1 BPI FAMILY SAVINGS BANK, INC. VS. ST. MICHAEL MEDICAL CENTER, INC.,
G.R. NO. 205469, 25 MARCH 2015 [754 SCRA 493]
FACTS: Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole
proprietors of St. Michael Diagnostic and Skin Care Laboratory Services and Hospital
(St. Michael Hospital), a 5-storey secondary level hospital built on their property located
in Molino 2, Bacoor, Cavite. With a vision to upgrade St. Michael Hospital into a modern,
well-equipped and full service tertiary 11-storey hospital, Sps. Rodil purchased two (2)
parcels of land adjoining their existing property and, on May 22, 2003, incorporated
SMMCI, with which entity they planned to eventually consolidate St. Michael Hospital’s
operations. SMMCI had an initial capital of P2,000,000.00 which was later increased to
P53,500,000.00, 94.49% of which outstanding capital stock, or P50,553,000.00, was
subscribed and paid by Sps. Rodil.5
To finance the costs of building construction, SMMCI applied for a loan with petitioner
BPI Family Savings Bank, Inc. (BPI Family) which gave a credit line of up to
P35,000,000.00,7secured by a Real Estate Mortgage8 (mortgage) over three (3) parcels
of land9 belonging to Sps. Rodil, on a portion of which stands the hospital building being
constructed.
They agreed to be co-borrowers on the loan and executed and signed a Promissory
Note.
After suffering financial losses due to problems with the first building contractor, 12 Sps.
Rodil temporarily deferred the original construction plans for the 11-storey hospital
building and, instead, engaged the services of another contractor for the completion of
the remaining structural works of the unfinished building up to the 5th floor. In this regard,
they spent an additional P25,000,000.00, or a total of P55,000,000.00 for the
construction. The lack of funds for the finishing works of the 3 rd, 4th and 5th floors,
however, kept the new building from becoming completely functional and, in turn,
hampered the plans for the physical transfer of St. Michael Hospital’s operations to
SMMCI. Nevertheless, using hospital-generated revenues, Sps. Rodil were still able to
purchase new equipment and machinery for St. Michael Hospital.
BPI Family demanded immediate payment of the entire loan obligation15and, soon after,
filed a petition for extrajudicial foreclosure16 of the real properties covered by the
mortgage. The auction sale was scheduled on December 11, 2009, which was
postponed to February 15, 2010 with the conformity of BPI Family.
SMMCI filed a Petition for Corporate Rehabilitation. SMMCI claimed that it had to defer
the construction of the projected 11-storey hospital building due to the problems it had
with its first contractor as well as the rise of the cost of construction materials. As of date,
only two (2) floors of the new building are functional, in which some of the operations of
St. Michael had already been transferred. RTC approved the Rehabilitation Plan with the
modifications recommended by the Rehabilitation Receiver. CA affirmed the RTC’s
approval of the Rehabilitation Plan.
ISSUE: WON the CA correctly affirmed SMMCI’s Rehabilitation Plan as approved by the
RTC.
COMM FEB 22
HELD: YES.
Restoration is the central idea behind the remedy of corporate rehabilitation. In common
parlance, to “restore” means “to bring back to or put back into a former or original
state.”42 Case law explains that corporate rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency, the purpose being to enable
the company to gain a new lease on life and allow its creditors to be paid their
claims out of its earnings.43 Consistent therewith is the term’s statutory definition under
Republic Act No. 10142, otherwise known as the “Financial Rehabilitation and Insolvency
Act of 2010” (FRIA).
In other words, rehabilitation assumes that the corporation has been operational
but for some reasons like economic crisis or mismanagement had become
distressed or insolvent, i.e., that it is generally unable to pay its debts as they fall due
in the ordinary course of business or has liability that are greater than its assets. 45 Thus,
the basic issues in rehabilitation proceedings concern the viability and desirability of
continuing the business operations of the distressed corporation, 46  all with a view of
effectively restoring it to a state of solvency or to its former healthy financial condition
through the adoption of a rehabilitation plan.
In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a
position of successful operation and solvency at the time the Rehabilitation Petition was
filed on August 11, 2010. While it had indeed “commenced business” through the
preparatory act of opening a credit line with BPI Family to finance the construction of a
new hospital building for its future operations, SMMCI itself admits that it has not formally
operated nor earned any income since its incorporation. This simply means that there
exists no viable business concern to be restored. Perforce, the remedy of corporate
rehabilitation is improper, thus rendering the dispositions of the courts a quo infirm.
A material financial commitment becomes significant in gauging the resolve,
determination, earnestness and good faith of the distressed corporation in financing the
proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to contribute funds or property to
guarantee the continued successful operation of the debtor corporation during the
period of rehabilitation.50cralawred
In this case, aside from the harped on merger of St. Michael Hospital with SMMCI, the
only proposed source of revenue the Rehabilitation Plan suggests is the capital which
would come from SMMCI’s potential investors, which negotiations are merely pending.
Evidently, both propositions commonly border on the speculative and, hence, hardly fit
the description of a material financial commitment which would inspire confidence that
the rehabilitation would turn out to be successful.
 2 VIVA SHIPPING LINES, INC. VS. KEPPEL PHILIPPINES MARINE, INC., G.R. NO.
177382, 17 FEBRUARY 2016 [784 SCRA 173]
FACTS: On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a
Petition for Corporate Rehabilitation before the Regional Trial Court of Lucena City. The
Regional Trial Court initially denied the Petition for failure to comply with the
requirements in Rule 4, Sections 2 and 3 of the Interim Rules of Procedure on Corporate
Rehabilitation. On October 17, 2005, Viva Shipping Lines filed an Amended Petition.
In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime
vessels and Ocean Palace Mall, a shopping mall in downtown Lucena City. Viva
Shipping Lines also declared its total properties’ assessed value at about
P45,172,790.00. However, these allegations were contrary to the attached documents in
the Amended Petition.
One of the attachments, the Property Inventory List, showed that Viva Shipping Lines
owned only two (2) maritime vessels: M/V Viva Peñafrancia V and M/V Marian Queen.
The list also stated that the fair market value of all of Viva Shipping Lines’ assets
amounted to P447,860,000.00, P400 million more than what was alleged in its Amended
Petition. Some of the properties listed in the Property Inventory List were already marked
as “encumbered” by its creditors; hence, only P147,630,000.00 of real property and its
vessels were marked as “free assets.
According to Viva Shipping Lines, the devaluation of the Philippine peso, increased
competition, and mismanagement of its businesses made it difficult to pay its debts as
they became due. It also stated that “almost all [its] vessels were rendered unserviceable
either because of age and deterioration that [it] can no longer compete with modern
made vessels owned by other operators.”
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of
funding such as the sale of old vessels and commercial lots of its sister company, Sto.
Domingo Shipping Lines. It also proposed the conversion of the Ocean Palace Mall into a
hotel, the acquisition of two (2) new vessels for shipping operations, and the “re-
operation” of an oil mill in Buenavista, Quezon.
ISSUE: WON THE CORPORATE REHABILITATION IS PROPER.
HELD: NO. The first rule breached by petitioner is the failure to implead all the
indispensable parties. Petitioner did not even interpose reasons why it should be
excused from compliance with the rule to “state the full names of the parties to the case,
without impleading the court . . . as . . . respondents.” Petitioner did exactly the opposite.
It failed to state the full names of its creditors as respondents. Instead, it impleaded the
Presiding Judge of the originating court.
The Rules of Court requires petitioner to implead respondents as a matter of due
process. Under the Constitution, “[n]o person shall be deprived of life, liberty or property
without due process of the law.” An appeal to a corporate rehabilitation case may deprive
creditor-stakeholders of property. Due process dictates that these creditors be impleaded
to give them an opportunity to protect the property owed to them.
Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case is
non-adversarial. In Boston Equity Resources, Inc. v. Court of Appeals:
An indispensable party is one who has such an interest in the controversy or subject
matter of a case that a final adjudication cannot be made in his or her absence, without
injuring or affecting that interest. He or she is a party who has not only an interest in the
subject matter of the controversy, but “an interest of such nature that a final decree
COMM FEB 22
cannot be made without affecting [that] interest or leaving the controversy in such a
condition that its final determination may be wholly inconsistent with equity and good
conscience. It has also been considered that an indispensable party is a person in whose
absence there cannot be a determination between the parties already before the court
which is effective, complete or equitable.” Further, an indispensable party is one who
must be included in an action before it may properly proceed.
A corporate rehabilitation case cannot be decided without the creditors’ participation. The
court’s role is to balance the interests of the corporation, the creditors, and the general
public. Impleading creditors as respondents on appeal will give them the opportunity to
present their legal arguments before the appellate court. The courts will not be able to
balance these interests if the creditors are not parties to a case. Ruling on petitioner’s
appeal in the absence of its creditors will not result in judgment that is effective,
complete, and equitable.
This court cannot exercise its equity jurisdiction and allow petitioner to circumvent the
requirement to implead its creditors as respondents. Tolerance of such failure will not
only be unfair to the creditors, it is contrary to the goals of corporate rehabilitation, and
will invalidate the cardinal principle of due process of law.
The failure of petitioner to implead its creditors as respondents cannot be cured by
serving copies of the Petition on its creditors. Since the creditors were not impleaded as
respondents, the copy of the Petition only serves to inform them that a petition has been
filed before the appellate court. Their participation was still significantly truncated.
Petitioner’s failure to implead them deprived them of a fair hearing. The appellate court
only serves court orders and processes on parties formally named and identified by the
petitioner. Since the creditors were not named as respondents, they could not receive
court orders prompting them to file remedies to protect their property rights.
Professor Stephanie V. Gomez of the University of the Philippines College of Law
suggests specific 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.
These requirements put emphasis on liquidity: the cash flow that the distressed
corporation will obtain from rehabilitating its assets and operations. A corporation’s
assets may be more than its current liabilities, but some assets may be in the form of
land or capital equipment, such as machinery or vessels. Rehabilitation sees to it that
these assets generate more value if used efficiently rather than if liquidated.
On the other hand, this court enumerated the characteristics of a rehabilitation plan that
is infeasible:
(a) the absence of a sound and workable business plan;
(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.
In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also
suggests that the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on
rehabilitation that provides for better present value recovery for its creditors.
Present value recovery acknowledges that, in order to pave way for rehabilitation, the
creditor will not be paid by the debtor when the credit falls due. The court may order a
suspension of payments to set a rehabilitation plan in motion; in the meantime, the
creditor remains unpaid. By the time the creditor is paid, the financial and economic
conditions will have been changed. Money paid in the past has a different value in the
future. It is unfair if the creditor merely receives the face value of the debt. Present value
of the credit takes into account the interest that the amount of money would have earned
if the creditor were paid on time.
Trial courts must ensure that the projected cash flow from a business’ rehabilitation plan
allows for the closest present value recovery for its creditors. If the projected cash flow is
realistic and allows the corporation to meet all its obligations, then courts should favor
rehabilitation over liquidation. However, if the projected cash flow is unrealistic, then
courts should consider converting the proceedings into that for liquidation to protect the
creditors.
The Regional Trial Court correctly dismissed petitioner’s rehabilitation plan. It found that
petitioner’s assets are non-performing. Petitioner admitted this in its Amended Petition
when it stated that its vessels were no longer serviceable. In Wonder Book Corporation
v. Philippine Bank of Communications, a rehabilitation plan is infeasible if the assets are
nearly fully or fully depreciated. This reduces the probability that rehabilitation may
restore and reinstate petitioner to its former position of successful operation and
solvency.
Petitioner’s rehabilitation plan should have shown that petitioner has enough serviceable
assets to be able to continue its business. Yet, the plan showed that the source of
funding would be to sell petitioner’s old vessels. Disposing of the assets constituting
petitioner’s main business cannot result in rehabilitation. A business primarily engaged
as a shipping line cannot operate without its ships. On the other hand, the plan to
purchase new vessels sacrifices the corporation’s cash flow. This is contrary to the goal
of corporate rehabilitation, which is to allow present value recovery for creditors. The plan
to buy new vessels after selling the two vessels it currently owns is neither sound nor
workable as a business plan.
COMM FEB 22
3 LINGKOD MANGGAGAWA SA RUBBERWORLD, ADIDAS-ANGLO VS.
RUBBERWORLD (PHILS.), INC., G.R. NO. 153882, 29 JANUARY 2007
Facts: On August 26, 1994, Rubberworld filed with the Department of Labor and
Employment (DOLE) a Notice of Temporary Partial Shutdown due to severe financial
crisis, therein announcing the formal actual company shutdown to take effect on
September 26, 1994. A copy of said... notice was served on the recognized labor union
of Rubberworld, the Bisig Pagkakaisa-NAFLU, the union with which the corporation had
a collective bargaining agreement.
On September 1, 1994, Bisig Pagkakaisa-NAFLU staged a strike. It set up a picket line in
front of the premises of Rubberworld and even welded its gate. As a result,
Rubberworld's premises closed prematurely even before the date set for the start of its
temporary... partial shutdown.
On September 9, 1994, herein petitioner union, the Lingkod Manggagawa Sa
Rubberworld, Adidas-Anglo (Lingkod, for brevity), represented by its President, Sonia
Esperanza, filed a complaint against Rubberworld and its Vice Chairperson, Mr. Antonio
Yang, for unfair... labor practice (ULP), illegal shutdown, and non-payment of salaries
and separation pay. In its complaint... petitioner union alleged that it had filed a petition
for certification... election during the freedom period, which petition was granted by the
DOLE Regional Director. In the same complaint, petitioner union claimed that the strike
staged by Bisig Pagkakaisa-NAFLU was company-instigated/supported.
On November 22, 1994 Rubberworld filed with the SEC a Petition for Declaration of a
State of Suspension of Payments with Proposed Rehabilitation Plan. The petition... was
granted by the SEC... in its Order dated December 28, 1994, to wit:
Accordingly, with the creation of the Management Committee, all actions for claims
against Rubberworld Philippines, Inc. pending before any court, tribunal, office, board,
body, Commission or sheriff are hereby deemed SUSPENDED.
Notwithstanding the SEC's aforementioned suspension order and despite Rubberworld's
submission on January 10, 1995 of a Motion to Suspend Proceedings, Labor Arbiter
Dinopol went ahead with the ULP case and rendered his decision thereon on August 16,
1995,... thus:
1 denying respondents motion to suspend proceedings;
2 declaring respondent Rubberworld Phils., Inc. to have committed unfair labor practice;
3 ordering respondent Rubberworld Phils., Inc. to reinstate complainant-Union's
members
4 ordering respondent Rubberworld Phils., Inc. to pay the members of the complainant-
Union their backwages
On September 21, 1995, Rubberworld went on appeal to the NLRC, posting there for a
temporary appeal bond in the amount of P500,000.00 as tentatively fixed by the Labor
Arbiter. Meanwhile, on October 10, 1995, Ricardo Atienza of the NLRC's Research and
Information Unit submitted... his report on the computation of the monetary awards, as
ordered by the Labor Arbiter. He came out with the total amount of Twenty-Seven Million
Five Hundred Six Thousand and Two Hundred Fifty-Five Pesos and 70/100
(P27,506,255.70). Despite Rubberworld's vigorous opposition, the First Division of the
NLRC, in its Order of January 22, 1996, required the corporation to post an appeal bond
in an amount equivalent to Mr. Atienza's computation, with a warning that failure to do so
shall result in the... dismissal of its appeal for non-perfection... on account of
Rubberworld's failure to upgrade or complete its appeal bond as indicated in the NLRC's
January 22, 1996 Order, the Commission, in a decision dated June 28, 1996, did dismiss
Rubberworld's appeal. Owing to this development, Rubberworld filed with the Court a
Supplemental Petition for Certiorari, therein incorporating its challenge to the said
dismissal order of the NLRC, contending that the labor tribunal acted without or in excess
of jurisdiction.
On April 22, 1998, the SEC issued an Order declaring Rubberworld as dissolved and
lifting its earlier suspension order
On August 18, 1995, a writ of execution was issued by the NLRC in favor of the petitioner
union with a copy thereof served on the respondent corporation.
On February 8, 1999, Rubberworld filed with the Court a Motion to Admit its Amended
Petition for Certiorari and its Supplement, alleging therein that pursuant to the SEC Order
dated December 28, 1994, supra, the proceedings before the Labor Arbiter should have
been suspended. Hence, since the Labor Arbiter disregarded the SEC's suspension
order, the subsequent proceedings before it was null and void.
Consistent with its ruling in St. Martin Funeral Homes v. NLRC, the Court, in its
Resolution of February 29, 1999, referred Rubberworld's amended petition for certiorari
and its supplement to the CA for appropriate action... the CA, in its Resolution[16] of May
11, 2000, over the vehement opposition of the petitioner union, resolved to admit
Rubberworld's aforementioned amended petition and the supplement thereto "in the
interest of justice."
Eventually, in the herein assailed Decision dated January 18, 2002, the CA granted
Rubberworld's petition in CA G.R. SP. No. 53356 on the finding that the Labor Arbiter
had indeed committed grave abuse of discretion when it proceeded with... the ULP case
despite the SEC's suspension order of December 28, 1994, and accordingly declared the
proceedings before it, including the subsequent orders by the NLRC dismissing
Rubberworld's appeal and the writ of execution, null and void.
NLRC, could ever attain final and executory status. The Labor Arbiter completely
disregarded and... violated Section 6(c) of Presidential Decree 902-A, as amended,
which categorically mandates the suspension of all actions for claims against a
corporation placed under a management committee by the SEC. Thus, the proceedings
before the Labor Arbiter and the order and writ... subsequently issued by the NLRC are
all null and void for having been undertaken or issued in violation of the SEC suspension
Order dated December 28, 1994. As such, the Labor Arbiter's decision, including the
dismissal by the NLRC of Rubberworl's appeal, could not have achieved... a final and
executory status.
As correctly ruled by the CA, the issue of applicability in labor cases of the aforequoted
provisions of PD 902-A, as amended, had already been resolved by this Court in its
earlier decisions in Rubberworld.
In the first Rubberworld case, the Court upheld the applicability of PD 902-A to labor
cases pursuant to Section 5(d) and Section 6(c) thereof
The law is clear: upon the creation of a management committee or the appointment of a
rehabilitation receiver, all claims for actions "shall be suspended accordingly." No
exception in favor of labor claims is mentioned in the law. Since the law... makes no
distinction or exemptions, neither should this Court. Ubi lex non distinguit nec nos
distinguere debemos.
In Chua v. National Labor Relations Commission, we ruled that labor claims cannot
proceed independently of a bankruptcy liquidation proceeding, since these claims "would
spawn needless controversy, delays, and confusion."[31] With more... reason, allowing
labor claims to continue in spite of a SEC suspension order in a rehabilitation case would
merely lead to such results.

Issues:
1 Whether the CA had committed grave abuse of discretion amounting to lack of
jurisdiction or an excess in the exercise thereof when it gave due course to the
petition filed by Rubberworld (Phils.), Inc. and annulled and set aside the
decisions rendered by the labor... arbiter a quo and the NLRC, when the said
decisions had become final and executory warranting the outright dismissal of
the aforesaid petition;
2 Whether the CA had committed grave abuse of discretion and reversible error when it
applied Section 5(d) and Section 6 (c) of P.D. No. 902-A, as amended, to the
case at bar;
3 Whether the CA had committed reversible error when it adopted and applied the
rulings in the cases of Rubberworld (Phils.), Inc., or Julie Yap Ong v. NLRC,
Marilyn F. Arellano, et. al. and Rubberworld (Phils.), Inc. and Julie Y.
Ong v. NLRC, Aquino Magsalin, et. al. to the case at bar.

Ruling: Given the factual milieu obtaining in this case, it cannot be said that the decision
of the Labor Arbiter, or the decision/dismissal order and writ of execution issued by the
COMM FEB 22
 4 JUANITO A. GARCIA VS. PHILIPPINE AIRLINES, INC., G.R. NO. 164856, 29
AUGUST 2007 [531 SCRA 574]
Petitioners Alberto J. Dumago and Juanito A. Garcia were employed by respondent
Philippine Airlines, Inc. (PAL) as Aircraft Furnishers Master "C" and Aircraft Inspector,
respectively. They were assigned in the PAL Technical Center.
On July 24, 1995, a combined team of the PAL Security and National Bureau of
Investigation (NBI) Narcotics Operatives raided the Toolroom Section – Plant Equipment
Maintenance Division (PEMD) of the PAL Technical Center. They found petitioners, with
four others, near the said section at that time. When the PAL Security searched the
section, they found shabu paraphernalia inside the company-issued locker of Ronaldo
Broas who was also within the vicinity. The six employees were later brought to the NBI
for booking and proper investigation.
On July 26, 1995, a Notice of Administrative Charge 4 was served on petitioners. They
were allegedly "caught in the act of sniffing shabu inside the Toolroom Section," then
placed under preventive suspension and required to submit their written explanation
within ten days from receipt of the notice.
Petitioners vehemently denied the allegations and challenged PAL to show proof that
they were indeed "caught in the act of sniffing shabu." Dumago claimed that he was in
the Toolroom Section to request for an allen wrench to fix the needles of the sewing and
zigzagger machines. Garcia averred he was in the Toolroom Section to inquire where he
could take the Trackster’s tire for vulcanizing.
On October 9, 1995, petitioners were dismissed for violation of Chapter II, Section 6,
Article 46 (Violation of Law/Government Regulations) and Chapter II, Section 6, Article
48 (Prohibited Drugs) of the PAL Code of Discipline.5 Both simultaneously filed a case for
illegal dismissal and damages.
In the meantime, the Securities and Exchange Commission (SEC) placed PAL under an
Interim Rehabilitation Receiver due to severe financial losses.
On January 11, 1999, the Labor Arbiter rendered a decision6 in petitioners’ favor:
WHEREFORE, conformably with the foregoing, judgment is hereby rendered finding the
respondents guilty of illegal suspension and illegal dismissal and ordering them to
reinstate complainants to their former position without loss of seniority rights and other
privileges. Respondents are hereby further ordered to pay jointly and severally unto the
complainants the following:
Alberto J. Dumago - P409,500.00 backwages as of 1/10/99
34,125.00 for 13th month pay
COMM FEB 22
Juanito A. Garcia - P1,290,744.00 backwages as of 1/10/99
107,562.00 for 13th month pay
The amounts of P100,000.00 and P50,000.00 to each complainant as and by way of
moral and exemplary damages; and
The sum equivalent to ten percent (10%) of the total award as and for attorneys fees.
Respondents are directed to immediately comply with the reinstatement aspect of this
Decision. However, in the event that reinstatement is no longer feasible, respondent[s]
are hereby ordered, in lieu thereof, to pay unto the complainants their separation pay
computed at one month for [e]very year of service. SO ORDERED. 7
Meanwhile, the SEC replaced the Interim Rehabilitation Receiver with a Permanent
Rehabilitation Receiver.
On appeal, the NLRC reversed the Labor Arbiter’s decision and dismissed the case for
lack of merit.8Reconsideration having been denied, an Entry of Judgment9 was issued on
July 13, 2000.
On October 5, 2000, the Labor Arbiter issued a Writ of Execution 10 commanding the
sheriff to proceed:
x x x x 1. To the Office of respondent PAL Building I, Legaspi St., Legaspi
Village, Makati City or to any of its Offices in the Philippines and cause
reinstatement of complainants to their former position and to cause the
collection of the amount of [₱]549,309.60 from respondent PAL representing
the backwages of said complainants on the reinstatement aspect;
2. In case you cannot collect from respondent PAL for any reason, you shall
levy on the office equipment and other movables and garnish its deposits with
any bank in the Philippines, subject to the limitation that equivalent amount of
such levied movables and/or the amount garnished in your own judgment, shall
be equivalent to [₱]549,309.60. If still insufficient, levy against immovable
properties of PAL not otherwise exempt from execution. x x x x11
Although PAL filed an Urgent Motion to Quash Writ of Execution, the Labor Arbiter
issued a Notice of Garnishment12addressed to the President/Manager of the Allied Bank
Head Office in Makati City for the amount of ₱549,309.60.
PAL moved to lift the Notice of Garnishment while petitioners moved for the release of
the garnished amount. PAL opposed petitioners’ motion. It also filed an Urgent Petition
for Injunction which the NLRC resolved as follows:
WHEREFORE, premises considered, the Petition is partially GRANTED. Accordingly, the
Writ of Execution dated October 5, 2000 and related [N]otice of Garnishment [dated
October 25, 2000] are DECLARED valid. However, the instant action is SUSPENDED
and REFERRED to the Receiver of Petitioner PAL for appropriate action. SO
ORDERED.13
PAL appealed to the Court of Appeals on the grounds that: (1) by declaring the writ of
execution and the notice of garnishment valid, the NLRC gave petitioners undue
advantage and preference over PAL’s other creditors and hampered the task of the
Permanent Rehabilitation Receiver; and (2) there was no longer any legal or factual
basis to reinstate petitioners as a result of the reversal by the NLRC of the Labor
Arbiter’s decision.
The appellate court ruled that the Labor Arbiter issued the writ of execution and the
notice of garnishment without jurisdiction. Hence, the NLRC erred in upholding its
validity. Since PAL was under receivership, it could not have possibly reinstated
petitioners due to retrenchment and cash-flow constraints. The appellate court declared
that a stay of execution may be warranted by the fact that PAL was under rehabilitation
receivership. The dispositive portion of the decision reads:
WHEREFORE, premises considered and in view of the foregoing, the instant petition is
hereby GIVEN DUE COURSE. The assailed November 26, 2001 Resolution, as well as
the January 28, 2002 Resolution of public respondent National Labor Relations
Commission is hereby ANNULLED and SET ASIDE for having been issued with grave
abuse of discretion amounting to lack or excess of jurisdiction. Consequently, the Writ of
Execution and the Notice of Garnishment issued by the Labor Arbiter are hereby
likewise ANNULLED and SET ASIDE. SO ORDERED.14
Hence, the instant petition raising a single issue as follows:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS ARE ENTITLED TO THEIR ACCRUED WAGES DURING THE
PENDENCY OF PAL’S APPEAL.15
Simply put, however, there are really two issues for our consideration: (1) Are petitioners
entitled to their wages during the pendency of PAL’s appeal to the NLRC? and (2) In the
light of new developments concerning PAL’s rehabilitation, are petitioners entitled to
execution of the Labor Arbiter’s order of reinstatement even if PAL is under receivership?
We shall first resolve the issue of whether the execution of the Labor Arbiter’s order is
legally possible even if PAL is under receivership.
We note that during the pendency of this case, PAL was placed by the SEC first, under
an Interim Rehabilitation Receiver and finally, under a Permanent Rehabilitation
Receiver. The pertinent law on this matter, Section 5(d) of Presidential Decree (P.D.) No.
902-A, as amended, provides that:
COMM FEB 22
SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:x x x x
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association
possesses property to cover all of its debts but foresees the impossibility of meeting them
when they respectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under the [management
of a rehabilitation receiver or] Management Committee created pursuant to this Decree.
The same P.D., in Section 6(c) provides that:
SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall
possess the following powers:
x x x x c) To appoint one or more receivers of the property, real or personal, which is the
subject of the action pending before the Commission in accordance with the pertinent
provisions of the Rules of Court in such other cases whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing
public and creditors:…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.x x x x
Worth stressing, upon appointment by the SEC of a rehabilitation receiver, all actions for
claims against the corporation pending before any court, tribunal or board shall ipso jure
be suspended. The purpose of the automatic stay of all pending actions for claims is to
enable 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
corporation.16
More importantly, the suspension of all actions for claims against the corporation
embraces all phases of the suit, be it before the trial court or any tribunal or before this
Court.17 No other action may be taken, including the rendition of judgment during the
state of suspension. It must be stressed that what are automatically stayed or suspended
are the proceedings of a suit and not just the payment of claims during the execution
stage after the case had become final and executory.18
Furthermore, the actions that are suspended cover all claims against the corporation
whether for damages founded on a breach of contract of carriage, labor cases, collection
suits or any other claims of a pecuniary nature.19 No exception in favor of labor claims is
mentioned in the law.201avvphi1
This Court’s adherence to the above-stated rule has been resolute and steadfast as
evidenced by its oft-repeated application in a plethora of cases involving PAL, the most
recent of which is Philippine Airlines, Inc. v. Zamora.21
Since petitioners’ claim against PAL is a money claim for their wages during the
pendency of PAL’s appeal to the NLRC, the same should have been suspended pending
the rehabilitation proceedings. The Labor Arbiter, the NLRC, as well as the Court of
Appeals should have abstained from resolving petitioners’ case for illegal dismissal and
should instead have directed them to lodge their claim before PAL’s receiver. 22
However, to still require petitioners at this time to re-file their labor claim against PAL
under the peculiar circumstances of the case – that their dismissal was eventually held
valid with only the matter of reinstatement pending appeal being the issue – this Court
deems it legally expedient to suspend the proceedings in this case.
WHEREFORE, the instant petition is PARTIALLY GRANTED in that the instant
proceedings herein are SUSPENDED until further notice from this Court. Accordingly,
respondent Philippine Airlines, Inc. is hereby DIRECTED to quarterly update the Court as
to the status of its ongoing rehabilitation. No costs. SO ORDERED.
Facts: Petitioners-employees filed a complaint for illegal dismissal against respondent
PAL who dismissed them after they were allegedly caught in the act of sniffing shabu
within its premises. The Labor Arbiter ruled for the petitioners and ordered immediately
for their reinstatement. Prior to this decision, SEC had placed PAL under an Interim
Rehabilitation Receiver, and subsequently under a Permanent Rehabilitation Receiver.
PAL appealed and the Labor Tribunal ruled in their favor. Subsequently, the Labor
Arbiter issued a writ of execution for the reinstatement and issued a notice of
garnishment. The Labor Tribunal affirmed the writ and notice but suspended and referred
the action to the Rehabilitation Receiver of PAL. On appeal, CA found for respondent
PAL.
Issue: Whether or not PAL being under corporate rehabilitation suspends any monetary
claims to it.
Ruling: YES.
It is settled that upon appointment by the SEC of a rehabilitation receiver, all actions for
claims before any court, tribunal or board against the corporation shall ipso jure be
suspended. As stated early on, during the pendency of petitioners’ complaint before the
Labor Arbiter, the SEC placed respondent under an Interim Rehabilitation Receiver. After
the Labor Arbiter rendered his decision, the SEC replaced the Interim Rehabilitation
Receiver with a Permanent Rehabilitation Receiver.
While reinstatement pending appeal aims to avert the continuing threat or danger to the
survival or even the life of the dismissed employee and his family, it does not
contemplate the period when the employer-corporation itself is similarly in a judicially
monitored state of being resuscitated in order to survive.
COMM FEB 22
5 JOSE MARCEL PANLILIO VS. REGIONAL TRIAL COURT, BRANCH 51, CITY OF
MANILA, REPRESENTED BY HON. PRESIDING JUDGE ANTONIO M. ROSALES,
On 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 Rehabilitation4 in SEC Corp. Case No. 04-111180.
On October 18, 2004, the RTC of Manila, Branch 24, issued an Order 5 staying all claims
against SIHI upon finding the petition sufficient in form and substance. The pertinent
portions of the Order read:
Finding the petition, together with its annexes, sufficient in form and substance and
pursuant to Section 6, Rule 4 of the Interim Rules on Corporate Rehabilitation, the Court
hereby:
x x x x 2) Stays the enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor, its
guarantors and sureties not solidarily liable with the debtor.6
At the time, however, of the filing of the petition for rehabilitation, there were a number of
criminal charges7 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)8 of Republic Act 8282, or the Social Security Act of
1997 (SSS law), in relation to Article 315 (1) (b)9 of the Revised Penal Code, or Estafa.
Consequently, petitioners filed with the RTC of Manila, Branch 51, a Manifestation and
Motion to Suspend Proceedings.10 Petitioners argued that the stay order issued by
Branch 24 should also apply to the criminal charges pending in Branch 51. Petitioners,
thus, prayed that Branch 51 suspend its proceedings until the petition for rehabilitation
was finally resolved.
On December 13, 2004, Branch 51 issued an Order 11 denying petitioners’ motion to
suspend the proceedings. It ruled that the stay order issued by Branch 24 did not cover
criminal proceedings, to wit:
x x x x Clearly then, the issue is, whether the stay order issued by the RTC commercial
court, Branch 24 includes the above-captioned criminal cases.
The Court shares the view of the private complainants and the SSS that the said stay
order does not include the prosecution of criminal offenses. Precisely, the law
"criminalizes" the non-remittance of SSS contributions by an employer to protect the
employees from unscrupulous employers. Clearly, in these cases, public interest requires
that the said criminal acts be immediately investigated and prosecuted for the protection
of society.
From the foregoing, the inescapable conclusion is that the stay order issued by RTC
Branch 24 does not include the above-captioned cases which are criminal in nature. 12
Branch 51 denied the motion for reconsideration filed by petitioners.
On August 19, 2005, petitioners filed a petition for certiorari 13 with the CA assailing the
Order of Branch 51.
On April 27, 2006, the CA issued a Decision denying the petition, the dispositive portion
of which reads:
WHEREFORE, premises considered, the Petition is hereby DENIED and is accordingly
DISMISSED. No costs.14
The CA discussed that violation of the provisions of the SSS law was a criminal liability
and was, thus, personal to the offender. As such, the CA held that the criminal
proceedings against the petitioners should not be considered a claim against the
corporation and, consequently, not covered by the stay order issued by Branch 24.
Petitioners filed a Motion for Reconsideration, 15 which was, however, denied by the CA in
a Resolution dated August 2, 2006.
Hence, herein petition, with petitioners raising a lone issue for this Court’s resolution, to
wit:
x x x WHETHER OR NOT THE STAY ORDER ISSUED BY BRANCH 24, REGIONAL
TRIAL COURT OF MANILA, IN SEC CORP. CASE NO. 04-111180 COVERS ALSO
VIOLATION OF SSS LAW FOR NON-REMITTANCE OF PREMIUMS AND VIOLATION
OF [ARTICLE] [3] 515 OF THE REVISED PENAL CODE.16
The petition is not meritorious.
To begin with, corporate rehabilitation connotes the restoration of the debtor to a position
of successful operation and solvency, if it is shown that its continued operation is
economically feasible and its creditors can recover more, by way of the present value of
payments projected in the rehabilitation plan, if the corporation continues as a going
concern than if it is immediately liquidated. 17 It contemplates a continuance of corporate
life and activities in an effort to restore and reinstate the corporation to its former position
of successful operation and solvency, the purpose being to enable the company to gain a
new lease on life and allow its creditors to be paid their claims out of its earnings. 18
A principal feature of corporate rehabilitation is the suspension of claims against the
distressed corporation. Section 6 (c) of Presidential Decree No. 902-A, as amended,
provides for suspension of claims against corporations undergoing rehabilitation, to wit:
COMM FEB 22
Section 6 (c). x x x x x x Provided, finally, that upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body, shall be suspended
accordingly.19
In November 21, 2000, this Court En Banc promulgated the Interim Rules of Procedure
on Corporate Rehabilitation,20 Section 6, Rule 4 of which provides a stay order on all
claims against the corporation, thus:
Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall,
not later than five (5) days from the filing of the petition, issue an Order x x x; (b) staying
enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and
sureties not solidarily liable with the debtor; x x x21
In Finasia Investments and Finance Corporation v. Court of Appeals,22 the term "claim"
has been construed to refer to debts or demands of a pecuniary nature, or the assertion
to have money paid. The purpose for suspending actions for claims against the
corporation in a rehabilitation proceeding is to enable the management committee or
rehabilitation receiver to effectively exercise its/his powers free from any judicial or
extrajudicial interference that might unduly hinder or prevent the rescue of the debtor
company.23
The issue to be resolved then is: does the suspension of "all claims" as an incident to a
corporate rehabilitation also contemplate the suspension of criminal charges filed against
the corporate officers of the distressed corporation?
This Court rules in the negative.
In Rosario v. Co24 (Rosario), a case of recent vintage, the issue resolved by this Court
was whether or not during the pendency of rehabilitation proceedings, criminal charges
for violation of Batas Pambansa Bilang 22 should be suspended, was disposed of as
follows:
x x x the gravamen of the offense punished by B.P. Blg. 22 is the act of making and
issuing a worthless check; that is, a check that is dishonored upon its presentation for
payment. It is designed to prevent damage to trade, commerce, and banking caused by
worthless checks. In Lozano v. Martinez, this Court declared that it is not the
nonpayment of an obligation which the law punishes. The law is not intended or designed
to coerce a debtor to pay his debt. The thrust of the law is to prohibit, under pain of penal
sanctions, the making and circulation of worthless checks. Because of its deleterious
effects on the public interest, the practice is proscribed by the law. The law punishes the
act not as an offense against property, but an offense against public order. The prime
purpose of the criminal action is to punish the offender in order to deter him and others
from committing the same or similar offense, to isolate him from society, to reform and
rehabilitate him or, in general, to maintain social order. Hence, the criminal prosecution is
designed to promote the public welfare by punishing offenders and deterring others.
Consequently, the filing of the case for violation of B.P. Blg. 22 is not a "claim" that can
be enjoined within the purview of P.D. No. 902-A. True, although conviction of the
accused for the alleged crime could result in the restitution, reparation or indemnification
of the private offended party for the damage or injury he sustained by reason of the
felonious act of the accused, nevertheless, prosecution for violation of B.P. Blg. 22 is a
criminal action.
A criminal action has a dual purpose, namely, the punishment of the offender and
indemnity to the offended party. The dominant and primordial objective of the criminal
action is the punishment of the offender. The civil action is merely incidental to and
consequent to the conviction of the accused. The reason for this is that criminal actions
are primarily intended to vindicate an outrage against the sovereignty of the state and to
impose the appropriate penalty for the vindication of the disturbance to the social order
caused by the offender. On the other hand, the action between the private complainant
and the accused is intended solely to indemnify the former.25lauuphil
Rosario is at fours with the case at bar. Petitioners are charged with violations of Section
28 (h) of the SSS law, in relation to Article 315 (1) (b) of the Revised Penal Code, or
Estafa. The SSS law clearly "criminalizes" the non-remittance of SSS contributions by an
employer to protect the employees from unscrupulous employers. Therefore, public
interest requires that the said criminal acts be immediately investigated and prosecuted
for the protection of society.
considered obligatory upon any court, tribunal, branch or body where there are pending
actions for claims against the distressed corporation. 29
On a final note, this Court would like to point out that Congress has recently enacted
Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of
2010.30 Section 18 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: x x x x
(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. The April 27, 2006
Decision and August 2, 2006 Resolution of the Court of Appeals in CA-G.R. SP No.
90947 are AFFIRMED. The Regional Trial Court of Manila, Branch 51, is ORDERED to
proceed with the criminal cases filed against petitioners. SO ORDERED.

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. 26 As correctly
observed in Rosario,27 it would be absurd for one who has engaged in criminal conduct
could escape punishment by the mere filing of a petition for rehabilitation by the
corporation of which he is an officer.

The prosecution of the officers of the corporation has no bearing on the pending
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. 28 The penal
sanctions as a consequence of violation of the SSS law, in relation to the revised penal
code can therefore be implemented if petitioners are found guilty after trial. However, any
civil indemnity awarded as a result of their conviction would be subject to the stay order
issued by the rehabilitation court. Only to this extent can the order of suspension be
COMM FEB 22
 6 SPOUSES EDUARDO SOBREJUANITE AND FIDELA SOBREJUANITE VS. ASB
DEVELOPMENT CORPORATION
FACTS OF THE CASE
1. On March 7, 2001, spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite) filed a
Complaint for rescission of contract, refund of payments and damages, against ASB
Development Corporation (ASBDC) before the Housing and Land Use Regulatory Board
(HLURB).
2. Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a
condominium unit and a parking space in the BSA Twin Tower-B Condominum located at
Bank Drive, Ortigas Center, Mandaluyong City.  They averred that despite full payment
and demands, ASBDC failed to deliver the property on or before December 1999 as
agreed.  They prayed for the rescission of the contract; refund of payments amounting to
P2,674,637.10; payment of moral and exemplary damages, attorney’s fees, litigation
expenses, appearance fee and costs of the suit.
3. ASBDC filed a motion to dismiss or suspend proceedings in view of the approval by
the Securities and Exchange Commission (SEC) on April 26, 2001 of the rehabilitation
plan of ASB Group of Companies, which includes ASBDC, and the appointment of a
rehabilitation receiver.  The HLURB arbiter however denied the motion and ordered the
continuation of the proceedings.
ISSUE: Whether the SEC’s approval of the corporate rehabilitation plan has the effect of
suspending the proceeding before HLURB.
RULING: Yes. Section 6(c) of PD No. 902-A empowers the SEC:
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.  enforcement of claims against guarantors or sureties of the debtors whose obligations
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
COMM FEB 22
defending claims against the corporation instead of being directed toward its
restructuring and rehabilitation.
7 METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM VS. HON.
REYNALDO B. DAWAY, G.R. NO. 160732, 21 JUNE 2004 [432 SCRA 559]
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the
the standby letter of credit issued by the bank as the former prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor.
The concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are
inconsistent with each other.  The guarantee theory destroys the independence of
the bank’s responsibility from the contract upon which it was opened and the
nature of both contracts is mutually in conflict with each other. A Standby Letter
of Credit is not a guaranty because under a Standby Letter of Credit, the bank
undertakes a primary obligation.  On the other hand, a guarantor undertakes a
collateral obligation which arises only upon the debtor’s default.  A Standby Letter
of Credit is a primary obligation and not an accessory contract. 
Facts:  Maynilad obtained a 20-year concession to manage, repair, refurbish, and
upgrade existing Metropolitan Waterworks and Sewerage System (MWSS) water
delivery and sewerage services in Metro Manila’s west zone.  Maynilad, under the
concession agreement undertook to pay concession fees and itsforeign loans.  To secure
its obligations, Maynilad was required under Section 9 of the concession contract to put
up a bond, bank guarantee or other security acceptable to MWSS.  Pursuant to this
requirement, Maynilad arranged on for a three-year facility with a number of foreign
banks led by Citicorp Intl for the issuance of an irrevocable standby letter of credit (SLC)
in the amount of $ 120 million in favor of MWSS for the full and prompt payment of
Maynilad’s obligations to MWSS. Due to devaluation of the peso and other business
reversals of Maynilad, MWSS filed a notice of early termination of the concession
contract.  Upon certification of the non performance of Maynilad obligation, the MWSS
moved to collect from Citicorp on the standby letters of credit issued. Maynilad filed for
corporate rehabilitation.    Judge Daway stayed the payment of the letter of credit by
Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.
Issue: Whether or not the payment of the standby of letter of credit can be stayed by
filing of a petition for rehabilitation
Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply
to the the standby letter of credit issued by the bank as the former prohibition is on the
are not solidary with the debtor.
The participating bank’s obligation under the letter of credit are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is
not conditioned on the prior exhaustion of the debtors assets. These are the same
characteristics of a surety or solidary obligor. And being solidary, the claims against them
can be pursued separately from and independently of the rehabilitation case.
Issuing banks under the letters of credit are not equivalent to guarantors. The concept of
guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with
each other.  The guarantee theory destroys the independence of the bank’s responsibility
from the contract upon which it was opened and the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On the other
hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We
have also defined a letter of credit as an engagement by a bank or other person made at
the request of a customer that the issuer shall honor drafts or other demands of payment
upon compliance with the conditions specified in the credit.
A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit,
the bank undertakes a primary obligation.  On the other hand, a guarantor undertakes a
collateral obligation which arises only upon the debtor’s default.  A Standby Letter of
Credit is a primary obligation and not an accessory contract.
COMM FEB 22
8 BUREAU OF INTERNAL REVENUE VS. LEPANTO CERAMICS, INC., G.R. NO.
224764, 24 APRIL 2017 [824 SCRA 125]
On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) - a corporation duly
organized and existing under Philippine Laws with principal office address in Calamba
City, Laguna - filed a petition 4 for corporate rehabilitation pursuant to Republic Act No.
(RA) 10142, 5 otherwise known as the "Financial Rehabilitation and Insolvency Act
(FRIA) of 2010," docketed before the RTC ofCalamba City, Branch 34, the designated
Special Commercial Court in Laguna (Rehabilitation Court). Essentially, LCI alleged that
due to the financial difficulties it has been experiencing dating back to the Asian financial
crisis, it had entered into a state of insolvency considering its inability to pay its
obligations as they become due and that its total liabilities amounting to ₱4,213 ,682,
715. 00 far exceed its total assets worth ₱1,112,723,941.00. Notably, LCI admitted in the
annexes attached to the aforesaid Petition its tax liabilities to the national government in
the amount of at least ₱6,355,368.00.6
On January 13, 2012, the Rehabilitation Court issued a Commencement
Order,7 which, inter alia: (a) declared LCI to be under corporate rehabilitation;
(b) suspended all actions or proceedings, in court or otherwise, for the enforcement of
claims against LCI; (c) prohibited LCI from making any payment of its liabilities
outstanding as of even date, except as may be provided under RA 10142;
and (d) directed the BIR to file and serve on LCI its comment or opposition to the petition,
or its claims against LCI. 8 Accordingly, the Commencement Order was published in a
newspaper of general circulation and the same, together with the petition for corporate
rehabilitation, were personally served upon LCI's creditors, including the BIR. 9
Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group
Supervisor, and Examiner, respectively, of the BIR's Large Taxpayers Service, sent LCI
a notice of informal conference10 dated May 27, 2013, informing the latter of its deficiency
internal tax liabilities for the Fiscal Year ending June 30, 2010. In response, LCI's court-
appointed receiver, Roberto L. Mendoza, sent BIR a letter-reply, reminding the latter of
the pendency of LCI's corporate rehabilitation proceedings, as well as the issuance of a
Commencement Order in connection therewith. Undaunted, the BIR sent LCI a Formal
Letter of Demand11 dated May 9, 2014, requiring LCI to pay deficiency taxes in the
amount of P567,519,348.39. 12 This prompted LCI to file a petition 13 for indirect contempt
dated August 13, 2014 against petitioners before RTC Br. 35. In said petition, LCI
asserted that petitioners' act of pursuing the BIR's claims for deficiency taxes against LCI
outside of the pending rehabilitation proceedings in spite of the Commencement Order
issued by the Rehabilitation Court is a clear defiance of the aforesaid Order. As such,
petitioners must be cited for indirect contempt in accordance with Rule 71 of the Rules of
Court in relation to Section 16 of RA 10142. 14
For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to cite them
in contempt as it is only the Rehabilitation Court, being the one that issued the
Commencement Order, which has the authority to determine whether or not such Order
was defied; (b) the instant petition had already been mooted by the Rehabilitation Court's
Order15 dated August 28, 2014 which declared LCI to have been successfully
rehabilitated resulting in the termination of the corporate rehabilitation proceedings;
(c) their acts do not amount to a defiance of the Commencement Order as it was done
merely to toll the prescriptive period in collecting deficiency taxes, and thus, sanctioned
by the Rules of Procedure of the FRIA; (d) their acts of sending a Notice of Informal
Conference and Formal Letter of Demand do not amount to a "legal action or other
recourse" against LCI outside of the rehabilitation proceedings; and (e) the indirect
contempt proceedings interferes with the exercise of their functions to collect taxes due
to the govemment.16
The RTC Br. 35 Ruling
In a Decision17 dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of indirect
contempt and, accordingly, ordered them to pay a fine of ₱5,000.00 each. 18 Preliminarily,
the RTC Br. 35 ruled that it has jurisdiction over LCI's petition for indirect contempt as it is
docketed, heard, and decided separately from the principal action. 19 Going to petitioners'
other contentions, the RTC found that: (a) the supervening termination of the
rehabilitation proceedings and the consequent lifting of the Commencement Order did
not render moot the petition for indirect contempt as the acts complained of were already
consummated; (b) petitioners' acts of sending LCI a notice of informal conference and
Formal Letter of Demand are covered by the Commencement Order as they were for the
purpose of pursuing and enforcing a claim for deficiency taxes, and thus, are in clear
defiance of the Commencement Order; and (c) petitioners could have tolled the
prescriptive period to collect deficiency taxes without violating the Commencement Order
by simply ventilating their claim before the rehabilitation proceedings, which they were
adequately notified of. In this relation, the RTC Br. 35 held that while the BIR is a juridical
entity which can only act through its authorized intermediaries, it cannot be concluded
that it authorized the latter to commit the contumacious acts complained of, i.e., defiance
of the Commencement Order. Thus, absent any contrary evidence, only those individuals
who performed such acts, namely, Misajon, et al., should be cited for indirect contempt of
court.20
Aggrieved, Misaj on, et al. moved for reconsideration, 21 which was, however, denied in
an Order22 dated October 26, 2015; hence, this petition.
The Issue Before the Court
The issue for the Court's resolution is whether or not the RTC Br. 35 correctly found
Misajon, et al. to have defied the Commencement Order and, accordingly, cited them for
indirect contempt.
The Court's Ruling
The petition is without merit.
Section 4 (gg) of RA 10142 states:
Section 4. Definition of Terms. - As used in this Act, the term:x x x x
COMM FEB 22
(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected
in the plan, more if the debtor continues as a going concern than if it is immediately
liquidated.x x x x
"[C]ase law has defined corporate rehabilitation as an attempt to conserve and
administer the assets of an insolvent corporation in the hope of its eventual return from
financial stress to solvency. It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of
successful operation and liquidity."23
Verily, the inherent purpose of rehabilitation is to find ways and means to minimize the
expenses of the distressed corporation during the rehabilitation period by providing the
best possible framework for the corporation to gradually regain or achieve a sustainable
operating form. 24 "[It] enable[s] the company to gain a new lease in life and thereby allow
creditors to be paid [t]heir claims from its earnings. Thus, rehabilitation shall be
undertaken when it is shown that the continued operation of the corporation is
economically more feasible and its creditors can recover, by way of the present value of
payments projected in the plan, more, if the corporation continues as a going concern
than if it is immediately liquidate d.25
In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia, that
upon the issuance of a Commencement Order - which includes a Stay or Suspension
Order - all actions or proceedings, in court or otherwise, for the enforcement of "claims"
against the distressed company shall be suspended. 26 Under the same law, claim "shall
refer to all claims or demands of whatever nature or character against the debtor or its
property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, including, but not limited to; (1) all
claims of the government, whether national or local, including taxes, tariffs and
customs duties; and (2) claims against directors and officers of the debtor arising from
acts done in the discharge of their functions falling within the scope of their
authority: Provided, That, this inclusion does not prohibit the creditors or third parties
from filing cases against the directors and officers acting in their personal capacities." 27
To clarify, however, creditors of the distressed corporation are not without remedy as
they may still submit their claims to the rehabilitation court for proper consideration so
that they may participate in the proceedings, keeping in mind the general policy of the
law "to ensure or maintain certainty and predictability in commercial affairs, preserve and
maximize the value of the assets of these debtors, recognize creditor rights and respect
priority of claims, and ensure equitable treatment of creditors who are similarly
situated."28 In other words, the creditors must ventilate their claims before the
rehabilitation court, and any "[a]ttempts to seek legal or other resource against the
distressed corporation shall be sufficient to support a finding of indirect contempt of
court."29
In the case at bar, it is undisputed that LCI filed a petition for corporate rehabilitation.
Finding the same to be sufficient in form and substance, the Rehabilitation Court issued
a Commencement Order30 dated January 13, 2012 which, inter alia: (a) declared LCI to
be under corporate rehabilitation; (b) suspended all actions or proceedings, in court or
otherwise, for the enforcement of claims against LCI; (c) prohibited LCI from making any
payment of its outstanding liabilities as of even date, except as may be provided under
RA 10142; and (d) directed the BIR to file and serve on LCI its comment or opposition to
the petition, or its claims against LCI. It is likewise undisputed that the BIR - personally
and by publication - was notified of the rehabilitation proceedings involving LCI and the
issuance of the Commencement Order related thereto. Despite the foregoing, the BIR,
through Misajon, et al., still opted to send LCI: (a) a notice of informal conference31 dated
May 27, 2013, informing the latter of its deficiency internal tax liabilities for the Fiscal
Year ending June 30, 2010; and (b) a Formal Letter of Demand 32 dated May 9, 2014,
requiring LCI to pay deficiency taxes in the amount of P567,5 l 9,348.39, notwithstanding
the written reminder coming from LCI's court-appointed receiver of the pendency of
rehabilitation proceedings concerning LCI and the issuance of a commencement order.
Notably, the acts of sending a notice of informal conference and a Formal Letter of
Demand are part and parcel of the entire process for the assessment and collection of
deficiency taxes from a delinquent taxpayer,33 - an action or proceeding for the
enforcement of a claim which should have been suspended pursuant to the
Commencement Order. Unmistakably, Misajon, et al. 's foregoing acts are in clear
defiance of the Commencement Order.
Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the
prescriptive period for the collection of deficiency taxes; and (b) to cite them in indirect
contempt would unduly interfere with their function of collecting taxes due to the
government, cannot be given any credence. As aptly put by the RTC Br. 35, they could
have easily tolled the running of such prescriptive period, and at the same time, perform
their functions as officers of the BIR, without defying the Commencement Order and
without violating the laudable purpose of RA 10142 by simply ventilating their claim
before the Rehabilitation Court.34 After all, they were adequately notified of the LCI's
corporate rehabilitation and the issuance of the corresponding Commencement Order. In
sum, it was improper for Misajon, et al. to collect, or even attempt to collect, deficiency
taxes from LCI outside of the rehabilitation proceedings concerning the latter, and in the
process, willfully disregard the Commencement Order lawfully issued by the
Rehabilitation Court. Hence, the RTC Br. 35 correctly cited them for indirect contempt. 35
WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the Order
dated October 26, 2015 of the Regional Trial Court of Calamba City, Province of Laguna,
Branch 35 in Civil Case No. 4813-2014- C are hereby AFFIRMED. SO ORDERED.
COMM FEB 22
Lepanto Ceramics, Inc. (LCI) filed a petition for corporate rehabilitation under RA 10142
with the RTC in Calamba City. Aside from financial difficulties, the petition for rehab also
alleged LCI's tax liability at 6.3 million pesos. The Rehabilitation (Rehab Court) issued a
Commencement Order (Order).
The Order declared LCI under rehab and suspended all actions or proceedings, in court
or otherwise, for the enforcement of claims against LCI. It also directed the BIR to file
and serve on LCI its comment or opposition to the petition, or its claims against LCI.
Despite this, petitioners, acting as Assistant Commissioner, Group Supervisor, and
Examiner, sent LCI a notice of informal conference, informing the latter of its tax liabilities
for the fiscal year ending June 30, 2010. Despite receiving LCI's letter-reply regarding the
pendency of a rehab proceeding, the BIR sent LCI a Formal Letter of Demand.
A petition for indirect contempt of court was filed by LCI against petitioners for defying the
Order. In their defense, petitioners insist that the issue has already become moot and
academic because, in the meantime, LCI had already been declared rehabilitated. Also,
petitioners argue that their acts do not amount to a defiance of the Commencement
Order as it was done merely to toll the prescriptive period in collecting deficiency taxes,
that their acts of sending a Notice of Informal Conference and Formal Letter of Demand
do not amount to a "legal action or other recourse" against LCI outside of the
rehabilitation proceedings and that the indirect contempt proceedings interferes with the
exercise of their functions to collect taxes due to the govenment.
ISSUE: Are petitioners guilty of indirect contempt for issuing a notice of informal
conference despite the fact that they simple wanted to toll the prescriptive period
and considering the lifeblood doctrine?
Yes, they are guilty of indirect contempt.
According to RA 10142, upon the issuance of a commencement order, the distressed
corporation shall be temporarily immune from the enforcement of all claims against it,
including 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, keeping in mind the general policy of the
law.
Petitioners' act of issuing a notice of informal conference and later a formal letter of
demand, all despite the written reminder by LCI regarding the pendency of the rehab
proceeding, is in clear defiance of the Commencement Order.
As aptly put by the RTC Br. 35, they could have easily tolled the running of such
prescriptive period, and at the same time, perform their functions as officers of the BIR,
without defying the Commencement Order and without violating the laudable purpose of
RA 10142 by simply ventilating their claim before the Rehabilitation Court.
 9 LEONARDO S. UMALE VS. ASB REALTY CORPORATION
FACTS:
1. This case involves a parcel of land located in Amethyst Street, Ortigas Center,
Pasig City which was originally owned by Amethyst Pearl Corporation
(Amethyst Pearl), a company that is, in turn, wholly-owned by respondent ASB
Realty Corporation (ASB Realty).
2. Amethyst Pearl executed a Deed of Assignment in Liquidation of the subject
premises in favor of ASB Realty in consideration of the full redemption of
Amethyst Pearl's outstanding capital stock from ASB Realty. making ASB
Realty the owner of the subject premises
3. Sometime in 2003, ASB Realty commenced an action in the MTC for unlawful
detainer against petitioner Leonardo S. Umale.
4. ASB Realty alleged that it entered into a lease contract with Umale for the
period June 1, 1999-May 31, 2000. Their agreement was for Umale to conduct
a pay-parking business on the property and pay a monthly rent of P60,720.00.
5. Upon the contract's expiration on continued occupying the premises and paying
rentals.
6. On June 2003, ASB Realty served on Umale a Notice of Termination of Lease
and Demand to Vacate and Pay. ASB Realty stated that it was terminating the
lease effective midnight of June 30, 2003.
7. Umale failed to comply with ASB Realty's demands and continued in
possession of the subject premises, even constructing commercial
establishments thereon.
8. Umale admitted occupying the property since 1999 by virtue of a verbal lease
contract but vehemently denied that ASB Realty was his lessor. He was
adamant that his lessor was the original owner, Amethyst Pearl. Since there
was no contract between himself and ASB Realty.
9. In asserting his right to remain on the property based on the oral lease contract
with Amethyst Pearl, Umale interposed that the lease period agreed upon was
"for a long period of time." Umale further claimed that when his oral lease
contract with Amethyst Pearl ended, they both agreed on an oral contract to
sell. They agreed that Umale did not have to pay rentals until the sale over the
subject property had been perfected between them.
10. Umale also challenged ASB Realty's personality to recover the subject
premises considering that ASB Realty had been placed under receivership by
SEC and a rehabilitation receiver had been duly appointed. Under the Interim
Rules of Procedure on Corporate Rehabilitation (Interim Rules), it is the
rehabilitation receiver that has the power to "take possession, control and
custody of the debtor's assets." Since ASB Realty claims that it owns the
subject premises, it is its duly-appointed receiver that should sue to recover
possession of the same.
11. ASB Realty replied that it was impossible for Umale to have entered into a
Contract of Lease with Amethyst Pearl in 1999 because Amethyst Pearl had
been liquidated in 1996.
COMM FEB 22
12. MTC dismissed ASB Realty's complaint against Umale without prejudice. It held
that ASB Realty had no cause to seek Umale's ouster from the subject property
because it was not Umale's lessor. MTC agreed with Umale that only the
rehabilitation receiver could file suit to recover ASB Realty's property. Having
been placed under receivership, ASB Realty had no more personality to file the
complaint for unlawful detainer.
13. RTC reversed decision of the MTC. It found sufficient evidence to support the
conclusion that it was indeed ASB Realty that entered into a lease contract with
Umale. With respect to ASB Realty's personality to file the unlawful detainer
suit, the RTC ruled that ASB Realty retained all its corporate powers, including
the power to sue, despite the appointment of a rehabilitation receiver. Citing the
Interim Rules, the RTC noted that the rehabilitation receiver was not granted
therein the power to file complaints on behalf of the corporation. Moreover, the
retention of its corporate powers by the corporation under rehabilitation will
advance the objective of corporate rehabilitation, which is to conserve and
administer the assets of the corporation in the hope that it may eventually be
able to go from financial distress to solvency.
14. Umale filed MR while ASB Realty moved for the issuance of a writ of execution,
the RTC denied reconsideration of its Decision and granted ASB Realty's
Motion for Issuance of a Writ of Execution.
15. Umale then filed his appeal with the CA insisting that the parties did not enter
into a lease contract.
16. Pending the resolution thereof, Umale died and was substituted by his widow
and legal heirs. CA affirmed RTC decision in toto.
Issue: Can a corporate officer of ASB Realty (duly authorized by the Board of
Directors) file suit to recover an unlawfully detained corporate property despite the fact
that the corporation had already been placed under rehabilitation?
The Court resolves the issue in favor of ASB Realty and its officers.
There is no denying that ASB Realty, as the owner of the leased premises, is the real
party-in-interest in the unlawful detainer suit. Real party-in-interest is defined as "the
party who stands to be benefited or injured by the judgment in the suit, or the party
entitled to the avails of the suit.
What petitioners argue is that the corporate officer of ASB Realty is incapacitated to file
this suit to recover a corporate property because ASB Realty has a duly-appointed
rehabilitation receiver. Allegedly, this rehabilitation receiver is the only one that can file
the instant suit.
Corporations, such as ASB Realty, are juridical entities that exist by operation of law. As
a creature of law, the powers and attributes of a corporation are those set out, expressly
or impliedly, in the law. Among the general powers granted by law to a corporation is the
power to sue in its own name. This power is granted to a duly-organized corporation,
unless specifically revoked by another law. The question becomes: Do the laws on
corporate rehabilitation — particularly PD 902-A, as amended and its corresponding
rules of procedure — forfeit the power to sue from the corporate officers and Board of
Directors?
Corporate rehabilitation is defined as "the restoration of the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of
payments projected in the plan more if the corporation continues as a going concern than
if it is immediately liquidated." This concept of preserving the corporation's business as a
going concern while it is undergoing rehabilitation is called debtor-in-possession or
debtor-in-place. This means that the debtor corporation (the corporation undergoing
rehabilitation), through its Board of Directors and corporate officers, remains in control of
its business and properties, subject only to the monitoring of the appointed rehabilitation
receiver. The concept of debtor-in-possession, is carried out more particularly in the SEC
Rules, the rule that is relevant to the instant case. It states therein that the interim
rehabilitation receiver of the debtor corporation "does not take over the control and
management of the debtor corporation." Likewise, the rehabilitation receiver that will
replace the interim receiver is tasked only to monitor the successful implementation of
the rehabilitation plan. There is nothing in the concept of corporate rehabilitation that
would ipso facto deprive the Board of Directors and corporate officers of a debtor
corporation, such as ASB Realty, of control such that it can no longer enforce its right to
recover its property from an errant lessee.
To be sure, corporate rehabilitation imposes several restrictions on the debtor
corporation. The rules enumerate the prohibited corporate actions and transactions 64
(most of which involve some kind of disposition or encumbrance of the corporation's
assets) during the pendency of the rehabilitation proceedings but none of which touch on
the debtor corporation's right to sue.
While the Court rules that ASB Realty and its corporate officers retain their power to sue
to recover its property and the back rentals from Umale, the necessity of keeping the
receiver apprised of the proceedings and its results is not lost upon this Court. Tasked to
closely monitor the assets of ASB Realty, the rehabilitation receiver has to be notified of
the developments in the case, so that these assets would be managed in accordance
with the approved rehabilitation plan.
COMM FEB 22
10 BANK OF THE PHILIPPINE ISLANDS VS. SARABIA MANOR HOTEL
CORPORATION, G.R. NO. 175844, 29 JULY 2013 [702 SCRA 432]
Facts: Sarabia is a corporation duly organized and existing under Philippine laws, with
principal place of business at 101 General Luna Street, Iloilo City. It was incorporated on
February 22, 1982, with an authorized capital stock of P10,000,000.00, fully subscribed
and paid-up, for the primary purpose of owning, leasing, managing and/or operating
hotels, restaurants, barber shops, beauty parlors, sauna and steam baths, massage
parlors and such other businesses incident to or necessary in the management or
operation of hotels.
In 1997, Sarabia obtained a P150,000,000.00 special loan package from Far East Bank
and Trust Company (FEBTC) in order to finance the construction of a five-storey hotel
building (New Building) for the purpose of expanding its hotel business. An additional
P20,000,000.00 stand-by credit line was approved by FEBTC in the same year. 
The foregoing debts were secured by real estate mortgages over several parcels of land
owned by Sarabia and a comprehensive surety agreement dated September 1, 1997
signed by its stockholders. 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, on July 26, 2002, 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.
In its proposed rehabilitation plan, Sarabia sought for the restructuring of all its
outstanding loans, submitting that the interest payments on the same be pegged at a
uniform escalating rate of: (a) 7% per annum (p.a.) for the years 2002 to 2005; (b) 8%
p.a. for the years 2006 to 2010; (c) 10% p.a. for the years 2011 to 2013; (d) 12% p.a. for
the years 2014 to 2015; and (e) 14% p.a. for the year 2018. Likewise, Sarabia sought to
make annual payments on the principal loans starting in 2004, also in escalating
amounts depending on cash flow. Further, it proposed that it should pay off its
outstanding obligations to the government and its suppliers on their respective due dates,
for the sake of its day to day operations.
Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued
a Stay Order on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabia’s
rehabilitation receiver (Receiver). Thereafter, BPI filed its Opposition.
Issue: Whether or not the BPI’s opposition proper.
Held: No. Recognizing the volatile nature of every business, the rules on corporate
rehabilitation have been crafted in order to give companies sufficient leeway to deal with
debilitating financial predicaments in the hope of restoring or reaching a sustainable
operating form if only to best accommodate the various interests of all its stakeholders,
may it be the corporation’s stockholders, its creditors and even the general public. In this
light, case law has defined corporate rehabilitation as an attempt to conserve and
administer the assets of an insolvent corporation in the hope of its eventual return from
financial stress to solvency. It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of
successful operation and liquidity. Verily, the purpose of rehabilitation proceedings is to
enable the company to gain a new lease on life and thereby allow creditors to be paid
their claims from its earnings. Thus, rehabilitation shall be undertaken when it is shown over its rehabilitation nor questions the controlling interest of Sarabia’s shareholders or
that the continued operation of the corporation is economically more feasible and its owners.
creditors can recover, by way of the present value of payments projected in the plan,
more, if the corporation continues as a going concern than if it is immediately liquidated. In this case, the Court finds BPI’s opposition on the approved interest rate to be
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim manifestly unreasonable considering that: (a) the 6.75% p.a. interest rate already
Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a constitutes a reasonable rate of interest which is concordant with Sarabia’s projected
rehabilitation plan may be approved even over the opposition of the creditors holding a rehabilitation; and (b) on the contrary, BPI’s proposed escalating interest rates remain
majority of the corporation’s total liabilities if there is a showing that rehabilitation is hinged on the theoretical assumption of future fluctuations in the market, this
feasible and the opposition of the creditors is manifestly unreasonable. Also known as notwithstanding the fact that its interests as a secured creditor remain well-preserved.
the “cram-down” clause, this provision, which is currently incorporated in the FRIA, is
necessary to curb the majority creditors’ natural tendency to dictate their own terms and
conditions to the rehabilitation, absent due regard to the greater long-term benefit of all
stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions
of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery.
In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that
a thorough examination and analysis of the distressed corporation’s financial data must
be conducted. If the results of such examination and analysis show that there is a real
opportunity to rehabilitate the corporation in view of the assumptions made and financial
goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation is
feasible. In this accord, the rehabilitation court should not hesitate to allow the
corporation to operate as an on-going concern, albeit under the terms and conditions
stated in the approved rehabilitation plan. On the other hand, if the results of the financial
examination and analysis clearly indicate that there lies no reasonable probability that the
distressed corporation could be revived and that liquidation would, in fact, better
subserve the interests of its stakeholders, then it may be said that a rehabilitation would
not be feasible. In such case, the rehabilitation court may convert the proceedings into
one for liquidation.

As further guidance on the matter, the Court’s pronouncement in Wonder Book

Corporation v. Philippine Bank of Communications proves instructive:

Rehabilitation… is 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.

Although undefined in the Interim Rules, it may be said that the 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. The unreasonableness becomes further manifest if the
rehabilitation plan, in fact, provides for adequate safeguards to fulfill the majority
creditor’s claims, and yet the latter persists on speculative or unfounded assumptions
that his credit would remain unfulfilled.  While Section 23, Rule 4 of the Interim Rules
states that the rehabilitation court shall consider certain incidents in determining whether
the opposition is manifestly unreasonable, BPI neither proposes Sarabia’s liquidation

COMM FEB 22

11 METROPOLITAN BANK AND TRUST COMPANY VS. LIBERTY CORRUGATED
BOXES MANUFACTURING CORPORATION, G.R. NO. 184317, 25 JANUARY 2017
Facts: The Court of Appeals affirmed the Regional Trial Court's December 21, 2007
Order approving Liberty Corrugated Boxes Manufacturing Corp.'s rehabilitation plan.
Respondent Liberty Corrugated Boxes Manufacturing Corp. is a domestic corporation
that produces corrugated packaging boxes.  It obtained various credit accommodations
and loan facilities from petitioner Metropolitan Bank and Trust Company (Metrobank)
amounting to Pl 9,940,000.00. To secure its loans, Liberty mortgaged to Metrobank 12
lots in Valenzuela City.
On June 21, 2007, Liberty filed a Petition8 for corporate rehabilitation before Branch 7 4
of the Regional Trial Court of Malabon City. Liberty claimed that it could not meet its
obligations to Metrobank because of the Asian Financial Crisis, which resulted in a
drastic decline in demand for its goods, and the serious sickness of its Founder and
President, Ki Kiao Koc.
Liberty's rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of marketing
efforts; (c) resumption of operations; and ( d) entry into condominium development, a
new business.
On August 6, 2007, Metro bank filed its comment/opposition. It argued that Liberty was
not qualified for corporate rehabilitation; that Liberty's Petition for rehabilitation and
rehabilitation plan were defective; and that rehabilitation was not feasible. It also claimed
that Liberty filed the Petition solely to avoid its obligations to the bank.
Rehabilitation Receiver Rafael Chris F. Teston recommended the approval of the plan,
provided that Liberty would initiate construction on the property in Valenzuela within 12
months from approval.
In its December 21, 2007 Order, the Regional Trial Court approved the rehabilitation
plan. Metrobank appealed to the Court of Appeals. On June 13, 2008, the Court of
Appeals issued the Decision16 denying the Petition and affirming the Regional Trial
Court's December 21, 2007 Order.
The Court of Appeals also found that the trial court correctly approved the rehabilitation
plan over Metrobank's Opposition upon the recommendation of the Rehabilitation
Receiver, who had carefully considered and addressed Metrobank's criticism on the
plan's viability.
The Court of Appeals stressed that the purpose of rehabilitation proceedings is to enable
the distressed company to gain a new lease on life and to allow the creditors to be paid
their claims. It held that the approval of the Regional Trial Court was precisely "'to effect a
feasible and viable rehabilitation' of ailing corporations” as required by Presidential
Decree No. 902-A.
COMM FEB 22
Issues: Whether respondent, as a debtor in default, is qualified to file a petition for
rehabilitation under Presidential Decree No. 902-A and Rule 4, Section 1 of the Interim
Rules; and
Whether respondent's Petition for rehabilitation is sufficient in form and substance and
respondent's rehabilitation plan, feasible.
Held:
1) Rule 4, Section 1 of the Interim Rules provides:
RULE4
Debtor-Initiated Rehabilitation
SECTION 1. Who May Petition. - Any debtor who foresees the impossibility of meeting its
debts when they respectively fall due, or any creditor or creditors holding at least twenty-
five percent (25%) of the debtor's total liabilities, may petition the proper Regional Trial
Court to • have the debtor placed under rehabilitation.
Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation50
reiterates the purpose of rehabilitation, which is to provide meritorious corporations an
opportunity for recovery: Under the Interim Rules, rehabilitation is the process of
restoring "the debtor to a position of successful operation and solvency, if it is shown that
its continuance of operation is economically feasible and its creditors can recover by way
of the present value of payments projected in the plan more if the corporation continues
as a going concern that if it is immediately liquidated." It contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency.
2) The Interim Rules provide for a liberal construction of its provisions:
RULE2 Definition of Terms and Construction
SECTION 2. Construction. - These Rules shall be liberally construed to carry out the
objectives of Sections 5(d), 6(c) and 6(d) of Presidential Decree No. 902-A, as amended,
and to assist the parties in obtaining a just, expeditious, and inexpensive determination of
cases. Where applicable, the Rules of Court shall apply suppletorily to proceedings
under these Rules.
To adopt petitioner's interpretation would undermine the purpose of the Interim Rules.
There is no reason why corporations with debts that may have already matured should
not be given the opportunity to recover and pay their debtors in an orderly fashion. The
opportunity to rehabilitate the affairs of an economic entity, regardless of the status of its
debts, redounds to the benefit of its creditors, owners, and to the economy in general.
Rehabilitation, rather than collection of debts from a company already near bankruptcy, is
a better use of judicial rewards.
A.M. No. 08-8-1 O-SC further describes the remedy initiated by a petition for
rehabilitation: A petition for rehabilitation, the procedure for which is provided in the
Interim Rules of Procedure on Corporate Recovery, should be considered as a special
proceeding. It is one that seeks to establish the status of a party or a particular fact. As
provided in section 1, Rule 4 of the Interim Rules on Corporate Recovery, the status or
fact sought to be established is the inability of the corporate debtor to pay its debts when
they fall due so that a rehabilitation plan, containing the formula for the successful
recovery of the corporation, may be approved in the end. It does not seek a relief from an
injury caused by another party.
FRIA
Liquidation vs. Rehabilitation.
Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at the
same time.  In rehabilitation, corporations have to maintain their assets to continue
business operations. In liquidation, on the other hand, corporations preserve their assets
in order to sell them. (Viva Shipping Lines, Inc. vs. Keppel Philippines Marine, Inc., 784
SCRA 173, G.R. No. 177382 February 17, 2016)
Cram-down clause.
A rehabilitation plan may be approved by the court 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.
(Bank of the Philippine Islands vs. Sarabia Manor Hotel Corporation, 702 SCRA 432,
G.R. No. 175844 July 29, 2013)
Financial need for medical expenses/support is not a ground for receivership.
Financial need and like reasons will not justify granting of receivership. (Mila Caboverde
Tantano & Roseller Tantano vs Dominalda Espina-Caboverde, et al, G.R. No. 203585;
July 29, 2013)
Exceptions to the Stay or Suspension Order. –
The Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the Supreme Court as of commencement date;
(b) cases pending or filed at a specialized court or quasi-judicial agency which, upon
determination by the court is capable of resolving the claim more quickly, fairly and
efficiently than the court;
(c) sureties and other persons solidarily liable with the debtor, and third party or
accommodation mortgagors as well as issuers of letters of credit;
(d) to any form of action of customers or clients of a securities market participant to
recover or otherwise claim moneys and securities entrusted to the latter in the ordinary
course of the latter's business as well as any action of such securities market participant
or the appropriate regulatory agency or self-regulatory organization to pay or settle such
claims or liabilities;
(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor
pursuant to a securities pledge or margin agreement for the settlement of securities
transactions in accordance with the provisions of the Securities Regulation Code and its
implementing rules and regulations;
(f) the clearing and settlement of financial transactions through the facilities of a clearing
agency or similar entities duly authorized, registered and/or recognized by the
appropriate regulatory agency like the BSP and the SEC as well as any form of actions of
such agencies or entities to reimburse themselves for any transactions settled for the
debtor; and
(g) any criminal action against individual debtor or owner, partner, director or officer of a
debtor shall not be affected by any proceeding commend under this Act. (Sec. 18, FRIA)
Requirement to implead creditors.
An appeal to a corporate rehabilitation case may deprive creditor-stakeholders of
COMM FEB 22
property. Due process dictates that these creditors be impleaded to give them an
opportunity to protect the property owed to them. Creditors are indispensable parties to a
rehabilitation case, even if a rehabilitation case is non-adversarial. (Viva Shipping Lines,
Inc. vs. Keppel Philippines Marine, Inc., 784 SCRA 173, G.R. No. 177382 February 17,
2016) Thus, the failure of petitioner to implead its creditors as respondents cannot be
cured by serving copies of the Petition on its creditors. (ibid)
Creditors are indispensable parties.
A corporate rehabilitation case cannot be decided without the creditors’ participation. The
failure of petitioner to implead its creditors as respondents cannot be cured by serving
copies of the Petition on its creditors. (Viva Shipping Lines, Inc. vs. Keppel Philippines
Marine, Inc., 784 SCRA 173, G.R. No. 177382 February 17, 2016)
By not declaring its former employees as creditors in the Amended Petition for Corporate
Rehabilitation and by not notifying the same employees that an appeal had been filed,
petitioner consistently denied the due process rights of these employees. (Viva Shipping
Lines, Inc. vs. Keppel Philippines Marine, Inc., 784 SCRA 173, G.R. No. 177382
February 17, 2016)
Material financial commitment as a requirement for rehabilitation
The commitment to add P10,000,000.00 working capital appeared to be doubtful
considering that the insurance claim from which said working capital would be sourced
had already been written off by Basic Polyprinters’s affiliate, Wonder Book Corporation. A
claim that has been written off is considered a bad debt or a worthless asset, and cannot
be deemed a material financial commitment for purposes of rehabilitation.
(PhilippineBankofCommunicationsvs.BasicPolyprintersandPackagingCorporation,738
SCRA 561, G.R. No. 187581 October 20, 2014)
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. (BPI Family Savings Bank, Inc.
vs. St. Michael Medical Center, Inc., 754 SCRA 493, G.R. No. 205469 March 25, 2015)
Rehabilitation must be denied where insolvency appears irreversible and purpose
is solely to delay enforcement of claims.
Hence, the remedy must be accorded only after a judicious regard of all stakeholders’
interests; it is not a one-sided tool that may be graciously invoked to escape every
position of distress. Thus, the remedy of rehabilitation 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: (a) the
absence of a sound and workable business plan; (b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative capital infusion or complete lack
thereof for the execution of the business plan. (Philippine Asset Growth Two, Inc. v.
Fastech Synergy Philippines, Inc. (formerly First Asia System Technology, Inc.), G.R. No.
206528, June 28, 2016)

Actual vs. Technical Insolvency

In case of actual insolvency, the corporation’s assets are not enough to cover its
liabilities whereas in technical insolvency, the corporation has enough assets but it
foresees its inability to pay its obligations for more than one year. (Philippine National
Bank v. Court of Appeals, G.R. No. 165571, January 20, 2009)

Pre-Negotiated Rehabilitation

An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition
with the court for the approval of a pre-negotiated Rehabilitation Plan, which has been
endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of
the debtor, including secured creditors holding more than fifty per cent (50%) of the total
secured claims of the debtor and unsecured creditors holding more than fifty per cent
(50%) of the total unsecured claims of the debtor. (Sec. 76, FRIA)

Cram Down

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. (Victorio-Aquino
v. Pacific Plans, Inc., G.R. No. 193108, December 10, 2014; Bank of the Philippine
Islands v. Sarabia Manor Hotel Corporation, G.R. No. 175844, July 29, 2013)

Standstill Period

Standstill Period is the period agreed upon by the debtor and its creditors to enable them
to negotiate and enter into an out-of-court or informal restructuring/workout agreement or
Rehabilitation Plan pursuant to Rule 4 of these Rules. The standstill agreement may
include provisions identical with or similar to the legal effects of a commencement order
under Section 9, Rule 2 of these Rules. (Sec. 5(q), Rule 1, A.M. 12-12-11-SC)

Properties merely owned by stockholders cannot be included in the inventory of

assets of a corporation under rehabilitation.

In rehabilitation proceedings, claims of creditors are limited to demands of whatever

nature or character against a debtor or its property, whether for money or otherwise. In
several cases, we have already held that stay orders should only cover those claims
directed against corporations or their properties, against their guarantors, or their sureties
who are not solidarily liable with them, to the exclusion of accommodation mortgagors.
xxx Given that the true owner the subject property is not the corporation, petitioner
cannot be considered a creditor of MSI but a holder of a claim against respondent
spouses. Bustos vs. Millians Shoe, Inc., 824 SCRA 67, G.R. No. 185024 April 24, 2017
COMM FEB 22