari. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. SP No. 77260 are AFFIRMED.
3. Wonder Book Corporation v. Philippine Bank of
Communications
GR. NO. 187316 JULY 16, 2012
DOCTRINE:
FACTS:
Wonder Book Corporation (Wonder Book) is a
corporation duly organized and existing under Philippine laws
engaged in the business of retailing books, school and office
supplies, greeting cards and other related items. It operates
the chain of stores known as the Diplomat Book Center.
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, which the court
subsequently approved. After LGC’s Rehabilitation Plan was
approved, Wonder Book filed its own Petition for Rehabilitation
before the RTC and cited the following as causes for its
inability to pay its debts as they fall due:
(a) high interest rates, penalties and charges imposed
by its creditors;
(b) low demand for gift items and greeting cards due to
the widespread use of cellular phones and economic
recession;
(c) competition posed by other stores; and
(d) the fire on July 19, 2002 that destroyed its
inventories worth P264 Million, which are insured for
P245 Million but yet to be collected.
PBCOM filed an opposition asserting primarily that it is
clear from Wonder Book’s financial statements that it is
insolvent and can no longer be rehabilitated. The bank also
raised that there is no guaranty that the insurance claim of
Wonder Book on its destroyed inventories will be paid. It also
stressed that Wonder Book’s sales and marketing plan does
not specifically discuss how sales and marketing will be
CSPRI | 4
carried out alleging that the strategies might not really produce
profits. RTC sided with Wonder Book and approved its
Rehabilitation Plan.
PBCOM filed a Petition for Review, which the CA
granted. CA noted that the total assets of Wonder Book is only
P144,922,218.00 whereas its liabilities totaled to
P306,141,399.00. In effect, the debt ratio of Wonder Book is
2.11 to 1. This means that Wonder Book has P2.11 pesos in
debt for every peso of asset. Obviously, Wonder Book is in
terrible financial condition as it does not have enough assets
to pay its obligations. Wonder Book instituted the present
petition claiming that the CA erred in dismissing its petition for
rehabilitation.
ISSUE:
Whether or Not the CA was correct in dismissing
Wonder Book’s petition for rehabilitation.
HELD:
CA was correct in ruling against Wonder Book. SC
explained that 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.
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 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
rehabilitation of a financially distressed corporation benefits its
employees, creditors, stockholders and, in a larger sense, the
general public.
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.
4. PHILIPPINE ISLANDS CORPORATION FOR
TOURISM DEVELOPMENT, INC., v. VICTORIAS
MILLING COMPANY, INC.
G.R. NO. 167674 : June 17, 2008
DOCTRINE:
The purpose for the suspension of the proceedings is to
prevent a creditor from obtaining an advantage or
preference over another and to protect and preserve the
rights of party litigants as well as the interest of the
investing public or creditors. 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
CSPRI | 5
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.
FACTS:
On March 7, 1997, petitioner filed a complaint for
collection of a sum of money with prayer for the issuance
of a writ of preliminary attachment against VMC before
the RTC of Makati City. In its complaint, PICTD alleged
that VMC obtained loans from the CICM Missionaries,
Inc. in the amount of P3,259,988.08 and from the
Congregation of the Most Holy Redeemer in the amount
of P1,211,596.00 Both loans were assigned to PICTD by
way of a deed of assignment.
When the loans matured on March 3, 1997, PICTD
sought payment from VMC but the latter failed to pay,
prompting PICTD to file the abovementioned complaint.
The RTC ordered the issuance of a writ of preliminary
attachment against VMC's properties. However, upon
VMC's motion, the writ of attachment was lifted when
VMC deposited a counter attachment bond.
VMC filed a petition5before the SEC to declare itself in a
state of suspension of payments, alleging that although it
has sufficient property to cover all of its debts, it foresees
its inability to pay them when they become due because
of financial difficulties. VMC sought the appointment of a
management committee that would oversee the
implementation of its proposed rehabilitation plan so that
it can continue its operations and thus enable it to meet
its obligations and satisfy its liabilities.
SEC: Ordered the suspension of all actions or claims
against VMC pending before any court, tribunal, office,
board, body and/or commission. The SEC ruled that
PICTD is merely a general creditor who was able to seize
the property of the debtor through an attachment issued
before judgment and did not have a prior security
agreement with VMC that will ripen into a creditor's right
in case of default. Thus, its claim against VMC could not
take precedence over the secured creditors.
RTC: PIC's Motion to Lift [the] Suspension of
Proceedings is hereby DENIED for lack of merit.
CA: Affirmed SEC’s order.
ISSUE/S:
Whether or not SEC erred in suspending the proceedings
of the collection suits filed by PICTD against VCM.
RULING:
NO. The Supreme Court agreed to sustain the ruling of
the appellate court upholding the SEC Order suspending
the proceedings of the collection suit filed by PICTD
against VMC.
CSPRI | 6
Section 6(c) of P.D. No. 902-A as amended by P.D. No.
1799, enumerating the powers of the SEC provides:
SEC. 6. In order to effectively exercise such
jurisdiction, the Commission shall possess
the following powers:
c) To appoint one or more receivers of the
property, real and personal, which is the
subject of the action pending before the
Commission whenever necessary in order
to preserve the rights of the parties-litigants
and/or protect the interest of the investing
public and creditors: Provided, finally, That
upon appointment of a management
committee, rehabilitation receiver, board or
body, pursuant to this Decree, all actions
for claims against corporations,
partnerships or associations under
management or receivership pending
before any court, tribunal, board or body
shall be suspended accordingly
The purpose for the suspension of the
proceedings is to prevent a creditor from obtaining
an advantage or preference over another and to
protect and preserve the rights of party litigants as
well as the interest of the investing public or
creditors. 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.
5. RUBBERWORLD, INC., v. NLRC, et al
G.R. No. 126773 April 14, 1999
Topic: Difference between Corporate Rehabilitation and
Corporate Liquidation
Doctrine: 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. On the other hand, in insolvency proceedings, the
company stops operating, and the claims of creditors are
satisfied from the assets of the insolvent corporation.
Facts: Petitioner is a domestic corporation which used to be in
the business of manufacturing footwear, bags and garments. It
filed with the SEC a petition for suspension of payments and
prayed (1) that be declared in a state of suspension of
payments; (2) that the SEC accordingly issue an order
restraining its creditors from enforcing their claims against the
petitioner; (3) for the creation of a management committee;
and (4) for the approval of the proposed rehabilitation plan and
memorandum of agreement between petitioner corporation
and its creditors. SEC granted the petition. Accordingly, with
the creation of the Management Committee, all actions for
claims against Rubberworld Philippines, Inc. pending before
any court, tribunal, office, board, body were deemed
suspended.
CSPRI | 7
Private respondents, who claim to be employees of petitioner,
filed against petitioners their respective complaints for illegal
dismissal, unfair labor practice, damages and payment of
separation pay, among others. Petitioners moved to suspend
the proceedings in the above labor cases on the strength of
the SEC Order. LA denied the motion holding that the
injunction in the SEC Order applied only to the enforcement of
established rights and did not include the suspension of
proceedings involving claims against petitioner which have yet
to be ascertained. Furthermore, LA 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. NLRC affirmed the LA ruling.
Issue: Whether the respondent NLRC erred in denying
petitioners' motion to suspend proceedings despite the SEC
Order directing the suspension of all actions against a
company under the first stages of insolvency proceedings. -
YES
Held:
1. Where the petition filed is one for declaration of a state of
suspension of payments due to a recognition of the inability to
pay one's debts and liabilities, and where the petitioning
corporation either: (a) has sufficient property to cover all its
debts but foresees the impossibility of meeting them when
they fall due (solvent but illiquid) or (b) has no sufficient
property (insolvent) but is under the management of a
rehabilitation receiver or a management committee, the
applicable law is P.D. 902-A (…that upon appointment of a
management committee, rehabilitation receiver… all actions
for claims against corporations… under management or
receivership pending before any court,… shall be suspended
accordingly). However, if the petitioning corporation has no
sufficient assets to cover its liabilities and is not under a
rehabilitation receiver or a management committee created
under P.D. 902-A and does not seek merely to have the
payments of its debts suspended, but seeks a declaration of
insolvency . . . the applicable law is the Insolvency Law on
voluntary Insolvency.
Here, petitioner filed a Petition for Declaration of Suspension
of Payments, as well as a proposed rehabilitation plan. SEC
ordered the creation of a management committee and the
suspension of all actions for claims against petitioner. Clearly,
the applicable law is PD 902-A.
The justification for the automatic stay of all pending actions
for claims is to enable the management committee or the
rehabilitation receiver to effectively exercise its/his powers free
from any judicial or extra-judicial interference that might unduly
hinder or prevent the rescue of the debtor company. To allow
such other actions to continue would only add to the burden of
the management committee or rehabilitation receiver, whose
time, effort and resources would be wasted in defending
claims against the corporation instead of being directed toward
its restructuring and rehabilitation.
2. The respondents contend that automatic stay under PD
902-A is not applicable to the instant case; otherwise, the
preference granted to workers by Article 110 of the Labor
Code would be rendered ineffective. However, the SC held
that this contention is misleading. The preferential right of
workers and employees under Article 110 of the Labor code
may be invoked only upon the institution of insolvency or
judicial liquidation proceeding.
Indeed, it is well-settled that "a declaration of bankruptcy or a
judicial liquidation must be present before preferences over
various money claims may be enforced." But debtors resort to
CSPRI | 8
preference of credit — giving preferred creditors the rights to
have their claims paid ahead of those of other claimants —
only when their assets are insufficient to pay their debts fully.
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. On the
other hand, in insolvency proceedings, the company stops
operating, and the claims of creditors are satisfied from the
assets of the insolvent corporation. The present case involves
the rehabilitation, not the liquidation, of petitioner. Hence, the
preference of credit granted to workers or employees under
Article 110 of the Labor Code is not applicable.
Other Notes: The solicitor general representing NLRC, argues
that the rationale for an automatic stay will not be frustrated
even if the NLRC proceeds with the disposition of these labor
cases, because any favorable obtained by the private
respondents would only establish their rights as creditors. The
SC ruled reiterated that the law provides that all claims for
actions "shall be suspended accordingly." No exception in
favor of labor claims is mentioned in the law. To rule otherwise
would open the floodgates to other similarly situated claimants
and forestall if not defeat the rescue efforts.
6. Philippine Veterans Bank Employees Union v. Vega, 360
SCRA 33
DOCTRINE: Both liquidation and rehabilitation cannot be
undertaken at the same time. To allow the liquidation
proceedings to continue would seriously hinder the
rehabilitation of the subject bank.
FACTS: In 1985, the Central Bank filed with the RTC Manila,
petition for assistance in the liquidation of the Philippine
Veteran's Bank (PVB). The petitioners in this case filed claims
for accrued and unpaid employee wages and benefits. After
lengthy proceedings, only partial payments of sums were paid
and other benefits remain unpaid.
In January 1992, the Congress enacted RA 7169 providing for
the rehabilitation of the PVB and the petitioners filed with the
labor tribunals their residual claims for benefits and for
reinstatement upon reopening of the bank. In May 1992, the
Central Bank issued a certificate of authority allowing PVB to
open.
However, despite the legislative mandate for rehabilitation and
reopening of PVB, the respondent judge continued with the
liquidation proceedings of the bank.
ISSUE: Whether a liquidation court may continue with
liquidation proceedings of the Philippine Veterans Bank (PVB)
when Congress had mandated its rehabilitation and reopening
HELD: No, the enactment of RA 7169 has rendered the
liquidation court functus officio and the respondent judge has
been stripped of the authority to issue orders involving acts of
liquidation.
Liquidation, in corporation law, connotes a winding up of a
corporation so that assets are distributed to those entitled to
receive them. It is process of reducing assets to cash,
discharging liabilities and dividing surplus or loss. On the other
hand, 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
CSPRI | 9
both cannot be undertaken at the same time. To allow the
liquidation proceedings to continue would seriously hinder the
rehabilitation of the subject bank.
The respondent judge is permanently enjoined from further
proceeding with the liquidation proceedings of PVB.
7. BIR v. Lepanto Ceramics, Inc. G.R. No. 224764, Apr. 24,
2017
Topic: Consolidate the resolution of all legal proceedings by
and against the debtor to the rehabilitation court.
DOCTRINE: It is improper for the BIR to collect or even
attempt to collect deficiency taxes from a corporation that is
covered by the Commencement Order, outside of the
rehabilitation proceedings, which act constitutes indirect
contempt against the RTC acting as a rehabilitation court.
Facts: December 23, 2011, respondent Lepanto Ceramics,
Inc. (LCI) filed a petition for corporate rehabilitation pursuant to
Republic Act No. (RA) 10142, before the RTC of Calamba
City, Branch 34. LCI alleged that due to the financial difficulties
it has been experiencing dating back to the Asian financial
crisis, it had entered into a state of insolvency considering its
inability to pay its obligations as they become due and that its
total liabilities amounting to P4,213,682,715.00 far exceed its
total assets worth P1,112,723,941.00. LCI admitted in the
annexes attached to the aforesaid Petition its tax liabilities to
the national government in the amount of at least
P6,355,368.00.
January 13, 2012, the Rehabilitation Court issued a
Commencement Order, which, inter alia: (a) declared LCI to be
under corporate rehabilitation; (b) suspended all actions or
proceedings, in court or otherwise, for the enforcement of
claims against LCI; (c) prohibited LCI from making any
payment of its liabilities outstanding as of even date, except as
may be provided under RA 10142; and (d) directed the BIR to
file and serve on LCI its comment or opposition to the petition,
or its claims against LCI.
Despite the foregoing, Misajon, et al., acting as
Assistant Commissioner, Group Supervisor, and Examiner,
respectively, of the BIR’s Large Taxpayers Service, sent LCI a
notice of informal conference dated May 27, 2013, informing
the latter of its deficiency internal tax liabilities for the Fiscal
Year ending June 30, 2010. LCI’s court-appointed receiver,
Roberto L. Mendoza, sent BIR a letter-reply, reminding the
latter of the pendency of LCI’s corporate rehabilitation
proceedings, as well as the issuance of a Commencement
Order. BIR sent LCI a Formal Letter of Demand, requiring LCI
to pay deficiency taxes in the amount of P567,519,348.39.12.
This prompted LCI to file a petition for indirect contempt dated
August 13, 2014 against petitioners.
RTC Br. 35 found Misajon, et al. guilty of indirect
contempt and, accordingly, ordered them to pay a fine of
P5,000.00 each.
Issue: Whether or not the RTC Br. 35 correctly found Misajon,
et al. to have defied the Commencement Order and,
accordingly, cited them for indirect contempt.
Held: The petition is without merit.
The inherent purpose of rehabilitation is to find ways
and means to minimize the expenses of the distressed
corporation during the rehabilitation period by providing the
best possible framework for the corporation to gradually regain
or achieve a sustainable operating form.
In order to achieve such objectives, Section 16 of RA
10142 provides, inter alia, that upon the issuance of a
Commencement Order — which includes a Stay or
Suspension Order — all actions or proceedings, in court or
otherwise, for the enforcement of “claims” against the
distressed company shall be suspended. Under the same law,
CSPRI | 10
claim “shall refer to all claims or demands of whatever nature
or character against the debtor or its property, whether for
money or otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or undisputed,
including, but not limited to: (1) all claims of the government,
whether national or local, including taxes, tariffs and customs
duties.
To clarify, however, creditors of the distressed
corporation are not without remedy as they may still submit
their claims to the rehabilitation court for proper consideration
so that they may participate in the proceedings. 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.
In the case at bar, it is undisputed that LCI filed a
petition for corporate rehabilitation. Finding the same to be
sufficient in form and substance, the Rehabilitation Court
issued a Commencement Order30 dated January 13, 2012. It
is likewise undisputed that the BIR — personally and by
publication — was notified of the rehabilitation proceedings
involving LCI and the issuance of the Commencement Order.
Despite the foregoing, the BIR, through Misajon, et al.,
still opted to send LCI: (a) a notice of informal conference
dated May 27, 2013, informing the latter of its deficiency
internal tax liabilities for the Fiscal Year ending June 30, 2010;
and (b) a Formal Letter of Demand dated May 9, 2014,
requiring LCI to pay deficiency taxes in the amount of
P567,519,348.39, notwithstanding the written reminder coming
from LCI’s court-appointed receiver of the pendency of
rehabilitation proceedings concerning LCI and the issuance of
a commencement order. Notably, the acts of sending a notice
of informal conference and a Formal Letter of Demand are part
and parcel of the entire process for the assessment and
collection of deficiency taxes from a delinquent taxpayer — an
action or proceeding for the enforcement of a claim which
should have been suspended pursuant to the 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.
8. Alemar’s Sibal v. Elbinias, 186 SCRA 94 (1990), G.R. No.
75414
TOPIC: Exceptions to the Stay/Suspension Order
Doctrine:
It is the general rule that once a decision becomes final
and executory, its enforcement becomes the ministerial duty of
the court. Equally settled is that the rule admits of certain
exceptions, one of which is where it becomes imperative in the
higher interest of justice to direct the deferment of execution.
In the instant case, the stay of execution is warranted by the
fact that petitioner Alemar's has been placed under
"rehabilitation receivership".
When a corporation threatened by bankruptcy is taken
over by a receiver, all the creditors should stand on an 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.
Facts:
On December 11, 1984, private respondent G.A.
Yupangco and Co. Inc. (G.A. Yupangco) filed an action with
respondent trial court for collection of a sum of money with
prayer for damages and preliminary attachment against
Alemar's Bookstore, a business entity owned and managed by
petitioner Alemar's Sibal & Sons, Inc. (Alemar's).
CSPRI | 11
Subsequently, on September 23, 1985, Ledesma, Saludo and
Associates, as intervenor-movant, filed an omnibus motion
informing the respondent trial court that the petitioner Alemar's
has been placed under rehabilitation receivership by the
Securities and Exchange Commission and that movant has
been appointed as its receiver. It prayed that it be allowed to
intervene, that the decision of August 30, 1985 be set aside
and that further proceedings in this case be suspended.
In its opposition, G.A. Yupangco maintained that it
received notice of the receivership only on January 10, 1985
or after one month after the collection suit. It further averred
that the motion to intervene by the receiver was not
seasonably made. In a motion dated January 7, 1986, G.A.
Yupangco urged the issuance of a writ of execution to
implement the August 30, 1985 default judgment which had
become final and executory, there being no motion for
reconsideration or appeal. The corresponding writ was issued
on January 15, 1986. Petitioner Alemar's moved for the
discharge of the writ on the ground that its issuance was
improper since the proceedings in Civil Case No. 9252 have
been suspended pursuant to the October 29, 1985 order.
Respondent court, however, held the resolution of the motion
in abeyance.
On January 31, 1986, the branch manager of the Bank
of the Philippine Islands, after having previously stopped
payment of the cashier's check issued to satisfy the August 30,
1985 money judgment, allowed the encashment of said check
in the amount of P62,240.00. And in compliance with a
subsequent order of the respondent court, BPI also
compensated G.A. Yupangco for the delay in payment in an
amount equivalent to the interest of P62,240.00 from January
17, 1986 to January 31, 1986 or a total of 14 days.
Contending that the payment of P 62,240.00 to G.A.
Yupangco through the BPI has defeated the purpose for which
petitioner has been placed under receivership, petitioner filed
a supplement to its motion to discharge the writ of execution
praying that the aforesaid payment be returned to petitioner or
to its account with the BPI.
Issue/s:
Whether or not respondent court can validly proceed
with the execution of a final decision for the payment of a sum
of money despite the fact that the judgment debtor has been
placed under receivership.
Ruling:
NO. The respondent court cannot validly proceed
with the execution of a final decision.
It is the general rule that once a decision becomes final
and executory, its enforcement becomes the ministerial duty of
the court. Equally settled is that the rule admits of certain
exceptions, one of which is where it becomes imperative in the
higher interest of justice to direct the deferment of execution.
In the instant case, the stay of execution is warranted by the
fact that petitioner Alemar's has been placed under
"rehabilitation receivership".
What are the legal consequences of such a
receivership? For one thing, the SEC has expressly decreed
that "all actions for claims against the corporation pending
before any court ... are suspended accordingly". Respondent
court apparently demurred to the SEC action when it granted
petitioner's motion to suspend its own proceedings. It even
went as far as to suggest to the creditor to present the
"judgment by default to the receiver as the basis for settlement
of its claim against defendant". So when respondent court
ordered the execution of its August 30, 1985 judgment, it
assumed a rather myopic view of its own suspension order.
Verily, the proceedings sought to be suspended by the order
of October 29, 1985 necessarily includes the issuance of the
writ of execution.
It must be stressed that the SEC had earlier ordered
the suspension of all actions for claims against Alemar's in
CSPRI | 12
order that all the assets of said petitioner could be inventoried
and kept intact for the purpose of ascertaining an equitable
scheme of distribution among its creditors. During
rehabilitation receivership, the assets are held in trust for the
equal benefit of all creditors to preclude one from obtaining an
advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent
an alert creditor, upon learning of the receivership, from
rushing posthaste to the courts to secure judgments for the
satisfaction of its claims to the prejudice of the less alert
creditors.
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 an 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.
HERE, when respondent court ruled in favor of G.A. Yupangco
in the collection case, it only determined the exact extent of
petitioner's indebtedness and in no way gave G.A. Yupangco a
priority over the other creditors. However, it clearly exceeded
its jurisdiction when it allowed G.A. Yupangco to encash the
check of P 62,240.00 pursuant to the writ of execution. In so
doing, respondent court gave G.A. Yupangco an undue
preference by reducing the assets of the petitioner corporation
for its sole benefit to the grave damage and prejudice of the
other creditors, and thus frustrating the very purpose for which
petitioner has been placed under receivership.
9. RUBY INDUSTRIAL CORPORATION and BENHAR
INTERNATIONAL, INC. petitioners, vs. COURT OF
APPEALS, MIGUEL LIM, ALLIED LEASING and FINANCE
CORPORATION, and THE MANAGEMENT COMMITTEE OF
RUBY INDUSTRIAL CORPORATION, respondents.
By: Morales, I
Doctrine: When a distressed company is placed under
rehabilitation, the appointment of a management committee
follows to avoid collusion between the previous management
and creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key
phrase is equality in equity.
Note: long case and masyadong technical kaya di ako
nagtanggal ng facts 
Facts: Ruby is a domestic corporation engaged in glass
manufacturing, while Benhar International, Inc. (BENHAR) is a
domestic corporation engaged in importation and sale of
vehicle spare parts. BENHAR is wholly-owned by the Yu family
and headed by Henry Yu who is also a director and majority
stockholder of RUBY. RUBY suffered severe liquidity
problems. Thus, on December 13, 1983, it filed a Petition for
Suspension of Payments with the Securities and Exchange
Commission (SEC).
SEC issued an Order declaring RUBY under suspension of
payments. Pending hearing of its petition, the SEC enjoined
RUBY from disposing its property, except insofar as necessary
in its ordinary operations. It also enjoined RUBY from making
payments outside of the necessary or legitimate expenses of
its business.
SEC Hearing Panel created a management committee[5] for
RUBY to: (1) undertake the management of RUBY; (2) take
custody of and control over all existing assets and liabilities of
RUBY; (3) evaluate RUBY's existing assets and liabilities,
earnings and operations; (4) determine the best way to
CSPRI | 13
salvage and protect the interest of its investors and creditors;
and (5) study, review and evaluate the proposed rehabilitation
plan for RUBY.
Subsequently, at RUBY's special stockholders meeting, its
majority stockholders led by Yu Kim Giang presented
the BENHAR/RUBY Rehabilitation Plan to be submitted to
SEC.Under the plan, BENHAR shall lend its P60 million credit
line in China Bank to RUBY, payable within ten (10)
years. Moreover, BENHAR shall purchase the credits of
RUBY's creditors and mortgage RUBY's properties to obtain
credit facilities for RUBY. Upon approval of the rehabilitation
plan, BENHAR shall control and manage RUBY'S
operations. For its service, BENHAR shall receive a
management fee equivalent to 7.5% of RUBY's net sales.
Some 40% of the stockholders opposed the BENHAR/RUBY
Plan, including private respondent MIGUEL LIM, a minority
shareholder of RUBY. Private respondent Allied Leasing and
Finance Corporation, the biggest unsecured creditor of RUBY
and chairman of the management committee, also objected to
the plan as it would transfer RUBY's assets beyond the reach
and to the prejudice of its unsecured creditors. Despite the
oppositions, the majority stockholders still submitted the
BENHAR/RUBY Plan to the SEC for approval.
Upon the other hand, RUBY's minority stockholders,
represented by private respondent Lim, submitted their own
rehabilitation plan (the ALTERNATIVE PLAN) to the SEC
where they proposed to: (1) pay all RUBY'S creditors without
securing any bank loan; (2) run and operate RUBY without
charging management fees; (3) buy-out the majority shares or
sell their shares to the majority stockholders; (4) rehabilitate
RUBY's two plants; and (5) secure a loan at 25% interest, as
against the 28% interest charged in the loan under the
BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to RUBY's
management committee for evaluation.
SEC Hearing Panel approved the BENHAR/RUBY Plan. The
minority stockholders, thru private respondent Lim, appealed
the approval to the SEC enbanc. On November 15, 1988, the
SEC en banc temporarily enjoined the implementation of the
BENHAR/RUBY Plan. On December 20, 1988, after the
expiration of the TRO, the SEC enbanc granted the writ of
preliminary injunction against the enforcement of the
BENHAR/RUBY Plan.
Thereafter, BENHAR and Henry Yu, later joined by RUBY and
Yu Kim Giang, appealed to the Court of Appeals (CA-G.R. SP
No. 16798) questioning the issuance of the writ. Their appeal
was denied.
However, it appears that before the SEC Hearing Panel
approved the BENHAR/RUBY Plan on October 28, 1988,
BENHAR had already implemented part of the plan by paying
off Far East Bank & Trust Company (FEBTC), one of RUBY's
secured creditors. Thus, by May 30, 1988, FEBTC had already
executed a deed of assignment of credit and mortgage rights
in favor of BENHAR. Moreover, despite the SEC en
banc's TRO and injunction, BENHAR still paid RUBY's other
secured creditors who, in turn, assigned their credits in favor of
BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and
Finance Corporation, and private respondent Lim moved to
nullify the deeds of assignment executed in favor of BENHAR
and cite the parties thereto in contempt for willful violation of
the December 20, 1983 SEC Order enjoining RUBY from
disposing its properties and making payments pending the
hearing of its petition for suspension of payments. Private
respondents Lim and Allied Leasing charged that in paying off
FEBTC's credits, FEBTC was given undue preference over the
other creditors of RUBY.
CSPRI | 14
Petitioners appealed to the SEC en banc. Their appeal was
denied.[15] It was ruled that, pending approval of the
BENHAR/RUBY plan, BENHAR had no authority to pay off
FEBTC, one of RUBY's creditors. In prematurely implementing
the BENHAR/RUBY plan, BENHAR defied the SEC Order
declaring RUBY under suspension of payments and directing
the management committee to preserve its assets.
SEC en banc - directed RUBY to submit the Revised
BENHAR/RUBY Plan to its creditors for comment and
approval. The petition for the creation of a new management
committee was remanded for further proceedings to the SEC
Hearing Panel. The Alternative Plan of RUBY's minority
stockholders was also forwarded to the hearing panel for
evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's
creditors objected to the Revised BENHAR/RUBY Plan and
the creation of a new management committee. Instead, they
endorsed the minority stockholders' Alternative Plan.
However, on September 18, 1991, despite the objections
of over 90% of RUBY's creditors and three (3) members of the
management committee, the SEC Hearing Panel approved the
revised plan and dissolved the existing management
committee. It also created a new management committee and
appointed BENHAR as one of its members.[19] In addition to
the powers originally conferred to the management committee
under P.D. No. 902-A, the new management committee was
tasked to oversee the implementation by the Board of
Directors of the revised rehabilitation plan for RUBY.
Consequently, the original management committee, Lim,
and the Allied Leasing Corporation appealed to the SEC en
banc. On July 30, 1993, the SEC En Banc affirmed the
approval of the Revised BENHAR/RUBY Plan and the creation
of a new management committee. To avoid any group from
controlling the management of RUBY, the SEC appointed SEC
lawyers Ruben C. Ladia and Teresita R. Siao as additional
members of the new management committee. Further, it
declared that BENHAR's membership in the new management
committee is subject to the condition that BENHAR will extend
its credit facilities to RUBY without using the latter's assets as
security or collateral.
Private respondents Lim, Allied Leasing Corporation and
the original management committee moved for
reconsideration. Petitioners, on the other hand, asked the SEC
to reconsider the portion of its Order prohibiting BENHAR from
utilizing RUBY's assets as collateral.
On October 15, 1993, the SEC denied private
respondents' motions for reconsideration. However, it granted
petitioners' motion and allowed BENHAR to use RUBY's
assets as collateral for loans, subject to the approval of the
majority of all the members of the new management
committee.
On appeal by private respondents, the Court of Appeals
set aside SEC's approval of the Revised BENHAR/RUBY plan
and remanded the case to the SEC for further proceedings. It
ruled that the revised plan circumvented its earlier decision
(CA-G.R. SP No. 18310) nullifying the deeds of assignment
executed by RUBY's creditors in favor of BENHAR. Under the
revised plan, BENHAR was to receive P34.068 Million of
the P60.437 Million credit facility to be extended to RUBY, as
settlement for its advance payment to RUBY's seven (7)
secured creditors. In effect, the payments made by BENHAR
under the void Deeds of Assignment were recognized as
payable to BENHAR under the revised plan.
Petitioners' motion for reconsideration was denied.
Issue: WON the Court of Appeals erred in approving the
revised BENHAR/RUBY Plan and gave undue preference to
BENHAR?
Ruling: No.
CSPRI | 15
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. When a distressed company is placed under
rehabilitation, the appointment of a management committee
follows to avoid collusion between the previous management
and creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key
phrase is equality in equity. Once the corporation threatened
by bankruptcy is taken over by a receiver, all the creditors
ought to stand on equal footing. Not any one of them should
be paid ahead of the others. This is precisely the reason for
suspending all pending claims against the corporation under
receivership.
Parenthetically, BENHAR is a domestic corporation engaged
in importing and selling vehicle spare parts with an authorized
capital stock of thirty million pesos. Yet, it offered to lend its
credit facility in the amount of sixty to eighty millions pesos to
RUBY. It is to be noted that BENHAR is not a lending or
financing corporation and lending its credit facilities, worth
more than double its authorized capitalization, is not one of the
powers granted to it under its Articles of
Incorporation. Significantly, Henry Yu, a director and a majority
stockholder of RUBY is, at the same time, a stockholder of
BENHAR, a corporation owned and controlled by his
family. These circumstances render the deals between
BENHAR and RUBY highly irregular.
To justify its appointment in the new management committee
and to dispute that it will become a creditor of RUBY only on
account of the proposed assignment of its credit facility to
RUBY, BENHAR avers that as early as December 27, 1988, it
already lent one million pesos (P1,000,000.00) to RUBY for
the latter's working capital.
The submission deserves scant consideration. To start with,
this argument was raised by BENHAR for the first time in its
motion for reconsideration before the Court of Appeals. The
settled rule is that issues not raised in the court a quo cannot
be raised for the first time on appeal -- in this case, in a motion
for reconsideration -- for being offensive to the basic rules of
fair play, justice and due process.
Moreover, when RUBY initiated its petition for suspension of
payments with the SEC, BENHAR was not listed as one of
RUBY's creditors. BENHAR is a total stranger to RUBY. If at
all, BENHAR only served as a conduit of RUBY. As aptly
stated in the challenged Court of Appeals decision:
"Benhar's role in the Revised Benhar/Ruby Plan, as
envisioned by the majority stockholders, is to contract the loan
for Ruby and, serving the role of a financier, relend the same
to Ruby.Benhar is merely extending its credit line facility with
China Bank, under which the bank agrees to advance funds to
the company should the need arise. This is unlikely a loan in
which the entire amount is made available to the borrower so
that it can be used and programmed for the benefit of the
company's financial and operational needs. Thus, it is actually
China Bank which will be the source of the funds to be relent
to Ruby. Benhar will not shell out a single centavo of its own
funds. It is the assets of Ruby which will be mortgaged in favor
of Benhar.Benhar's participation will only make the
rehabilitation plan more costly and, because of the mortgage
of its (Ruby's) assets to a new creditor, will create a situation
which is worse than the present. x x x."
10. Bank of P.I. v. Court of Appeals, 229 SCTA 223 (1994)
DOCTRINE:
CSPRI | 16
Whenever a distressed corporation asks SEC for
rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but shall
stand on equal footing with other creditors.
While a preferred creditor has right to enforce its claim in court,
this right is suspended with when the SEC places a distressed
company (debtor) under rehabilitation. This rule will enable the
management committee or rehabilitation receiver to effectively
exercise his/its powers free from any judicial or extrajudicial
interference that might unduly hinder the rescue of the
distressed company.
Facts:
BPI filed a case for foreclosure of real estate mortgage (3
parcels of land) against Ruby Industrial Corporation (RUBY).
After filing its answer with counterclaim, RUBY submitted to
the trial court a motion for suspension of the proceedings
on the ground that the Securities and Exchange Commission
(SEC) issued an Order placing RUBY under a rehabilitation
plan pursuant to Sec. 6, par. (c), of P.D. 902-A. The trial court
granted RUBY’s motion.
Subsequently, BPI filed a motion for reopening of the
proceedings, invoking our ruling in Philippine Commercial
International Bank v. Court of Appeals (PCIB v CA Ruling)
which states that”
"SEC's order of suspension of payments of Philfinance
as well as for all actions or claims against Philfinance
could only be applied to claims of unsecured
creditors. Such order can not extend to creditors
holding a mortgage, pledge or any lien on the property
unless they give up the property, security or lien in
favor of all the creditors of Philfinance."
BPI claims that since it is a secured creditor, it is not
affected by the suspension order of SEC and may
therefore enforce its credit against the distressed firm.
The Trial court denied BPI’s motion.
Hence, BPI filed a petition for certiorari and mandamus with
the CA. The CA dismissed their petition and held that under
Sec. 5, P.D. No. 902-A, and the case of Alemar's Sibal &
Sons, Inc. v. Elbinias, a creditor, whether secured or
unsecured, cannot enforce his credit against a distressed firm
which had been placed by SEC under receivership or
rehabilitation; that during rehabilitation or receivership, the
assets are held in trust for the equal benefit of all creditors to
preclude one from obtaining an advantage or preference over
the others by the expediency of an attachment, execution or
otherwise; that instead of vexing the courts with suits
against the distressed firm, they are directed to file their
claims with the duly appointed receiver of SEC.
Issue:
Whether BPI may still judicially enforce its claim against RUBY
which has already been placed by SEC under rehabilitation
following the PCIB vs CA ruling?
Held:
NO. Firstly, The doctrine in the PCIB v CA case has been
overturned.
In Alemar's Sibal & Sons v. Elbinias, BF Homes, Inc. v. Court
of Appeals, Araneta v. Court of Appeals, and RCBC v. Court of
Appeals, the court ruled that whenever a distressed
corporation asks SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert such
preference, but shall stand on equal footing with other
CSPRI | 17
creditors. Foreclosure shall be disallowed so as not to
prejudice other creditors or cause discrimination among them.
If foreclosure is undertaken despite the fact that a petition for
rehabilitation has been filed, the certificate of sale shall not be
delivered pending rehabilitation. If this has already been done,
no transfer certificate of title shall likewise be effected within
the period of rehabilitation. The rationale behind PD 902-A, as
amended, is to effect a feasible and viable rehabilitation. This
cannot be achieved if one creditor is preferred over the others.
Secondly, the facts in the (1) PCIB v CA and the (2) instant
case are different.
(1) PCIB v CA = Auction held after the SEC proceedings
had been terminated and order of dissolution already
issued; PCIB still had possession of properties
In PCIB v. CA, SEC ordered the dissolution and
liquidation of Philfinance on the basis of the findings of
the receivership committee appointed by SEC. After
the order of dissolution, Philfinance failed to satisfy its
obligation with Philippine Commercial International
Bank (PCIB), prompting the latter to put up for auction
sale the pledged shares of stocks and bonds of
Philfinance in the possession of PCIB. By then the
proceedings before the SEC had already been
terminated and an order of dissolution already
issued when the bank moved for the sale of the
pledged stocks and bonds. The pledged properties
being still in PCIB's possession, the receiver could
not possess the same for equitable distribution to
the creditors of Philfinance.
(2) Instant Case = Action for foreclosure or REM was pending
with trial court when RUBY was placed under rehabilitation;
Trial court jurisdiction suspended and SEC now has
jurisdiction. Here, court urged to file with duly appointed
receiver of the SEC.
Herein, the action of petitioner for foreclosure of real
estate mortgage had been filed against respondent
RUBY and was pending with the trial court when RUBY
was placed by SEC under rehabilitation through the
creation of a management committee pursuant to Sec.
6, par. (d), P.D. 902-A. In its order of 10 August 1984,
SEC directed that all actions or claims against RUBY
pending before any court, tribunal, branch or body be
deemed suspended. On the basis of this order, the
jurisdiction of this trial court over the case was also
considered suspended. As a result, SEC acquired
jurisdiction, which is bolstered by the fact that it had
already appointed a rehabilitation receiver for the
distressed corporation and had directed that all
proceedings or claims against it be suspended.
11. TAYSONS SUPER CONCRETE, INC., GREGORIO S.
NAVARRO, vs. COURT OF APPEALS
AUSTRIA-MARTINEZ, J.:
DOCTRINE:
FACTS:
Romana Dela Cruz is the registered owner of several parcels
of land located Caloocan City. She 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 beginning January 1,
1993 until December 31, 2012.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.
CSPRI | 18
 Sometime in March 1995, the two major blocks of
stockholders of Tysons comprising of Elsa and Francis Chua,
on one hand, and Nancy, William, Genaro and Lydia, all
surnamed Hao, on the other, due to internal squabbling, filed a
joint motion with the Securities and Exchange Commission
(SEC) praying for the appointment of a receiver to oversee the
functions of the corporation.
SEC issued an order creating a Management Committee
(Committee, for brevity) to undertake the management of
Tysons, to take custody of and control over all the existing
assets, funds and records of the corporation, and to determine
the best way to protect the interest of the stockholders and
creditors.
unlawful detainer case was served upon one Francis Chua, as
shown by the Return filed by the Sheriff of the respondent
Metropolitan Trial Court on 25 March 1996. Both parties are in
agreement that Francis Chua is the corporate secretary of the
petitioner corporation, as well as subsequently a member of
the Management Committee created by virtue and Order of
the Securities and Exchange Commission dated
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.
MeTC ordered defendant Tysons Super Concrete, Inc.
and all persons claiming right under it to vacate the leased
premises and to pay plaintiff its rental arrearages from
September to February, 1996.
Tysons then filed with the Regional Trial Court (RTC) of
Caloocan City a petition for certiorari and prohibition with
application for the issuance of a writ of preliminary injunction
and temporary restraining order seeking to stop the judgment
of the MeTC.[
After conducting a summary hearing, the RTC issued a
temporary restraining order enjoining the enforcement of the
judgment rendered by the MeTC. Thereafter, the RTC received
evidence to determine the propriety of the issuance of a writ of
preliminary injunction. After hearing, the RTC, per its
resolution dated August 26, 1996, denied Tysons application
for the issuance of a writ of preliminary injunction, finding that
there is no evidence to warrant the issuance of the said writ.
CA reversed the decision, it held that since petitioner
corporation was undergoing intra-corporate problems which
had been taken over by the SEC, under this (sic) special
circumstances, summons should have been effected on the
Management Committee created by the SEC and not on any
of the officers enumerated under Sec. 13, Rule 14, Rules of
Court.
ISSUE: Whether or not 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.
HELD: As to petitioners 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.[25] 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
CSPRI | 19
detainer.[26] 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[27] and in Rizal
Commercial Banking Corporation vs. Intermediate Appellate
Court,[28] 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.
Besides, the other object of suspending all actions against a
distressed corporation, which is to treat all of its creditors on
equal footing, is defeated by the fact that the assailed
judgment of the MeTC has already been implemented through
a writ of execution issued by the court a quo as early as July
22, 1996.[29]
Lastly, considering that petitioners had already been given
sufficient opportunity to adduce their arguments through
submission of evidence and the filing of various pleadings in
the RTC, the CA, and in this Court, we deem it proper to
resolve the controversy pending before us.
As to petitioners 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.[25] 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.[26] 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[27] and in Rizal
Commercial Banking Corporation vs. Intermediate Appellate
Court,[28] 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
CSPRI | 20
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.
Besides, the other object of suspending all actions against
a distressed corporation, which is to treat all of its creditors on
equal footing, is defeated by the fact that the assailed
judgment of the MeTC has already been implemented through
a writ of execution issued by the court a quo as early as July
22, 1996.[29]
Lastly, considering that petitioners had already been given
sufficient opportunity to adduce their arguments through
submission of evidence and the filing of various pleadings in
the RTC, the CA, and in this Court, we deem it proper to
resolve the controversy pending before us.
12. Traders Royal Bank vs. CA and Alfredo Ching
DOCTRINE: SEC has jurisdiction over corporations only not
over private individuals, except stockholders in an intra-
corporate dispute.
Facts: Phil. Blooming Mills., Inc. (PBM) and Alfredo Ching
jointly submitted with SEC a petition for suspension of
payments where Ching was joined as co-petitioner because
under the law, he was allegedly entitled (as surety) to avail of
the defenses of PBM and he was expected to raise most of the
stockholders’ equity of P100 M being required under the plan
for the rehabilitation. Traders Royal Bank was among PBM’s
creditor named in Schedule A accompanying PBM’s petition.
Traders filed a civil case in the RTC against PBM and Ching to
collect P22,227,794.05 exclusive of interests, penalties and
bank charges representing PBM’s outstanding obligation.
Ching was impleaded as co-defendant for having signed as
surety for PBM to the extent of P10M.
SEC placed PBM under rehabilitation receivership and
ordered all actions listed in Schedule A suspended.
PBM and Ching jointly filed a motion to dismiss the civil case
in the RTC invoking the pendency in the SEC of PBM’s
application for suspension of payments. Before the motion to
dismiss could be resolved, the court dropped PBM from the
complaint, on motion of the plaintiff bank, for the reason that
the SEC had already placed PBM under rehabilitation
receivership.
RTC denied the motion to dismiss. P.D. 1758 is only
concerned with the activities of corporations, partnerships and
associations. Never was it intended to regulate and/or control
activities of individuals. SEC may not acquire jurisdiction over
an individual like Ching.
Ching filed a petition for certiorari and prohibition in the CA.
The CA granted.
Issue: Whether the SEC has jurisdiction over Ching
Held: No. Although Ching was impleaded in SEC Case No.
2250, as a co-petitioner of PBM, the SEC could not assume
jurisdiction over his person and properties. The Securities and
Exchange Commission was empowered, as rehabilitation
receiver, to take custody and control of the assets and
properties of PBM only, for the SEC has jurisdiction over
corporations only not over private individuals, except
stockholders in an intra-corporate dispute.
Being a nominal party in SEC Case No. 2250, Ching's
properties were not included in the rehabilitation receivership
that the SEC constituted to take custody of PBM's assets.
Therefore, the petitioner bank was not barred from filing a suit
against Ching, as a surety for PBM. An anomalous situation
would arise if individual sureties for debtor corporations may
escape liability by simply co- filing with the corporation a
petition for suspension of payments in the SEC whose
jurisdiction is limited only to corporations and their corporate
assets.
Ching can be sued separately to enforce his liability as surety
for PBM, as expressly provided by Article 1216 of the New
Civil Code:
CSPRI | 21
 ART. 1216. The creditor may proceed against
any of the solidary debtors or all of them
simultaneously. The demand made against one
of them shall not be an obstacle to those which
may subsequently be directed against the
others, as long as the debt has not been fully
collected.
It is elementary that a corporation has a personality distinct
and separate from its individual stockholders or members.
Ching's act of joining as a co-petitioner with PBM in SEC Case
No. 2250 did not vest in the SEC jurisdiction over his person or
property, for jurisdiction does not depend on the consent or
acts of the parties but upon express provision of law.
13. RAMON P. JACINTO and JAIME J. COLAYCO,
petitioners, vs. FIRST WOMENS CREDIT CORPORATION,
represented in this derivative suit by SHIG KATAYAMA,
respondents.
[G.R. No. 154049. August 28, 2003]
DOCTRINE: 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. The word imminent has
been defined as impending or on the point of happening; while
danger means peril or exposure to loss or injury.
Facts:
Shig Katayama, in his capacity as director and minority
stockholder of First Womens Credit Croporation (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 diverted the staggering amount of P720,333,266.00
to RJ Group of Companies as well as to companies affiliated
with FWCC. He claimed that petitioners withdrew and
transferred this amount from FWCC to said companies,
without Board authorization. Because of this, FWCC was left
flat broke causing it to default on several of its obligations with
creditor banks, particularly with Land Bank of the Philippines
and Philippine National Bank, and to close down several of its
offices around the country. Katayama also averred that the
intemperate withdrawal of funds amounted to grave
mismanagement.
In their Answer, petitioners stated that such withdrawals
constituted legitimate advances and loans extended in the
ordinary course of business intended to maximize FWCCs idle
funds. Petitioners likewise insisted that Katayama was
estopped as he himself had consented thereto. Lastly, all
loans and advances extended by FWCC to RJ Group of
Companies had been fully paid by the latter through an off-
setting agreement done with the knowledge and consent of
Katayama.
Katayama denied such allegations and prayed that petitioners
be ordered to account for and return the diverted amount to
FWCC and that in the interim a management committee be
appointed to end the dissipation, wastage and loss of
corporate funds.
On 17 November 1999, after petitioners presented their
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.
CSPRI | 22

MR, appeal to SEC En Banc, MR to SEC En Banc, and appeal
to CA all upheld the Hearing Officer’s order. 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
Committee to take over the management of First Womens
Credit Corporation (FWCC)
Held: YES
Sec. 6(d) of PD 902-A, reveals that for a minority stockholder
to obtain the appointment of an interim management
committee, 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.
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. 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.
The word imminent has been defined as impending or on the
point of happening; while danger means peril or exposure to
loss or injury. The findings of FWCCs external auditor were not
questioned by petitioners and support the conclusion that
petitioners unrestricted and continuous management of FWCC
poses an impending peril to corporate assets. First, it was
without the corresponding Board resolutions. Also, petitioners
contention that there is no need for the IMC to oversee
corporate operations since FWCC had collected on the
obligations of RJ Group of Companies through the 30 July
1997 Deed of Assignment is flawed. Petitioners need to be
reminded that FWCC has not consummated the contract, that
is, collect the assigned receivables, and there is still the
danger that these receivables may turn out to be bad loans
much to the detriment of FWCC as assignee.
Additionally, as admitted by the parties and borne out by the
evidence on record, the prevailing internal dispute and feud
between petitioners and Katayama have resulted in the total
paralization of FWCCs business operations and adversely
affected its collection efforts. In view of these facts, Hearing
Officer Palmares was clearly justified in ordering the
appointment of the IMC to oversee the operation of FWCC and
preserve its assets pending resolution of the parties dispute.
A management committee is not the representative or agent of
the stockholder upon whose instance the committee has been
appointed; rather, it is for the time being a ministerial officer
and representative of the court hearing the derivative suit.
Since its appointment is for the benefit of all interested parties,
it holds and manages the property for the benefit of those
CSPRI | 23
ultimately entitled to, and not primarily for the benefit of the
party at whose instance the appointment has been made.
14. NDC v. Philippine Veterans Bank
Facts: Pres. Decree No. 1717, which ordered the
rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company,
outlined the procedure for filing claims against the Agrix
companies and created a Claims Committee to process these
claims. Especially relevant to this case is Sec. 4(1) thereof
providing that "all mortgages and other liens presently
attaching to any of the assets of the dissolved corporations are
hereby extinguished."
Before this, the Agrix Marketing had executed in favor of
petitioner Philippine Veterans Bank a real estate mortgage
dated July 7, 1978, over three (3) parcels of land situated in
Los Baños, Laguna. During the existence of the mortgage,
AGRIX went bankrupt. It was for the expressed purpose of
salvaging this and the other Agrix companies that the
aforementioned decree was issued by President Marcos.
Petitioner filed a claim with the AGRIX Claims Committee for
the payment of its loan credit. In the meantime, the New Agrix,
Inc. and the National Development Company, invoking Sec. 4
(1) of the decree, filed a petition with the Regional Trial Court
of Calamba, Laguna, for the cancellation of the mortgage lien
in favor of Philippine Veterans.
For its part, the Philippine Veterans took steps to
extrajudicially foreclose the mortgage, prompting Agrix to file a
second case with the same court to stop the foreclosure.
In the trial court, the judge annulled not only the challenged
provision of Sec. 4 (1), but the entire Pres. Decree No. 1717
on the grounds that: (1) the presidential exercise of legislative
power was a violation of the principle of separation of powers;
(2) the law impaired the obligation of contracts; and (3) the
decree violated the equal protection clause.
The motion for reconsideration of this decision having been
denied, the present petition was filed in the Supreme Court.
The petitioners contend that the private respondent is now
estopped from contesting the validity of the decree. They cited
Mendoza v. Agrix Marketing, Inc., where the constitutionality of
Pres. Decree No. 1717 was also raised but not resolved.
Moreover the claims committee dismissed the filing of the
petition by Philippine Veterans on the ground of the
aforementioned estoppel.
The petitioners stress that in that the private respondent also
invoked the provisions of Pres. Decree No. 1717 by filing a
claim with the AGRIX Claims Committee. Failing to get results,
it sought to foreclose the real estate mortgage executed by
AGRIX in its favor, which had been extinguished by the
decree. It was only when the petitioners challenged the
foreclosure on the basis of Sec. 4 (1) of the decree, that the
private respondent attacked the validity of the provision. At
that stage, however, consistent with Mendoza, the petitioners
alleged that private respondent was already estopped from
questioning the constitutionality of the decree.
Issue: WON PD 1717 is constitutional.
Ruling: No. The Court is especially disturbed by Section 4(1)
of the decree, quoted above, extinguishing all mortgages and
other liens attaching to the assets of AGRIX. It also notes, the
restriction in Subsection (ii) thereof that all "unsecured
obligations shall not bear interest" and in Subsection (iii) that
"all accrued interests, penalties or charges as of date hereof
CSPRI | 24
pertaining to the obligations, whether secured or unsecured,
shall not be recognized."
These provisions must be read with the Bill of Rights, where it
is clearly provided in Section 1 that "no person shall be
deprived of life, liberty or property without due course of law
nor shall any person be denied the equal protection of the law"
and in Section 10 that "no law impairing the obligation of
contracts shall be passed.
Petitioners argue that property rights, like all rights, are subject
to regulation under the police power for the promotion of the
common welfare. Hence justification of the provision.
The court held, however, that police power is not a panacea
for all constitutional maladies. Neither does its mere invocation
conjure an instant and automatic justification for every act of
the government depriving a person of his life, liberty or
property.
In this case, the interests of the public are not sufficiently
involved to warrant the interference of the government with the
private contracts of AGRIX. The decree speaks vaguely of the
"public, particularly the small investors," who would be
prejudiced if the corporation were not to be assisted. There
was no record of these investors. Also, there was no public
interest to be protected. The decree was to the benefit of an
exclusive set of investors. On the contrary, it would appear
that the decree was issued only to favor a special group of
investors who, for reasons not given, have been preferred to
the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court
still finds that the means employed to rehabilitate AGRIX fall
far short of the requirement that they shall not be unduly
oppressive. The oppressiveness is patent on the face of the
decree to rehabilitate Agrix. No consideration is paid for the
extinction of the mortgage rights. The accrued interests and
other charges are simply rejected by the decree.
A mortgage lien is a property right derived from contract and
so comes under the protection of the Bill of Rights. Private
property cannot simply be taken by law from one person and
given to another without compensation and any known public
purpose. This is plain arbitrariness and is not permitted under
the Constitution. And not only is there arbitrary taking, there is
discrimination as well. In extinguishing the mortgage and other
liens, the decree lumps the secured creditors with the
unsecured creditors and places them on the same level in the
prosecution of their respective claims. In this respect, all of
them are considered unsecured creditors. The only
concession given to the secured creditors is that their loans
are allowed to earn interest from the date of the decree, but
that still does not justify the cancellation of the interests earned
before that date. Such interests, whether due to the secured or
the unsecured creditors, are all extinguished by the decree.
On top of all this, New Agrix, Inc. was created by special
decree notwithstanding the provision of Article XIV, Section 4
of the 1973 Constitution, then in force, that: SEC. 4. The
Batasang Pambansa shall not, except by general law, provide
for the formation, organization, or regulation of private
corporations, unless such corporations are owned or
controlled by the Government or any subdivision or
instrumentality thereof.
The new corporation is neither owned nor controlled by the
government. The National Development Corporation was
merely required to extend a loan of not more than
P10,000,000.00 to New Agrix, Inc. Pending payment thereof,
NDC would undertake the management of the corporation, but
with the obligation of making periodic reports to the Agrix
board of directors. After payment of the loan, the said board
can then appoint its own management. The stocks of the new
CSPRI | 25
corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the
abolished corporation. They shall then be the owners of the
new corporation.
The Court also feels that the decree impairs the obligation of
the contract between AGRIX and the private respondent
without justification. While it is true that the police power is
superior to the impairment clause, the principle will apply only
where the contract is so related to the public welfare that it will
be considered congenitally susceptible to change by the
legislature in the interest of the greater number. It can be seen
that the contracts of loan and mortgage executed by AGRIX
are purely private transactions and have not been shown to be
affected with public interest. There was therefore no warrant to
amend their provisions and deprive the private respondent of
its vested property rights.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid
exercise of the police power, not being in conformity with the
traditional requirements of a lawful subject and a lawful
method. The extinction of the mortgage and other liens and of
the interest and other charges pertaining to the legitimate
creditors of AGRIX constitutes taking without due process of
law, and this is compounded by the reduction of the secured
creditors to the category of unsecured creditors in violation of
the equal protection clause. Moreover, the new corporation,
being neither owned nor controlled by the Government, should
have been created only by general and not special law. And
insofar as the decree also interferes with purely private
agreements without any demonstrated connection with the
public interest, there is likewise an impairment of the obligation
of the contract.
15. RIZAL COMMERCIAL BANKING CORPORATION VS.
IAC, BF HOMES, INC. G.R. NO. 74851, December 9, 1999
(RESOLUTION FOR MOTION FOR RECONSIDERATION)
Facts: BF Homes filed a "Petition for Rehabilitation and for
Declaration of Suspension of Payments" with the SEC. One of
the creditors listed in its inventory of creditors and liabilities
was RCBC. RCBC then requested the Provincial Sheriff of
Rizal to extra-judicially foreclose its real estate mortgage on
some properties of BF Homes. A notice of extra-judicial
foreclosure sale was issued by the Sheriff, copies furnished
both BF Homes (mortgagor) and RCBC (mortgagee). On
motion of BF Homes, the SEC issued a temporary restraining
order (TRO), effective for 20 days, enjoining RCBC and the
sheriff from proceeding with the public auction sale. The sale
was rescheduled.
SEC then ordered the issuance of a writ of preliminary
injunction upon petitioner's filing of a bond. However, petitioner
did not file a bond until the very day of the auction sale, so no
writ of preliminary injunction was issued by the SEC.
Presumably, unaware of the filing of the bond, the sheriffs
proceeded with the public auction sale in which RCBC was the
highest bidder for the properties auctioned. BF Homes then
filed in the SEC a consolidated motion to annul the auction
sale and to cite RCBC and the sheriff for contempt. RCBC
opposed the motion. Because of the proceedings in the SEC,
the sheriff withheld the delivery to RCBC of a certificate of sale
covering the auctioned properties.
The SEC belatedly issued a writ of preliminary injunction
stopping the auction sale which had been conducted by the
sheriff two weeks earlier. Despite the SEC Case, RCBC filed
with the Regional Trial Court, Br. 140, Rizal an action
for mandamus against the provincial sheriff of Rizal and his
deputy to compel them to execute in its favor a certificate of
sale of the auctioned properties. In answer, the sheriffs alleged
CSPRI | 26
that they proceeded with the auction sale because no writ of
preliminary injunction had been issued by SEC as of that date
of auction sale, but they informed the SEC that they would
suspend the issuance of a certificate of sale to RCBC. SEC
then appointed a Management Committee for BF Homes. RTC
of Rizal granted the petition. It ordered the sheriff and deputy
to execute and deliver to RCBC the Certificate of Auction Sale.
B.F. Homes then filed an original complaint with the IAC
pursuant to Section 9 of B.P. 129 praying for the annulment of
the judgment, premised on the following: (1) even before
RCBC asked the sheriff to extra-judicially foreclose its
mortgage on petitioner's properties, the SEC had already
assumed exclusive jurisdiction over those assets, and (2) that
there was extrinsic fraud in procuring the judgment because
the petitioner was not impleaded as a party in
the mandamus case, respondent court did not acquire
jurisdiction over it, and it was deprived of its right to be heard.
IAC rendered a decision, setting aside the decision of the trial
court, dismissing the mandamus case and suspending
issuance to RCBC of new land titles, "until the resolution of
case by SEC". RCBC appealed the decision.
While the case was pending in the Court, RCBC brought an
order issued by the SEC, denying the consolidated motion to
annul the Auction sale and to cite RCBC and the Sheriff for
contempt. With this, the Register of Deeds of Pasay effected
transfer and issuance of title of B.F. Homes’ properties to
RCBC. RCBC then moved for a motion for the dismissal of the
petition, on the ground that the issuance of said new transfer
certificates of title in its name rendered the petition moot and
academic. The Court therein upheld the decision of the IAC
which dismissed the mandamus case filed by RCBC and
suspended the issuance of new titles to RCBC. The Court held
that:
“ . whenever a distressed corporation asks the
SEC for rehabilitation and suspension of
payments, preferred creditors may no longer
assert such preference, but stand on equal
footing with other creditors. Foreclosure shall be
disallowed so as not to prejudice other
creditors, or cause discrimination among them.
If foreclosure is undertaken despite the fact that
a petition, for rehabilitation has been filed, the
certificate of sale shall not be delivered pending
rehabilitation. Likewise, if this has also been
done, no transfer of title shall be effected also,
within the period of rehabilitation. The rationale
behind PD 902-A, as amended to effect a
feasible and viable rehabilitation. This cannot
be achieved if one creditor is preferred over the
others. In this connection, the prohibition
against foreclosure attaches as soon as a
petition for rehabilitation is filed. Were it
otherwise, what is to prevent the petitioner from
delaying the creation of a Management
Committee and in the meantime dissipate all its
assets. The sooner the SEC takes over and
imposes a freeze on all the assets, the better
for all concerned.”
In connection with this Decision, then Justice Feliciano (joined
by three other Justices), dissented and voted to grant the
petition. He opined that the SEC acted prematurely and
without jurisdiction or legal authority in enjoining RCBC and
the sheriff from proceeding with the public auction sale. The
dissent maintain that Section 6 (c) of Presidential Decree 902-
A is clear and unequivocal that, claims against the
corporations, partnerships, or associations shall be suspended
only upon the appointment of a management committee,
rehabilitation receiver, board or body. Thus, in the case under
consideration, only upon the appointment of the Management
CSPRI | 27
Committee for BF Homes should the suspension of actions for
claims against BF Homes have taken effect and not earlier.
Hence, this Motion for Reconsideration.
Issue: WON preferred creditors of distressed corporations
stand on equal footing with all other creditors?
Ruling: NO, for in this case no management committee was
appointed by the SEC.
Paragraph (c), Section 6 of Presidential Decree 902-A,
provides:
Sec. 6. In order to effectively exercise such jurisdiction,
the Commission shall possess the following powers:
c) To appoint one or more receivers of the
property, real and personal, which is the subject
of the action pending before the Commission in
accordance with the pertinent provisions of the
Rules of Court in such other cases whenever
necessary to preserve the rights of the parties
litigants to and/or protect the interest of the
investing public and creditors; Provided,
however, that the Commission may, in
appropriate cases, appoint a rehabilitation
receiver of corporations, partnerships or other
associations not supervised or regulated by
other government agencies who shall have, in
addition to the powers of a regular receiver
under the provisions of the Rules of Court, such
functions and powers as are provided for in the
succeeding paragraph (d) hereof: Provided,
finally, That upon appointment of a and the Bar, the following rules of thumb shall are laid down:
management committee rehabilitation receiver,
board or body, pursuant to this Decree, all
actions for claims against corporations,
partnerships or associations under
management or receivership, pending before
any court, tribunal, board or body shall be
suspended accordingly. (As amended by PDs
No. 1673, 1758 and by PD No. 1799).
It is thus adequately clear that suspension of claims against a
corporation under rehabilitation is counted or figured up only
upon the appointment of a management committee or a
rehabilitation receiver. Furthermore, as relevantly pointed out
in the dissenting opinion, a petition for rehabilitation does nor
always result in the appointment of a receiver or the creation
of a management committee. The SEC has to initially
determine whether such appointment is appropriate and
necessary under the circumstances. Under Paragraph (d),
Section 6 of Presidential Decree No. 902-A, certain situations
must be shown to exist before a management committee may
be created or appointed, such as; 1. when there is imminent
danger of dissipation, loss, wastage or destruction of assets or
other properties; or 2. when there is paralization of business
operations of such corporations or entities which may be
prejudicial to the interest of minority stockholders, parties-
litigants or to the general public.
On the other hand, receivers may be appointed whenever: 1.
necessary in order to preserve the rights of the parties-
litigants; and/or 2. protect the interest of the investing public
and creditors. (Section 6 (c), P.D. 902-A.)
In addition, the Court, to settle the issue in this present
resolution once and for all, and for the guidance of the Bench
CSPRI | 28
1. All claims against corporations, partnerships, or
associations that are pending before any court, tribunal, or
board, without distinction as to whether or not a creditor is
secured or unsecured, shall be suspended effective upon the
appointment of a management committee, rehabilitation
receiver, board, or body in accordance which the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured
creditors, but enforcement of such preference is equally
suspended upon the appointment of a management
committee, rehabilitation receiver, board, or body. In the event
that the assets of the corporation, partnership, or association
are finally liquidated, however, secured and preferred credits
under the applicable provisions of the Civil Code will definitely
have preference over unsecured ones.
In other words, once a management committee, rehabilitation
receiver, board or body is appointed pursuant to P.D. 902-A,
all actions for claims against a distressed corporation pending
before any court, tribunal, board or body shall be suspended
accordingly. This suspension shall not prejudice or render
ineffective the status of a secured creditor as compared totally
unsecured creditor P.D. 902-A does not state anything to this
effect. What it merely provides is that all actions for claims
against the corporation, partnership or association shall be
suspended. This should give the receiver a chance to
rehabilitate the corporation if there should still be a possibility
of doing so. However, in the event that rehabilitation is no
longer feasible and claims against the distressed corporation
would eventually have to be settled, the secured creditors shall
enjoy preference over the unsecured creditors, subject only to
the provisions of the Civil Code on Concurrence and
Preferences of Credit. All claims of both a secured or
unsecured creditors, without distinction on this score, are
suspended once a management committee is appointed.
Secured creditors, in the meantime, shall not be allowed to
assert such preference before the Securities and Exchange
Commission. It may be stressed, however, that this shall only
take effect upon the appointment of a management committee,
rehabilitation receiver, board, or body, as opined in the
dissent.
In fine, the Court granted RBCB’s motion for reconsideration
for the cogent reason that suspension of actions for claims
commences only from the time a management committee or
receiver is appointed by the SEC. Petitioner RCBC, therefore,
could have rightfully, as it did, move for the extrajudicial
foreclosure of its mortgage, because a management
committee was not appointed by the SEC.
16. Metropolitan Bank & Trust Co. v. ASB Holdings, Inc. -
Manzo
G.R. No. 166187 (2007)
Doctrine: The approval of a rehabilitation plan and the
appointment of a receiver merely suspends the action for
claims against the corporation concerned. The preferred status
of creditors relative to mortgage liens are retained as only the
enforcement of such preference is suspended.
Facts: The MBTC is the creditor bank of several corporations
engaged in real estate development collectively known as the
ASB Group of Companies. ASB took out loans amounting to
over P1.5 billion and secured such loans by real estate
mortgages.
ASB Group then filed with the SEC a petition for rehabilitation
with prayer for suspension of actions and proceedings
pursuant to PD 902-A. They allege that there is a clear,
present, and imminent danger that their creditors will institute
CSPRI | 29
extrajudicial and judicial foreclosure proceedings against them
which will negatively affect their operations and be detrimental
to their investors, creditors, and the general public unless
restrained by the SEC. Furthermore, they allege that they
possess sufficient properties to cover its obligations amounting
to P12.7 billion but only foresee an inability to pay within a
period of 1 year. Hence, the petition.
SEC granted ASB’s petition for rehabilitation and appointed a
receiver.
Under ASB’s rehabilitation plan, they intended to satisfy their
obligation to MBTC in the form of a Dacion en Pago
Agreement of related properties subject to SEC approval.
Included in these properties were those they mortgaged to the
bank to secure their loans.
MBTC objected to the Plan, specifically opposing the mode of
payment offered by ASB. MBTC claimed the arrangement was
unacceptable because: (1) the values of the properties and the
obligations do not match, (2) waiving interests due would
result to a loss on their part, (3) there is no basis to release the
properties which serve as collateral for the loans.
Nevertheless, SEC still granted the Rehabilitation Plan
submitted by ASB Group. MBTC then filed a petition for review
with the CA. The CA likewise denied MBTC’s opposition. Thus,
this case.
In the meantime, MBTC assigned the loans and mortgages of
ASB Group to Asset Recovery Corporation (ARC). ARC then
assigned the same to Cameron Granville. Cameron Granville
filed a motion for intervention and manifested that it adops
MTBC’s petition and all other pleadings.
Petitioner contends that the approval of the Rehabilitation Plan
illegally compels it to accept, through a dacion en pago
arrangement, the mortgaged properties based on ASB
Group’s transfer values and to release part of the collateral. As
such, it would result in the diminution of the MTBC’s right to
enforce it lien on the mortgaged properties thus violating its
constitutional right against impairment of contracts and right to
due process.
Issue: W/N the approval of the rehabilitation plan violates the
constitutional right against impairment of contracts and
prejudices ASB’s creditors – NO.
Held: The SC held that the approval of the rehabilitation plan
does not impair MBTC’s lien over the mortgaged properties.
PD 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,
partnership 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 action for claims against
respondent corporations. Petitioners banks preferred status
over the unsecured creditors relative to the mortgage
liens is retained, and only the enforcement of such
preference is suspended.
The loan agreement between the parties have not been set
aside and MBTC may still enforce its preference when the
assets of ASB Group of companies are liquidated in the event
rehabilitation is no longer feasible. Considering that the
provisions of the loan agreements are merely suspended,
there is no impairment of contracts, specifically its lien on the
mortgaged properties.
CSPRI | 30
Likewise, there is no compulsion on part of the bank to accept
the dacion en pago arrangement based on ASB’s transfer
values and to condone interests and penalties. The Revised
Rehabilitation Plan explicitly states that the terms should be
mutually agreed upon, and even addresses the possibility that
creditors might reject the proposal.
Lastly, the Court emphasized that the purpose of rehabilitating
proceedings is to enable the company to gain new lease on
life thereby allows creditors to be paid their claims from its
earnings. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate
the financially distressed corporation to its former position of
successful operation and solvency. This is in consonance with
the State's equitable distribution of wealth to protect
investments and the public. The approval of the rehabilitation
plan by the SEC hearing panel, affirmed by both the SEC en
banc and the CA, is precisely in furtherance if the rationale
behind the law which is "to effect a feasible and viable
rehabilitation" of ailing corporations which affect the public
welfare.
Petition for review on certiorari is denied. CA decision is
affirmed.
17. Express Investments III v. Bayan Telecommunications,
687 SCRA 50 (2012) – Uson
FACTS:
Bayantel entered into several credit agreements with Express
Investments III Private Ltd. And Export Development Canada
and other creditors.It executed an Assignment Agreement in
favor of the lenders under the Omnibus Agreement wherein it
bound itself to assign, convey and transfer properties as
collateral security for the prompt and complete payment of its
obligations to the Omnibus Creditors. It also issued US$200
million worth of 13.5% Senior Notes pursuant to an Indenture
that it entered into with The Bank of New York as trustee for
the holders of said notes.
Foreseeing the impossibility of further meeting its obligations,
Bayantel sent a proposal for the restructuring of its debts to
the Bank Creditors and the Holders of Notes. Bayantel
suggested a 25% write-off of the principal owing to the Holders
of Notes. The Informal Steering Committee rejected the idea,
but accepted Bayantel’s proposal to pay the restructured debt,
pari passu, out of its cash flow. This pari passu or equal
treatment of debts, however, was opposed by the Bank
Creditors who invoked their security interest under the
Assignment Agreement.
Bayantel’s total indebtedness had reached US$674 million or
P35.928 billion in unpaid principal and interest, based on the
prevailing conversion rate of US$1 = P53.282.
Bank of New York filed a petition for the corporate
rehabilitation of Bayantel upon the instructions of the Informal
Steering Committee.
RTC issued Stay order for the suspension of all claims
against Bayantel and appointed Atty. Noval as the
Rehabilitation Receiver.
In his report, Atty. Noval classified Bayantel’s debts into three:
(1) those owed to secured Bank Creditors pursuant to the
Omnibus Agreements (Omnibus Creditors) in the total amount
of US$334 million or P17.781 billion; (2) those owed to
Holders of the Senior Notes and Bank Creditors combined
(Chattel Creditors), comprising US$625 million, of which
US$473 million (P25.214 billion) is principal and US$152
CSPRI | 31
million (P8.106 billion) is accrued unpaid interest; and (3)
those that Bayantel owed to persons other than Financial
Creditors/unsecured creditors in the amount of US$49 million
or P2.608 billion.
RTC approved the report and recommendation of Atty. Noval.
It directed the creation of a Monitoring Committee to
participate with the Receiver in monitoring and overseeing the
actions of the Board of Directors of Bayantel.
Court of Appeals dismissed the petitions in CA-G.R. SP Nos.
87100, 87111 and 87203 for lack of merit. In CA-G.R. SP No.
89894, the Court of Appeals rendered the assailed Decision
dated October 27, 2006 declaring null and void the November
9, 2004 and March 15, 2005 Orders of the Rehabilitation Court
insofar as they defined the powers and functions of the
Monitoring Committee.
ISSUES:
(1) whether the claims of secured and unsecured creditors
should be treated pari passu during rehabilitation;
(2) whether the pari passu treatment of creditors during
rehabilitation impairs the Assignment Agreement between
respondent and petitioners;
(3) whether a debtor may submit a rehabilitation plan in a
creditor-initiated rehabilitation;
(4) whether the write-off of respondent’s penalties and default
interest and recomputation of its past due interest violate the
pari passu principle; and
(5) whether petitioners are entitled to costs.
RULING:
(1) YES, the claims secured and unsecured creditors
should be treated pari passu during rehabilitation.
The resolution of the issue at hand rests on a determination of
whether secured creditors may enforce preference in payment
during rehabilitation by virtue of a contractual agreement.
Section 6(c), PD 902-A provides that upon the 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
accordingly.66 The suspension of action for claims against the
corporation under a rehabilitation receiver or management
committee embraces all phases of the suit, be it before the trial
court or any tribunal or before this Court.
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.
In the case of Alemar’s Sibal & Sons, Inc. v. Judge Elbinias,
the SC held that during rehabilitation receivership, the assets
are held in trust for the equal benefit of all creditors to preclude
one from obtaining an advantage or preference over another
CSPRI | 32
by the expediency of an attachment, execution or otherwise.
For what would prevent an alert creditor, upon learning of the
receivership, from rushing posthaste to the courts to secure
judgments for the satisfaction of its claims to the prejudice of
the less alert creditors.
As between the 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.
Since then, 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.
In Rizal Commercial Banking Corporation v. Intermediate
Appellate Court, the Court ruled that whenever a distressed
corporation asks the SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert preference
but shall stand on equal footing with other creditors. In 1999,
The Court qualified this ruling by stating that preferred
creditors of distressed corporations shall stand on equal
footing with all other creditors only after a rehabilitation
receiver or management committee has been appointed. More
importantly, the Court laid the guidelines for the treatment of
claims against corporations undergoing rehabilitation:
1. All claims against corporations, partnerships, or
associations that are pending before any court, tribunal, or
board, without distinction as to whether or not a creditor is
secured or unsecured, shall be suspended effective upon the
appointment of a management committee, rehabilitation
receiver, board, or body in accordance with the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured
creditors, but enforcement of such preference is equally
suspended upon the appointment of a management
committee, rehabilitation receiver, board, or body. In the event
that the assets of the corporation, partnership, or association
are finally liquidated, however, secured and preferred credits
under the applicable provisions of the Civil Code will definitely
have preference over unsecured ones.75 (Emphasis supplied)
Basically, once a management committee or rehabilitation
receiver has been appointed in accordance with PD 902-A, no
action for claims may be initiated against a distressed
corporation and those already pending in court shall be
suspended in whatever stage they may be. Notwithstanding,
secured creditors shall continue to have preferred status but
the enforcement thereof is likewise held in abeyance.
However, if the court later determines that the rehabilitation of
the distressed corporation is no longer feasible and its assets
are liquidated, secured claims shall enjoy priority in payment.
We perceive no good reason to depart from established
jurisprudence. While 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
CSPRI | 33
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."
(2) NO, the pari passu treatment of creditors during
rehabilitation does not impair the Assignment Agreement
between respondent and petitioners.
At this point, it bears stressing that the non-impairment clause
is a limitation on the exercise of legislative power and not of
judicial or quasijudicial power. In Lim, Sr. v. Secretary of
Agriculture & Natural Resources, et al., it was held that a law
within the meaning of this constitutional provision has
reference primarily to statutes and ordinances of municipal
corporations. Executive orders issued by the President
whether derived from his constitutional powers or valid
statutes may likewise be considered as such. It does not
cover, therefore, the exercise of the quasi-judicial power of a
department head even if affirmed by the President. The
administrative process in such a case partakes more of an
adjudicatory character. It is bereft of any legislative
significance. It falls outside the scope of the non-impairment
clause. The prohibition embraces enactments of a
governmental law-making body pertaining to its legislative
functions. Strictly speaking, it does not cover the exercise by
such law-making body of quasi-judicial power.
The Decision of the Rehabilitation Court is not a proper subject
of the Non-impairment Clause.
(3) YES, a debtor may submit a rehabilitation plan in a
creditor-initiated rehabilitation.
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.
(4) NO, write-off of respondent’s penalties and default
interest and recomputation of its past due interest do not
violate the pari passu principle.
Section 5(d), Rule 4 of the Interim Rules provides that the
rehabilitation plan shall include 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.
CSPRI | 34
Debt restructuring may involve conversion of the debt or any
portion thereof to equity, sale of the assets of the distressed
company and application of the proceeds to the obligation,
dacion en pago, debt relief or reduction, modification of the
terms of the loan or a combination of these schemes.
In this case, the approved Rehabilitation Plan provided for a
longer period of payment, the conversion of debt to 40% equity
in respondent company, modification of interest rates on the
restructured debt and accrued interest and a write-off or relief
from penalties and default interest. These recommendations
by the Receiver are perfectly within the powers of the
Rehabilitation Court to adopt and approve, as it did adopt and
approve. In so doing, no reversible error can be attributed to
the Rehabilitation Court.
The pertinent portion of the fallo of said court’s Decision dated
June 28, 2004 states:
1. The ruling on the pari passu treatment of all creditors whose
claims are subject to restructuring shall be maintained and
shall extend to all payment terms and treatment of past due
interest. (Emphasis supplied)
Thus, the court a quo provided for a uniform application of the
pari passu principle among creditor claims and the terms by
which they shall be paid, including past due interest. This is
consistent with the interpretation accorded by jurisprudence to
the pari passu principle that during rehabilitation, the assets of
the distressed corporation are held in trust for the equal benefit
of all creditors to preclude one from obtaining an advantage or
preference over another. All creditors should stand on equal
footing. Not any one of them should be given preference by
paying one or some of them ahead of the others.
As applied to this case, the pari passu treatment of claims
during rehabilitation entitles all creditors, whether secured or
unsecured, to receive payment out of Bayantel’s cash flow.
Despite their preferred position, therefore, the secured
creditors shall not be paid ahead of the unsecured creditors
but shall receive payment only in the proportion owing to them.
In any event, the debt restructuring schemes complained of
shall be implemented among all creditors regardless of class.
Both secured and unsecured creditors shall suffer a write-off of
penalties and default interest and the escalating interest rates
shall be equally imposed on them. We repeat, 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.
(5) NO, petitioner’s are not entitled to costs.
SC doubt the propriety of the Rehabilitation Court’s award for
costs. A perusal of the Order dated March 15, 2005 reveals
that the award to petitioner Bank of New York was made
pursuant to Section 1, Rule 142 of the Rules of Court, which
states:
SECTION 1. Costs ordinarily follow results of suit.- Unless
otherwise provided in these Rules, costs shall be allowed to
the prevailing party as a matter of course, but the court shall
have power, for special reasons, to adjudge that either party
shall pay the costs of an action, or that the same be divided,
as may be equitable. No costs shall be allowed against the
Republic of the Philippines unless otherwise provided by law.
(Emphasis supplied)
However, there is no prevailing party in rehabilitation
proceedings which is non-adversarial in nature. Unlike in
adversarial proceedings, the court in rehabilitation proceedings
CSPRI | 35
appoints a receiver to study the best means to revive the
debtor and to ensure that the value of the debtor’s property is
reasonably maintained pending the determination of whether
or not the debtor should be rehabilitated, as well as implement
the rehabilitation plan after its approval.107 The main thrust of
rehabilitation is not to adjudicate opposing claims but to
restore the debtor to a position of successful operation and
solvency. Under the Interim Rules, reasonable fees and
expenses are allowed the Receiver and the persons hired by
him, for those expenses incurred in the ordinary course of
business of the debtor after the issuance of the stay order but
excluding interest to creditors.
Moreover, while it is true that the Indenture between
petitioners and respondent corporation authorizes the Trustee
to file proofs of claim for the payment of reasonable expenses
and disbursements of the Trustee, its agents and counsel,
accountants and experts, such remedy is available only in
cases where the Trustee files a collection suit against
respondent company. Indubitably, the rehabilitation
proceedings in the case at bar is not a collection suit, which is
adversarial in nature.
18. Philippine Asset Growth Two, Inc. vs. Fastech Synergy
Philippines,Inc. (formerly First Asia System Technology,
Inc.)
Doctrine:
Facts: Respondents filed a verified Joint Petition for corporate
rehabilitation with prayer for the issuance of a Stay or
Suspension Order. Among the common creditors listed in the
rehabilitation petition was PDB,10 which had earlier filed a
petition for extrajudicial foreclosure of mortgage over the two
(2) parcels of land. The foreclosure sale was held on April 13,
2011, with PDB emerging as the highest bidder. Respondents
claimed that this situation has impacted on their chance to
recover from the losses they have suffered over the years,
since the said properties are being used by Fastech
Microassembly and Fastech Electronique in their business
operations, and a source of significant revenue for their owner-
lessor, Fastech Properties.
Hence, respondents submitted for the court’s approval their
proposed Rehabilitation Plan, which sought: (a) a waiver of all
accrued interests and penalties; (b) a grace period of two (2)
years to pay the principal amount of respondents’ outstanding
loans, with the interests accruing during the said period
capitalized as part of the principal, to be paid over a twelve
(12)-year period after the grace period; and (c) an interest rate
of four percent (4%) and two percent (2%) per annum (p.a.) for
creditors whose credits are secured by real estate and chattel
mortgages, respectively.
RTC-Makati issued a Commencement Order with Stay Order,
and appointed Atty. Rosario S. Bernaldo as Rehabilitation
Receiver, which the latter subsequently accepted.
RTC- Makati gave due course to the said petition, and,
thereafter, referred the same to the court-appointed
Rehabilitation Receiver, who submitted in due time her
preliminary report,24 opining that respondents may be
rehabilitated, considering that their assets appear to be
sufficient to cover their liabilities, but reserved her comment to
the Rehabilitation Plan’s underlying assumptions, financial
goals, and procedures to accomplish said goals after the
submission of a revised rehabilitation plan as directed by the
RTC- Makati, which respondents subsequently complied.
the court-appointed Rehabilitation Receiver submitted her
comments, opining that respondents may be successfully
rehabilitated, considering the sufficiency of their assets to
cover their liabilities and the underlying assumptions, financial
CSPRI | 36
projections and procedures to accomplish said goals in their
Rehabilitation Plan.
In a Resolution, the RTC-Makati dismissed the rehabilitation
petition despite the favorable recommendation of its appointed
Rehabilitation Receiver. It found the facts and figures
submitted by respondents to be unreliable in view of the
disclaimer of opinion of the independent auditors who
reviewed respondents’ 2009 financial statements,31 which it
considered as amounting to a “straightforward unqualified
adverse opinion.
In the same vein, it did not give credence to the unaudited
2010 financial statements as the same were mere photocopied
documents and unsigned by any of respondents’ responsible
officers. It also observed that respondents added new
accounts and/or deleted/omitted certain accounts.
Furthermore, it rejected the revised financial projections as the
bases for which were not submitted for its evaluation on the
ground of confidentiality.
Aggrieved, respondents appealed to the CA, with prayer for
the issuance of a temporary restraining order (TRO) and/or a
writ of preliminary injunction (WP I)
CA reversed the RTC Makati ruling and declared that the
Rehabilitation Plan is feasible and should be approved, finding
that respondents would be able to meet their obligations to
their creditors within their operating cash profits and other
assets without disrupting their business operations, which will
be beneficial to their creditors, employees, stockholders, and
the economy.
Issue: Whether or not the rehabilitation plan is a feasible?
Ruling: No. The court held that the rehabilitation Plan failed to
comply with the minimum requirements, i.e.: (a) material
financial commitments to support the rehabilitation plan; and
(b) a proper liquidation analysis, under Section 18, Rule 3 of
the 2008 Rules of Procedure on Corporate Rehabilitation80
(Rules), which Rules were in force at the time respondents’
rehabilitation petition. The rehabilitation receiver’s duty prior to
the court’s approval of the plan is to study the best way to
rehabilitate the debtor, and to ensure that the value of the
debtor’s properties is reasonably maintained; and after
approval, to implement the rehabilitation plan. Notwithstanding
the credentials of the court-appointed rehabilitation receiver,
the duty to determine the feasibility of the rehabilitation of the
debtor rests with the court. While the court may consider the
receiver’s report favorably recommending the debtor’s
rehabilitation, it is not bound thereby if, in its judgment, the
debtor’s rehabilitation is not feasible. Here, there appears to
be no concrete plan to build on respondents’ beleaguered
financial position through substantial investments as the plan
for rehabilitation appears to be pegged merely on financial
reprieves. CA, unfortunately, failed to address that there’s a
proper liquidation analysis. espondents’ unaudited financial
statements for the year 2010, and the months of February and
March 2011 were unaccompanied by any notes or explanation
on how the figures were arrived at. RTC-Makati’s observation
that respondents added new accounts and/or deleted/omitted
certain accounts, but failed to explain or justify the same.
Verily, respondents’ Rehabilitation Plan should have shown
that they have enough serviceable assets to be able to
continue its business operation The CA’s reliance on the
expertise of the court-appointed Rehabilitation Receiver, who
opined that respondents’ rehabilitation is viable, in order to
justify its finding that the financial statements submitted were
reliable, overlooks the fact that the determination of the validity
and the approval of the rehabilitation plan is not the
CSPRI | 37
responsibility of the rehabilitation receiver, but remains the
function of the court.
Note:
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.
Proper liquidation analysis - 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 were not shown. As such, the Court could not
ascertain 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.
Characteristics of an economically feasible rehabilitation plan:
a. The debtor has assets that can generate more cash if used
in its daily operations than if sold.
b.Liquidity issues can be addressed by a practicable business
plan that will generate enough cash to sustain daily
operations.
c.The debtor has a definite source of financing for the proper
and full implementation of a Rehabilitation Plan that is
anchored on realistic assumptions and goals.
Characteristics of a rehabilitation plan that is infeasible:
(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.
19. Bank of the Philippine Islands vs. Sarabia Manor Hotel
Corporation
G.R. No. 175844. July 29, 2013
Doctrine: 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 “cram-down” clause, 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 longterm viability over immediate
but incomplete recovery.
Facts:
Sarabia is a corporation and was incorporated 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 in the same year.
CSPRI | 38
The foregoing debts were secured by real estate mortgages
over several parcels of land owned by Sarabia and a
comprehensive surety agreement. By virtue of a merger, Bank
of the Philippine Islands (BPI) assumed all of FEBTC’s rights
against Sarabia.
Sarabia started to pay interests on its loans as soon as the
funds were released in October 1997. However, largely
because of the delayed completion of the New Building,
Sarabia incurred various cash flow problems. Thus, despite
the fact that it had more assets than liabilities at that time, it,
nevertheless, filed a Petition for corporate rehabilitation
(rehabilitation petition) with prayer for the issuance of a stay
order before the RTC as it foresaw the impossibility to meet its
maturing obligations to its creditors when they fall due.
RTC issued a Stay Orde and appointed Liberty B. Valderrama
as Sarabia’s rehabilitation receiver (Receiver). Thereafter, BPI
filed its Opposition.
RTC approved Sarabia’s rehabilitation plan as recommended
by the Receiver, finding the same to be feasible.
CA affirmed the RTC’s ruling with the modification of
reinstating the surety obligations of Sarabia’s stockholders to
BPI as an additional safeguard for the effective implementation
of the approved rehabilitation plan.
BPI’s contention: The approved rehabilitation plan did not give
due regard to its interests as a secured creditor in view of the
imposition of a fixed interest rate of 6.75% p.a. and the
extended loan repayment period.45 It likewise avers that
Sarabia’s misrepresentations in its
rehabilitation petition remain unresolved.
Sarabia’s Contention: the approved rehabilitation plan takes
into consideration all the interests of the parties and the terms
and conditions stated therein are more reasonable than what
BPI proposes
Issue: Whether CA correctly affirmed Sarabia’s rehabilitation
plan as approved by the RTC.
Held:
Yes. 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.
Section 23, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation56 (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 longterm viability over immediate
but incomplete recovery.
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. The court found that: a. Sarabia has
the financial capability to undergo rehabilitation; b. Sarabia has
the ability to have sustainable profits over a long period of
time; c. the interests of Sarabia’s creditors are wellprotected.
CSPRI | 39

Opposition of a distressed corporation’s majority creditor is
manifestly unreasonable if it counter-proposes unrealistic
payment terms and conditions which would, more likely than
not, impede rather than aid its rehabilitation Oppositions which
push for high interests rates are generally frowned upon in
rehabilitation proceedings given that the inherent purpose of a
rehabilitation is to find ways and means to minimize the
expenses of the distressed corporation during the
rehabilitation period.
In this case, the Court finds BPI’s opposition on the approved
interest rate to be manifestly unreasonable considering that:
(a) the 6.75% p.a. interest rate already constitutes a
reasonable rate of interest which is concordant with Sarabia’s
projected rehabilitation; and (b) on the contrary, BPI’s
proposed escalating interest rates remain hinged on the
theoretical assumption of future fluctuations in the market, this
notwithstanding the fact that its interests as a secured creditor
remain wellpreserved.
20. Veterans Philippine Scout Security Agency, Inc.
v. First Dominion Prime Holdings, Inc. Topic:
Rehabilitation Plan
Doctrine: 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.
Facts: Petitioner Veterans is a corporation duly organized
and existing under Philippine laws engaged in the business
of providing security services. Respondent FDPHI, on the
other hand, is a holding investment and management
company which owns and operates various subsidiaries and
affiliates. FDPHI and its subsidiaries filed with the RTC a
Petition for Rehabilitation where the attached Schedule of
Debts and Liabilities show outstanding liability of one of the
subsidiaries with petitioner Veterans. After finding the
petition sufficient in form and substance, the Rehabilitation
Court issued a Stay Order and later approved the
Rehabilitation Plan.
Subsequently, Veterans filed a complaint for sum of
money and damages against the debtor-subsidiary and/or
Atty. Jacob in his capacity as appointed receiver, to recover
unpaid security services. FDPHI filed a motion to dismiss on
the ground that Veterans’ claim is barred as the same had
been settled, determined and finally adjudicated in the
Amended Rehabilitation Plan approved by the Rehabilitation
Court.
Issue: Whether Veterans’ action to enforce 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. 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.
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,
CSPRI | 40
 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.
21. PANLILIO vs. RTC, BRANCH 51, City of Manila
641 SCRA 438
FEBRUARY 02, 2011
DOCTRINE: 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.
FACTS:
October 15, 2004, Jose Marcel Panlilio, Erlinda
Panlilio, Nicole Morris and Marlo Cristobal (petitioners), as
corporate officers of Silahis International Hotel, Inc. (SIHI),
filed with the Regional Trial Court (RTC) of Manila, Branch 24,
a petition for Suspension of Payments and Rehabilitation.
On October 18, 2004, the RTC of Manila, Branch 24, issued
an Order staying all claims against SIHI upon finding the
petition sufficient in form and substance. At the time,
however, of the filing of the petition for rehabilitation,
there were a number of criminal charges pending against
petitioners in Branch 51 of the RTC of Manila. These
criminal charges were initiated by respondent Social
Security System (SSS) and involved charges of violations
of Section 28 (h) of Republic Act 8282, or the Social
Security Act of 1997 (SSS law), in relation to Article 315 (1)
(b) of the Revised Penal Code, or Estafa.
Consequently, petitioners filed with the RTC of Manila,
Branch 51, a Manifestation and Motion to Suspend
Proceedings. Petitioners argued that the stay order issued by
Branch 24 should also apply to the criminal charges pending in
Branch 51. Petitioners, thus, prayed that Branch 51 suspend
its proceedings until the petition for rehabilitation was finally
resolved. Branch 51 issued an Order denying petitioners
motion to suspend the proceedings. The inescapable
conclusion is that the stay order issued by RTC Branch 24
does not include the above-captioned cases which are criminal
in nature.
The petitioners filed a petition for certiorari with the CA
assailing the Order of Branch 51.The CA issued a Decision
denying the petition. The CA discussed that violation of the
provisions of the SSS law was a criminal liability and was,
thus, personal to the offender. As such, the CA held that the
criminal proceedings against the petitioners should not be
considered a claim against the corporation and, consequently,
not covered by the stay order issued by Branch 24.
ISSUE: Whether or not the Stay Order issued by the Regional
Trial Court covers also violation of SSS Law for non remittance
of Premiums and Violation of Article 3 of RPC.
CSPRI | 41

RULING: NO. 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. It would be absurd for one
who has engaged in criminal conduct could escape
punishment by the mere filing of a petition for rehabilitation by
the corporation of which he is an officer. The prosecution of
the officers of the corporation has no bearing on the pending
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.
The Congress has recently enacted Republic Act No. 10142,
or the Financial Rehabilitation and Insolvency Act of 2010.
Section 18 thereof explicitly provides that criminal actions
against the individual officer of a corporation are not subject to
the Stay or Suspension Order in rehabilitation proceedings, to
wit:
The Stay or Suspension Order shall not apply:
xxxx
(g) any criminal action against individual debtor or owner,
partner, director or officer of a debtor shall not be affected by
any proceeding commenced under this Act.
Withal, based on the foregoing discussion, this Court rules that
there is no legal impediment for Branch 51 to proceed with the
cases filed against petitioners.
WHEREFORE, premises considered, the petition is DENIED.
22. New Frontier Sugar v RTC
G.R. NO. 165001 Jan 31, 2007
Facts:
New Frontier Sugar Corporation (petitioner) is a domestic
corporation engaged in the business of raw sugar
milling. Foreseeing that it cannot meet its obligations with its
creditors as they fell due, petitioner filed a Petition for the
Declaration of State of Suspension of Payments with Approval
of Proposed Rehabilitation Plan under the Interim Rules of
Procedure on Corporate Rehabilitation (2000). Finding the
petition to be sufficient in form and substance, RTC issued a
Stay Order, appointing Manuel B. Clemente as rehabilitation
receiver, ordering the latter to put up a bond, and setting the
initial hearing on the petition.
Equitable PCI Bank (respondent bank), filed a
Comment/Opposition with Motion to Exclude Property, alleging
that petitioner is not qualified for corporate rehabilitation, as it
can no longer operate because it has no assets left; that the
financial statements, schedule of debts and liabilities,
inventory of assets, affidavit of general financial condition, and
rehabilitation plan submitted by petitioner are misleading and
CSPRI | 42
inaccurate since its properties have already been foreclosed
and transferred to respondent bank before the petition for
rehabilitation was filed, and petitioner, in fact, still owes
respondent bank deficiency liability.
RTC issued an Omnibus Order terminating the proceedings
and dismissing the case. CA sustained the findings of the RTC
since petitioner no longer has sufficient assets and properties
to continue with its operations and answer its corresponding
liabilities, it is no longer eligible for rehabilitation.
Issues:
1. Whether the CA erred in prematurely excluding the
foreclosed property of petitioner and declaring that
petitioner has no substantial property to make
corporate rehabilitation feasible?
2. Whether the CA was correct in upholding the RTCs
dismissal of the petition for rehabilitation?
2. YES. The fact that there is a pending case for the
Ruling:
1. NO. The suspension of the enforcement of all claims
against the corporation is subject to the rule that it shall
commence only from the time the Rehabilitation
Receiver is appointed.
Under the Interim Rules, the RTC, within five (5) days
from the filing of the petition for rehabilitation and after
finding that the petition is sufficient in form and
substance, shall issue a Stay Order appointing a
Rehabilitation Receiver, suspending enforcement of all
claims, prohibiting transfers or encumbrances of the
debtors properties, prohibiting payment of outstanding
liabilities, and prohibiting the withholding of supply of
goods and services from the debtor. Any transfer of
property or any other conveyance, sale, payment, or
agreement made in violation of the Stay Order or in
violation of the Rules may be declared void by the court
upon motion or motu proprio.
In this case, respondent bank instituted the foreclosure
proceedings against petitioners properties on March
13, 2002 and a Certificate of Sale at Public Auction
was issued on May 6, 2002, with respondent bank as
the highest bidder. The mortgage on petitioners
chattels was likewise foreclosed and the Certificate of
Sale was issued on May 14, 2002. It also appears that
titles over the properties have already been transferred
to respondent bank. On the other hand, the petition for
corporate rehabilitation was filed only on August 14,
2002 and the Rehabilitation Receiver appointed on
August 20, 2002. Respondent bank, therefore, acted
within its prerogatives when it foreclosed and bought
the property, and had title transferred to it since it was
made prior to the appointment of a rehabilitation
receiver.
annulment of the foreclosure proceedings and auction
sales is of no moment. Until a court of competent
jurisdiction, which in this case is the RTC of
Dumangas, Iloilo, Branch 68, annuls the foreclosure
sale of the properties involved, petitioner is bereft of a
valid title over the properties.
CA was therefore correct in upholding the RTCs
dismissal of the petition for rehabilitation in view of the
fact that the titles to petitioners properties have already
passed on to respondent bank and petitioner has no
more assets to speak of, specially since petitioner does
not dispute the fact that the properties which were
foreclosed by respondent bank comprise the bulk, if not
the entirety, of its assets.
It should be stressed that the Interim Rules was
enacted to provide for a summary and non-adversarial
rehabilitation proceedings. This is in consonance with
the commercial nature of a rehabilitation case, which is
CSPRI | 43
 aimed to be resolved expeditiously for the benefit of all
the parties concerned and the economy in general.
23. State Investment House v. Citibank, 203 SCRA 9 (1991)
Facts: The foreign banks involved in the controversy are Bank
of America NT and SA, Citibank N.A. and Hongkong and
Shanghai Banking Corporation. On December 11, 1981, they
jointly filed with the Court of First Instance of Rizal a petition
for involuntary insolvency of Consolidated Mines, Inc. (CMI),
which they amended four days later.
- The petition for involuntary insolvency alleged:
1) that CMI had obtained loans from the three petitioning
banks;
2) that in November, 1981, State Investment House, Inc.
(SIHI) and State Financing Center, Inc. (SFCI) had separately
instituted actions for collection of sums of money and
damages in the Court of First Instance of Rizal against CMI;
nd that on application of said plaintiffs, writs of preliminary
attachment had been issued which were executed on "the
royalty/profit sharing payments due CMI from Benguet
Consolidated Mining, Inc;" and
3) that CMI had "committed specific acts of insolvency as
provided in Section 20 of the Insolvency Law, to wit:
xxx xxx xxx
5. that he (CMI) has suffered his (CMI's) property to
remain under attachment or legal process for three
days for the purpose of hindering or delaying or
defrauding his (CMI's) creditors;
xxx xxx xxx
11. that being a merchant or tradesman he (CMI) has
generally defaulted in the payment of his (CMI's)
current obligations for a period of thirty days; . . .
- The petition was opposed by State Investment House, Inc.
(SIHI) and State Financing Center, Inc. (SFCI). It claimed that
the Court had no jurisdiction because the alleged acts of
insolvency were false: the writs of attachment against CMI had
remained in force because there were "just, valid and lawful
grounds for the(ir) issuance," and CMI was not a "merchant or
tradesman" nor had it "generally defaulted in the payment of
(its) obligations for a period of thirty days . . . ;" and the Court
had no jurisdiction to take cognizance of the petition for
insolvency because petitioners are not resident creditors of
CMI in contemplation of the Insolvency Law.
- CMI filed its Answer to the petition for insolvency, asserting in
the main that it was not insolvent, and later filed a "Motion to
Dismiss Based on Affirmative Defense of Petitioner's Lack of
Capacity to Sue," echoing the theory of SIHI and SFCI that the
petitioner banks are not "Philippine residents."
- SIHI and SFCI then filed a Motion for Summary Judgment
dated May 23, 1983 "on the ground that, based on the
pleadings and admissions on record, the trial court had no
jurisdiction to adjudicate CMI insolvent since the petitioners
(respondent foreign banks) are not "resident creditors" of CMI
as required under the Insolvency Law."
RTC: In favor of petitioners. It ruled that the Insolvency Court
has no jurisdiction to adjudicate debtor CMI as insolvent
because the foreign banks are not “residents of the
Philippines”.
CSPRI | 44
CA: Reversed. The 3 banks are residents of the Philippines for
the purpose of doing business in the Philippines, and that
Insolvency Law was designed for the benefit of both creditors
and debtors.
Issue: Whether or not foreign banks licensed to do business in
the Philippines, may be considered "residents of the Philippine
Islands" within the meaning of Section 20 of the Insolvency
Law.
Held: The answer cannot be found in the Insolvency Law
itself, which contains no definition of the term, resident, or any
clear indication of its meaning. There are however other
statutes, albeit of subsequent enactment and effectivity, from
which enlightening notions of the term may be derived.
The National Internal Revenue Code declares that the term
"'resident foreign corporation' applies to a foreign corporation
engaged in trade or business within the Philippines," as
distinguished from a "non-resident foreign corporation" . . .
(which is one) not engaged in trade or business within the
Philippines."
The Offshore Banking Law, Presidential Decree No. 1034,
states "that branches, subsidiaries, affiliation, extension offices
or any other units of corporation or juridical person organized
under the laws of any foreign country operating in the
Philippines shall be considered residents of the Philippines."
The General Banking Act, Republic Act No. 337, places
"branches and agencies in the Philippines of foreign banks . . .
(which are) called Philippine branches," in the same category
as "commercial banks, savings associations, mortgage banks,
development banks, rural banks, stock savings and loan
associations" (which have been formed and organized under
Philippine laws), making no distinction between the former and
the later in so far, as the terms "banking institutions" and
"bank" are used in the Act, declaring on the contrary that in "all
matters not specifically covered by special provisions
applicable only to foreign banks, or their branches and
agencies in the Philippines, said foreign banks or their
branches and agencies lawfully doing business in the
Philippines "shall be bound by all laws, rules, and regulations
applicable to domestic banking corporations of the same class,
except such laws, rules and regulations as provided for the
creation, formation, organization, or dissolution of corporations
or as fix the relation, liabilities, responsibilities, or duties of
members, stockholders or officers or corporations."
- This Court itself has already had occasion to hold 25 that a
foreign corporation licitly doing business in the Philippines,
which is a defendant in a civil suit, may not be considered a
non-resident within the scope of the legal provision authorizing
attachment against a defendant not residing in the Philippine
Islands;".
- Our laws and jurisprudence indicate a purpose to assimilate
foreign corporations, duly licensed to do business here, to the
status of domestic corporations. Obviously, the assimilation of
foreign corporations authorized to do business in the
Philippines "to the status of domestic corporations," subsumes
their being found and operating as corporations, hence,
residing, in the country.
- The Court cannot thus accept the petitioners' theory that
corporations may not have a residence (i.e., the place where
they operate and transact business) separate from their
domicile (i.e., the state of their formation or organization), and
that they may be considered by other states as residents only
for limited and exclusive purposes. The Court cannot thus
accept the petitioners' theory that corporations may not have a
residence (i.e., the place where they operate and transact
business) separate from their domicile (i.e., the state of their
CSPRI | 45
formation or organization), and that they may be considered by
other states as residents only for limited and exclusive
purposes.
- Neither can the Court accept the theory that the omission by
the banks in their petition for involuntary insolvency of an
explicit and categorical statement that they are "residents of
the Philippine Islands," is fatal to their cause. In truth, in light of
the concept of resident foreign corporations just expounded,
when they alleged in that petition that they are foreign banking
corporations, licensed to do business in the Philippines, and
actually doing business in this Country through branch offices
or agencies, they were in effect stating that they are resident
foreign corporations in the Philippines.
24. Metropolitan Bank vs SF Naguilat
Doctrine: With the declaration of insolvency of the debtor,
insolvency courts ’obtain full and complete jurisdiction over all
property of the insolvent and of all claims by and against [it.]’ It
follows that the insolvency court has exclusive jurisdiction to
deal with the property of the insolvent. Consequently, after the
mortgagor-debtor has been declared insolvent and the
insolvency court has acquired control of his estate, a
mortgagee may not, without the permission of the insolvency
court, institute proceedings to enforce its lien. In so doing, it
would interfere with the insolvency court’s possession and
orderly administration of the insolvent’s properties.
Facts:
- In 1997, Sps Naguiat and SF Naguiat Enterprises Inc
executed a real estate mortgage in favor of Metrobank.
In March 2005, SF Naguiat obtained a loan which was
likewise secured by the 1997 real estate mortgage.
- In July 2005, SF Naguiat filed a petition for voluntary
insolvency. RTC granted the petition and declared SF
Naguiat insolvent; directing the Deputy Sheriff to take
possession of all the properties of S.F. Naguiat until the
appointment of a receiver/assignee; and forbidding
payment of any debts due, delivery of properties, and
transfer of any of its properties.
- Pending the appointment of a receiver,the court
directed the creditors, including Metrobank, to file their
respective Comments on the Petition.In lieu of a
Comment, Metrobank filed a Manifestation and Motion
informing the court of Metrobank's decision to withdraw
from the insolvency proceedings because it intended to
extrajudicially foreclose the mortgaged property to
satisfy its claim against S.F. Naguiat.
- On November 8, 2005, Metrobank instituted an
extrajudicial foreclosure proceeding against the
mortgaged property and sold the property at a public
auction. Afterwards, prepared the Certificate of Sale
and submitted it for approval to Clerk of Court and
Executive Judge Bernardita Gabitan-Erum. However,
Executive Judge Gabitan-Erum issued the Order dated
December 15, 2005 denying her approval of the
Certificate of Sale in view of the July 12, 2005 Order
issued by the insolvency court. Metrobank's
subsequent Motion for Reconsideration was also
denied in the Order dated April 24, 2006.
- The Court of Appeals held that leave of court must be
obtained from the insolvency court whether the
foreclosure suit was instituted judicially or
extrajudicially so as to afford the insolvent estate's
proper representation (through the assignee) in such
action and "to avoid the dissipation of the insolvent
debtor's assets in possession of the insolvency court
without the latter's knowledge
Issue:
CSPRI | 46
WoN prior leave of the insolvency court is necessary before a
secured creditor, like petitioner Metropolitan Bank and Trust
Company, can extra-judicially foreclose the mortgaged
property.
Ruling:
- Yes. It is the policy of Act No. 1956 to place all the
assets and liabilities of the insolvent debtor completely
within the jurisdiction and control of the insolvency
court without the intervention of any other court in the
insolvent debtor's concerns or in the administration of
the estate. It was considered to be of prime importance
that the insolvency proceedings follow their course as
speedily as possible in order that a discharge, if the
insolvent debtor is entitled to it, should be decreed
without unreasonable delay. "Proceedings of [this]
nature cannot proceed properly or with due dispatch
unless they are controlled absolutely by the court
having charge thereof."
- Act No. 1956 continued to remain in force and effect
until its express repeal on July 18, 2010 when Republic
Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act of 2010, took effect.
Republic Act No. 10142 now provides for court
proceedings in the rehabilitation or liquidation of
debtors, both juridical and natural persons, in a "timely,
fair, transparent, effective and efficient" manner
- Act No. 1956 impliedly requires a secured creditor to
ask the permission of the insolvent court before said
creditor can foreclose the mortgaged property.
- With the declaration of insolvency of the debtor,
insolvency courts "obtain full and complete jurisdiction
over all property of the insolvent and of all claims by
and against [it.]" It follows that the insolvency court has
exclusive jurisdiction to deal with the property of the
insolvent. Consequently, after the mortgagor-debtor
has been declared insolvent and the insolvency court
has acquired control of his estate, a mortgagee may
not, without the permission of the insolvency court,
institute proceedings to enforce its lien. In so doing, it
would interfere with the insolvency court's possession
and orderly administration of the insolvent's properties.
- Here, the foreclosure and sale of the mortgaged
property of the debtor, without leave of court,
contravene the provisions of Act No. 1956 and violate
the Order dated July 12, 2005 of the insolvency court
which declared S.F. Naguiat insolvent and forbidden
from making any transfer of any of its properties to any
person.
25. Pacific Coast v. Chinese Groceries Assn.,65Phil.375
(1938)
Doctrine: The so-called current account, savings and fixed
deposits made with the insolvent bank, are commercial and
should be governed by the Code of Commerce, and the
classification and preference of the credits involved in this
liquidation should be determined in accordance with the
Insolvency Law, No. 1956, as amended, in its sections 48, 49
and 50. The current account and the so-called savings and
fixed deposits are not deposits in the sense that this contract is
defined by the Code of Commerce and they do not have the
legal effect and classification that is given to this contract in
articles 908 and 909, paragraph 3, of the Code of Commerce,
and section 48, paragraph 3, of the Insolvency Law. The
claims by virtue of a current account and the so-called savings
and fixed deposits are not preferred.
Facts:
CSPRI | 47
In its appealed decision, the court said that having instituted
these proceedings for the liquidation of the assets of the
Mercantile Bank of China and the payment of its obligations,
as under its financial condition it could not continue its
operations without danger of greater losses, the court declared
the said bank in a state of liquidation on December 4, 1931,
pursuant to the provisions of section 1639 of the
Administrative Code, as amended by Act No. 3519. Some
presented their claims against the aforesaid bank with the
Bank Commissioner, while others presented theirs before this
court. The Bank Commissioner filed his report with the court in
April, 1932, and in view of the fact that other claims had been
subsequently presented, the court, by its order of July 15,
1932, appointed Mr. Fulgencio Borromeo, ex-president of the
Bank of the Philippine Islands, Commissioner, to hear said
claims and those presented subsequently by the creditors,
with instructions that he submit to the court his report
containing his findings of fact and his recommendations. By
virtue of the aforesaid order of the court, Mr. Borromeo
properly acted not merely as a commissioner but as a referee,
with the consent of all the creditors who substantiated their
claims before him, and his acts in such capacity were
approved by the court in its order of October 31, 1933.
Issue/s: Whether The court erred in declaring the claims of the
depositors of the insolvent bank, Mercantile Bank of China, to
be preferred and not ordinary claims?
Ruling: The claims by virtue of a current account and the so-
called savings and fixed deposits are not preferred.
The so-called current account, savings, and fixed deposits
made with the insolvent bank, are commercial and should be
governed by the Code of Commerce, and that the
classification and preference of the credits involved in this
liquidation should be determined in accordance with the
Insolvency Law, No. 1956, as amended, in its sections 48, 49
and 50. The current account and the so-called savings and
fixed deposits are not deposits in the sense that this contract is
defined by the Code of Commerce and they do not have the
legal effect and classification that is given to this contract in
articles 908 and 909, paragraph 3, of the Code of Commerce,
and section 48, paragraph 3, of the Insolvency Law.
A deposit takes place when the thing which constitutes its
object is delivered to the depositary, with the obligation to
preserve it in the manner he receives the article deposited
(arts. 305 and 306 of the Code of Commerce). Consequently,
it is necessary in a commercial deposit that the thing received
be preserved, thus precluding the use thereof by the
depositary. This condition is so essential in a deposit that it
loses its character and is converted into another contract if,
with the consent of the depositor, the depositary disposes of
the articles on deposit (art. 309 of the Code of Commerce). In
the contract of current account the bank may dispose of the
money thus received for its operations, its only obligation
being to attend to the payment of the checks issued by the
current account depositor. This is deducible from the legal
provision requiring the bank to have in its possession at all
times an amount equal to 18 per cent of the total amount
received by it in current account, a provision which would be
purposeless if, at any rate, the bank should be under a duty to
keep the same amount received and could not use it in its
operations. It is, therefore, plain that the contract of current
account bears an aspect which makes it essentially
incompatible with a deposit.
Articles 908 and 909 of the Code of Commerce and section 48
of the Insolvency Law, in enumerating the properties which,
being in the possession of the insolvent, should, however, be
considered as belonging to another because the ownership
thereof has not been transferred, include the properties
received on deposit, but exclude those deposited on current
account, which means that the latter does not belong to
CSPRI | 48
anyone but the insolvent who, therefore, may use the same in
its operations. The mere fact that properties on deposit are
considered as belonging to another, while those received on
current account are not (arts. 908 and 909, pars. 3 and 6 of
the Code of Commerce) is tantamount to a declaration that a
current account is not a deposit.
The same circumstance that the law, in excluding from
properties considered as belonging to another those received
on current account, exclude them from properties merely
remitted to the insolvent (sec. 48, par. 6, of the Insolvency
Law) and not from the properties received on deposit (sec. 48,
par. 3, of the same law), is proof that it does not in any wise
consider a current account as a deposit.
At any rate, the properties remitted on current account do not
constitute, under section 48, paragraph 6, of the Insolvency
Law, properties belonging to another which should be placed
at the disposal of their rightful owners. On the other hand,
neither do they constitute preferred credits in accordance with
section 50. They should, therefore, be considered as ordinary
credits pursuant to section 49 of the same law.
What has been said so far is applicable with more reason to
the so-called savings and fixed deposits. For the foregoing
reasons, The claims by virtue of a current account and the so-
called savings and fixed deposits are not preferred.
26. Arabesque Industrial Philippines, Inc. vs. Court of
Appeals
FACTS
 On 19 April 1989, Arabesque Industrial Philippines,
Inc. (AIPI), bought at public auction the tugboat MT
Rover of respondent PNOC Dockyard and
Engineering Corp. (PDEC).
 Despite notice by PDEC that it was imposing lay day
charges if the boat was not removed from its premises
by 9 May 1989, AIPI did not remove the boat; instead,
it engaged PDEC to repair it.
 The bill for the repair rose to P1,681,896.30. Petitioner
AIPI paid only P329,115.00 leaving a balance of
P1,352,781.30.
 On 7 September 1990, AIPI received from Atty.
Rosendo Chaves, a notary public, a notice for the sale
of the boat at public auction slated for 14 September
1990, pursuant to Arts. 2241 (5), 2243 and 2212 of the
Civil Code. Under Art. 2241, credits for the marking,
repairs, safekeeping or preservation of personal
property, on the movable-made, repaired, kept or
possessed constitutes fifth in the order of preference
(par. 5), such credit being considered under Art. 2245
as a mortgage or lien within the purview of the legal
provisions governing insolvency. From the time of
judicial demand, the interest due on such credit shall
earn legal interest according to Art. 2212 although the
obligation may be silent on this point.
 Subsequently, AIPI sued PDEC and Notary Public
Rosendo Chaves for the nullification of the public
auction sale plus accounting, with prayer for
preliminary injunction before RTC, Branch 147, Makati,
contending that Arts. 2241 and 2243 of the Civil Code
cited by PDEC were not applicable as AIPI was not yet
judicially declared insolvent, AIPI praying for immediate
injunction of the auction sale and for PDEC to accept
P494,593.60 as reasonable and complete payment of
its services.
o On 12 September 1990, Judge Teofilo Guadiz,
Jr., of the Regional Trial Court, Makati, enjoined
PDEC and Notary Public Chaves from holding
the slated public auction sale until after its
hearing set 1 October 1990.
CSPRI | 49
  On 20 September 1990, PDEC filed an omnibus motion
in opposition of the injunction and praying for the lifting
of the TRO, for summary judgment upon admission of
AIPI of the liability of P494,593.60, and for the
dismissal of the complaint.
o On 3 October 1990, upon filing by AIPI of a
bond of P100,000.00, the trial court issued a
preliminary injunction against the sale of the
boat.
 AIPI moved to amend the complaint, which was
granted, and on 23 November 1990, the amended
complaint was admitted upon a finding that there was
no alteration of the cause of action.
o On 26 November 1990, upon AIPI posting a
bond of P1 Million, and considering the answer
of PDEC admitting the ownership of the boat by
AIPI, the court granted the replevin and ordered
the return of the boat to AIPI.
 PDEC filed an Urgent Motion to Annul, Revoke, Recall
and Lift the Order Admitting the Amended Complaint
dated November 23, 1990 and Order of Seizure dated
November 26, 1990.
o Meanwhile, on 14 December 1990, the sheriffs
enforcing the writ of replevin took possession of
the boat and delivered the same to AIPI.
 After denial of the motion of PDEC on 20 March 1991,
it filed a petition for certiorari and prohibition with the
Court of Appeals under Rule 65 seeking to set aside
the orders of the trial court of 23 November 1990, 26
November 1990, and 20 March 1991 admitting the
amended complaint, granting the writ of replevin, and
denying the urgent motion of PDEC, respectively.
CA: set aside the order of 26 November 1990 and directed
the return of the boat to PDEC on the ground that the chattel
was not wrongfully detained but possessed in the exercise of
PDEC of a mechanics lien for its unpaid repair bills.
AIPI contentions: It argues that respondent appellate court
should not have set aside the writ of replevin because AIPI is
the owner of the boat and that the right of an owner is superior
to that of a mere lien holder. AIPI contends that lay day fees
are incurred by it for continuous possession of the boat by
PDEC, and that AIPI should not be made to suffer for PDECÊs
refusal to release the boat. Moreover, the return of the boat to
PDEC should have been refused as it has not posted a
counterbond. AIPI argues that the petition should have been
dismissed by the appellate court and remanded the case to
the court a quo as it involved factual issues, like the
determination of reasonable expenses for the repair. Finally,
AIPI disputes the resolution of respondent appellate court on
the challenge to the interlocutory orders of the court a quo
because such orders are unappealable.
PDEC contentions: in its comment, points to the admission
by AIPI of delivering the boat to PDEC for repair as fatal to the
instant petition. PDEC asserts its right to retain possession of
the chattel until the repair fees are fully settled, pursuant to
Arts. 1731, 2098, 2105, 2112 and 2122 of the Civil Code. In its
reply, AIPI reiterates the arguments in its petition, and adds
that Art. 1731 of the Civil Code, which states that he who has
executed works on a movable has the right to retain it by way
of pledge until paid, does not apply because it actually
remitted payments to PDEC.
ISSUE whether the writ of replevin was properly issued by the
court a quo. NO.
whether the interlocutory orders issued herein are
appealable. NO.
HELD
CSPRI | 50
 1. On the first issue, respondent Court of Appeals
correctly set aside the writ of replevin. Such writ cannot
be properly directed against a lawful possessor of a
chattel, and the matter of ownership as well as
incurring of additional lay day fees by the continued
detention of the boat by PDEC is therefore
inconsequential. The requirement of posting a
counterbond to reacquire possession of the chattel
subject of the writ, does not apply in the case at bar
because that presupposes a previous valid writ. In the
case before Us, however, the chattel was ordered
returned to PDEC because the writ was improperly
issued. Definitely, it was not issued on the basis of the
non-posting of a counterbond.
2. As regards the second issue, interlocutory orders,
because they do not dispose of the case on the merits,
are not appealable; consequently, they were correctly
made subject of a petition for certiorari/prohibition
before the Court of Appeals under Rule 65 of the Rules
of Court.
26. Barretto vs. Villanueva 1 SCRA 288 (1961)
(note: 2 case to isang 1961 and 1962. Please read the
Resolution on motion to consider, I also made a digest. Mas
important yung 1962 but read the facts based on 1961)
Doctrine in 1961:
Nothing in the New Civil Code indicates that its
provisions on concurrence and preference of credits are
applicable only to the insolvent debtor. If those provisions are
intended only to insolvency cases, then other creditor-debtor
relationship where there are concurrence and preference of
credits, would be left without any governing rules, a view that
would render purposeless the laws on insolvency
DOCTRINE in 1962:
There being no insolvency or liquidation, the claim of
the appellee, as unpaid vendor, did not require the character
and rank of a statutory lien co-equal to the mortgagee's
recorded encumbrance, and must remain subordinate to the
latter.
FACTS:
Rosario Cruzado mortgaged their land to Rehabilitation
Finance Corporation (RFC) as a security for a loan. As she
failed to pay some installments, the mortgaged land was
foreclosed and the RFC acquired the property, subject to
repurchase. The land was sold back to Cruzado conditionally
to pay the remaining balance.
Cruzado then sold the land, with Court Authority to sell
and consent from RFC to Pura Villanueva, with the condition
that Pura will continue to pay RFC. Villanueva then executed a
promissory note in favor of Rosario Cruz and was able to
transfer the title to her name.
Pura then mortgaged the said land to Magdalena
Barretto as a security for a loan. Villanueva however failed to
pay the remaining installment on her promissory note in favor
of Cruzado. Cruzado filed a recovery of the land against
Villanueva. Pending trial, a lien was constituted upon the
property in favor of Cruzado and such was annotated at the
back of TCT. Trial court rendered a decision ordering
Villanueva to pay Cruzado. Villanueva however also failed to
pay Barretto hence, an action for foreclosure and after such
Cruzado filed a “vendor’s lien”
The court ordered the annotation of the lien at the TCT and
decreeing that should it be sold at public auction in the
foreclosure, Cruzado sould be credited with their pro-rata
share pursuant to Art 2248, 2249 in relation to Art. 2242. par.
CSPRI | 51
2. Of Civil Code. Barretto filed an MR. Barretto as a higher
bidder in the auction.
Article 2242 of the new Civil Code
enumerates the claims, mortgages
and liens that constitute an
encumbrance on specific immovable
property, and among them are:
"(2) For the unpaid price of real
property sold, upon the immovable
sold"; and "(5) Mortgage credits
recorded in the Registry of Property."
Article 2249 of the same Code
provides that "if there are two or more
credits with respect to the same
specific real property or real rights,
they shall be satisfied pro-rata, after
the payment of the taxes and
'assessments upon the immovable
property or real rights."
RTC- Barretto be issued certificate of title subject to vendor’s
lien of the Cruzado’s.
Barretto- MR from the decision but was denied.
Barretto appealed claiming that Cruzado’s alleged action was
merely to recover the balance of promissory note cannot be a
basis for a vendo’s lien arguing that it should have been an
action to recover the remaining obligation of promissor and
argued that preference and concurrence of credit be
applicable only to insolvent debtor.
ISSUE: Whether or not Cruzado’s action may prosper being
as such was also not registered? And Does preference and
concurrence of credit be applicable only to insolvent debtor?
YES and NO.
HELD:
First, Applying the aboved provisions of the Civil Code,
Cruzado as an unpaid vendor of the property has the right to
share pro-rata with the proceed of the foreclosure sale with
Barretto. It must be noted that under Art 2242 it enumerated
the preferred claims and mortgages and liens of immovable
specifically requires that —unlike the unpaid price of real
property sold—mortgage credits, in order to be given
preference, should be recorded in the Registry of Property.
Although the unpaid vendor’s lien is not registered, it
should not prejudice the right of Cruzado. The law, however,
does not make any distinction between registered and
unregistered vendor's lien, which only goes to show that any
lien of that kind enjoys the preferred credit status.
Second, As to th e point made that the articles of the
Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that
nothing in the law shows any such limitation. If we are to
interpret this portion of the Code as intended only for
insolvency cases, then other creditor-debtor relationships
where there are concurrence of credits would be left without
any rules to govern them, and it would render purposeless the
special laws on insolvency.
RESOLUTION ON MOTION TO RECONSIDER (1962)
Appellants, spouses Barretto, have filed a motion vigorously
urging that our decision be reconsidered and set aside, and a
new one entered declaring that their right as mortgagees
remain superior to the unrecorded claim of herein appellee for
the balance of the purchase price of her rights, title, and
interests in the mortgaged property
CSPRI | 52
The court reached to a conclusion that their original decision
must be reconsidered and set aside.
Under the system of the Civil Code of the Philippines,
only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under Article
2242 enjoy no priority among themselves, but must be paid
pro-rata i.e., in proportion to the amount of the respective
credits.
Thus, Article 2249 provides:
If there are two or more credits with respect to the same
specific real property or real rights, they, shall be satisfied pro-
rata after the payment of the taxes and assessments upon the
immovable property or real rights."
The full application of Articles 2249 and 2242 demands that
there must be first some proceedings where the claims of
all the preferred creditors may be bindingly adjudicated, such
as:
1. insolvency,
2. the settlement of decedents estate under Rule 87 of the
Rules of Court, or
3. other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
— and Preference of Credits applies.
The claims or credits enumerated in the two preceding
articles" shall be considered as mortgages or pledges of real
or personal property, or liens within the purview of legal
provisions governing insolvency.
And the rule is further clarified in the Report of the
Code Commission, as follows:
The question as to whether the Civil Code and the insolvency
Law can be harmonized is settled by Article 2243. The
preferences named in Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance with the Insolvency
Law."
Rule:
Thus, it becomes evident that one preferred creditor's third-
party claim to the proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding contemplated by
law for the enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain
the pro-rata dividend corresponding to each, because the
rights of the other creditors likewise" enjoying preference
under Article 2242 cannot be ascertained.
Held: There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not require the character and
rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.
27. STATE INVESTMENT v COURT OF APPEALS
DOCTRINE: In any rehabilitation/receivership proceedings
where claims of several creditors shall have to be resolved,
the provisions of the Title XIX of the Civil Code Concurrence
FACTS: Petitioner filed a motion for reconsideration imputing
upon this Court the principal error of having that the doctrine in
PCIB vs. Court of Appeals (172 SCRA 436 [1989]), had
already been abrogated by the rulings of this Court in the
cases of Alemars Sibal &Sons vs. Elbinias (186 SCRA 94
[1990]); BF homes Inc. vs. Court of Appeals, 190 SCRA 262
[1990]; Araneta vs. Court of Appeals, 211 SCRA 390 [1992;
and RCBC vs. Court of Appeals, 213 SCRA 830 [1992]),
where we ruled that whenever a distressed corporationasks
CSPRI | 53
the Securities and Exchange Commission (SEC) for
rehabilitation and suspension of payments, preferred
creditors may no longer asserts such preference, but shall
stand on equal footing with other creditors.
Petitioner points out that:
That of the above-cited cases where the Court ruled contrary
to PCIB, thereby abandoning the ruling in said case, only the
RCBC Case could have complied with the Constitutional
requirement that no doctrine or principle of law rendered en
banc or in division may be modified or reversed except by the
Court sitting en banc (Par. 3, Section 4, Article VIII, 1987
Constitution), because only the RCBC Case was rendered by
the Court en banc.
Petitioner submits that the judgment in RCBC has not yet
attained finality as the motion for reconsideration therein up to
the present time, has remained pending and unresolved, and
could, therefore, not be relied upon in the instant case as a
precedent.
ISSUE: Whether or not petitioner State Investment, as
mortgagee of respondent PBM, may be declared to have
highest preference over specific property subject of the
mortgage, despite the pendency of rehabilitation/receivership
proceeding pending before the SEC.
HELD: NO.
In any rehabilitation/receivership proceedings where claims of
several creditors shall have to be resolved, the provisions of
the Title XIX of the Civil Code Concurrence and Preference of
Credits applies. In the present case where a mortgage piece of
realty is involved, the following relevant articles govern, to wit:
Art. 2242 - With reference to specific immovable property and
real rights of the debtor, the following claims, mortgages and
liens shall be preferred and shall constitute an encumbrance
on the immovable or real right:(1) Taxes due upon the land or
building;(2) For unpaid price of real property, sold upon the
immovable sold;(3) Claims of laborers, mason, mechanics and
other workmen, as well as architects, engineers and
contractors, engaged in the construction, reconstitution or
repair of buildings, canals or other works, upon said buildings,
canals or other works;(4) Claims of furnishers of materials
used in the construction, reconstruction, or repair of buildings,
canals or other works, upon said buildings, canals or other
works;(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;(6) Expenses for the
preservation or improvement of real property when the law
authorizes reimbursement, upon the immovable preserved or
improved;(7) Credits annotated in the Registry of Property in
virtue of a judicial order, by attachment or execution, upon the
property affected, and only as to the latter credits;(8) Claims of
co-heirs for warranty in the partition of an immovable among
them, upon the real property thus divided;(9) Claims of donors
of real property of pecuniary charges or other conditions
imposed upon the donee, upon the immovable donated;(10)
Credits of insurers, upon the property insured, for the
insurance premium for two years.Art. 2243. The claims of
credits enumerated in the two preceding articles shall be
considered as mortgagees or pledges of real or personal
property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No.1, article 2241,
and No. 1 , article 2242, shall first be satisfied.At best this
issue should be resolve in the light of the rehabilitation plan
approved by the SEC on January 3, 1990 which includes the
schedule of payment. Verily, this rehabilitation plan is not
included among the matters submitted for review in the
present petition. On this score alone, without having to refer to
any of the above/cited decisions yet, the instant petition may
already be dismissed. We shall reserve our ruling on whether
or not petitioner may be adjudge to be preferred creditor at the
CSPRI | 54
proper opportunity when the entire judgment of the SEC shall
be before us for review.
However, if only to appease petitioner on its insistence that the
instant case should be consolidated with the RCBC as these
two cases involve similar facts and issues, we rule to deny
such prayer first, because the decision in RCBC had long
been rendered, and second, the factual premises in RCBC are
not on all fours with the instant case.
The issues involved in the RCBC Case are, therefore,
essentially different from the issues in the instant case.There,
the question of retroactive application of the writ of injunction
to the foreclosure proceedings was involved.
Petition in the RCBC Case Necessarily involves issues
concerning the requisite elements of a void judgment, such as
lack of jurisdiction and/or fraud, accident, mistake or excusable
negligence.
In the present petition, the foreclosure sale of the mortgaged
property was declared by this Court in G.R. No. 87053 to be
totally null and void, and petitioner SIHIs claim was
accordingly referred to the SEC for determination of the
preferences or priorities under the law in the settlement of
claims of firms under receivership or liquidation. Hence, unlike
in RCBC, in the present case there are no longer any previous
foreclosure proceedings to speak of. Also, in the present
petition, the factual considerations in the issuance of the
pertinent rehabilitation plan where SIHIs claim had been
reportedly included in the schedule of payment finds
relevance. This was not true in the RCBC Case.

CSPRI | 55