[ G.R. No.

226894, September 03, 2020 ]

KAIZEN BUILDERS, INC. (FORMERLY KNOWN AS MEGALOPOLIS

PROPERTIES, INC.) AND CECILLE F. APOSTOL, VS. COURT OF APPEALS AND
THE HEIRS OF OFELIA URSAIS.

FACTS:
In 2004, Ofelia Ursais purchased from Kaizen Builders, Inc. (formerly Megalopolis
Properties, Inc.) a house and lot situated in White Pine Street, Camp 7, Baguio City. In
2007, the parties executed a contract to sell where Kaizen Builders bought back from
Ofelia the property for P2,700,000.00 and swapped it with another house and lot in
Kingstone Ville, Camp 1, Baguio City. They deducted from the price the P300,000.00
unpaid balance of Ofelia in White Pine property and the P2,200,000.00 value of
Kingstone Ville property. The remaining P200,000.00 shall be paid in cash. Later, the
parties replaced the contract to sell with another agreement where Ofelia invested the
P2,200,000.00 in Kaizen Builders' development of the Kingstone Ville project. In 2008,
however, the parties rescinded the investment agreement where Ofelia received
P320,000.00 from Kaizen Builders. The parties then stipulated that the amount of
P380,000.00 will be paid on installment basis while the remaining P1,500,000.00 shall
bear an interest of 1.5% or P22,500.00 per month.
Despite repeated demands, Kaizen Builders stopped remitting the monthly interest
beginning November 2009 and refused to deliver the P380,000.00. In 2011, Ofelia filed
against Kaizen Builders and its CEO Cecille F. Apostol (Cecille) a complaint for sum of
money before the RTC. The RTC in its Decision ordered Kaizen Builders and Cecille
solidarity liable to pay Ofelia. Meantime, Ofelia died and was substituted by her heirs.
Aggrieved, Kaizen Builders and Cecille elevated the case to the CA. Meantime, Kaizen
Builders filed before the special commercial court a petition for corporate rehabilitation
which in turn issued a Commencement Order consolidating all legal proceedings by
and against Kaizen Builders and suspended all actions for the enforcement of claims
against it. Accordingly, Kaizen Builders and Cecille moved to consolidate the appealed
case with the rehabilitation proceedings. On December 8, 2015, however, the CA denied
the motion and affirmed the Decision of the RTC with some modifications.

ISSUE:
WON the CA erred in holding Kaizen Builders and Cecille liable to pay Ofelia’s heirs.

RULING:
YES. The CA erred in holding Kaizen Builders and Cecille liable to pay Ofelia’s heirs.
Republic Act No. 10142 or the Financial Rehabilitation and Insolvency Act of 2010
statutorily defined "rehabilitation" as 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. Case law explains that rehabilitation is an attempt to
conserve and administer the assets of an insolvent corporation in the hope of its
eventual return from financial stress to solvency. A corporate rehabilitation case is a
special proceeding in rem where the basic issues concern the viability and desirability
of continuing the business operations of the distressed corporation. The purpose is to
enable the company to gain a new lease on life and allow its creditors to be paid their
claims out of its earnings. The rationale is to resuscitate businesses in financial distress
because assets are often more valuable when so maintained than they would be when
liquidated.
To achieve these objectives, Sections 16 and 17 of RA No. 10142 authorizes the
rehabilitation court to issue a Commencement Order that includes a Stay Order, which
have the effects of suspending all actions for the enforcement of claims against the
debtor and consolidating the resolution of all legal proceedings by and against it.
Here, the Commencement Order ipso jure suspended the proceedings in the CA at
whatever stage it may be, considering that the appeal emanated from a money claim
against a distressed corporation which is deemed stayed pending the rehabilitation
case. Moreover, the appeal before the CA is not one of the instances where a suspension
order is inapplicable. The CA should have abstained from resolving the appeal. Taken
together, the CA clearly defied the effects of a Commencement Order and disregarded
the state policy to encourage debtors and their creditors to collectively and realistically
resolve and adjust competing claims and property rights.

POINTS TO REMEMBER:

 "Rehabilitation" is defined as 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. That it is an attempt to conserve and
administer the assets of an insolvent corporation in the hope of its eventual
return from financial stress to solvency. A corporate rehabilitation case is a
special proceeding in rem where the basic issues concern the viability and
desirability of continuing the business operations of the distressed corporation.
The purpose is to enable the company to gain a new lease on life and allow its
creditors to be paid their claims out of its earnings. The rationale is to resuscitate
businesses in financial distress because assets are often more valuable when so
maintained than they would be when liquidated. When a rehabilitation court
issues a Commencement Order that includes a Stay Order, it will have the effect
of suspending all actions for the enforcement of claims against the debtor and
consolidating the resolution of all legal proceedings by and against it.

[G.R. No. 177382 February 17, 2016]

 VIVA SHIPPING LINES, INC.
vs.
KEPPEL PHILIPPINES MINING, INC., METROPOLITAN BANK & TRUST
COMPANY, PILIPINAS SHELL PETROLEUM CORPORATION, CITY OF
BATANGAS, CITY OF LUCENA, PROVINCE OF QUEZON, ALEJANDRO OLIT,
NIDA MONTILLA, PIO HERNANDEZ, EUGENIO BACULO, and HARLAN
BACALTOS.

FACTS:
On October 4, 2005, Viva Shipping Lines, Inc. filed a Petition for Corporate
Rehabilitation before the RTC of Lucena City. The RTC 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. On October 19, 2005, the Regional Trial Court found that
Viva Shipping Lines’ Amended Petition to be "sufficient in form and substance," and
issued a stay order. It stayed the enforcement of all monetary and judicial claims against
Viva Shipping Lines, and prohibited Viva Shipping Lines from selling, encumbering,
transferring, or disposing of any of its properties except in the ordinary course of
business.
In the Order dated October 30, 2006, RTC lifted the stay order and dismissed Viva
Shipping Lines’ Amended Petition for failure to show the company’s viability and the
feasibility of rehabilitation. RTC found that Viva Shipping Lines’ assets all appeared to
be non-performing. Further, it noted that Viva Shipping Lines failed to show any
evidence of consent to sell real properties belonging to its sister company.
Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules
of Court before the CA. It only impleaded the Presiding Judge of the trial court that
rendered the assailed decision. It did not implead any of its creditors but served copies
of the Petition on counsels for Metrobank, Keppel Philippines Marine, Inc., Pilipinas
Shell, City of Batangas, Province of Quezon, and City of Lucena. Viva Shipping Lines
neither impleaded nor served a copy of the Petition on its former employees or their
counsels.
CA dismissed Viva Shipping Lines’ Petition for Review in the Resolution dated January
5, 2007. It found that Viva Shipping Lines failed to comply with procedural
requirements under Rule 43. CA ruled that due to the failure of Viva Shipping Lines to
implead its creditors as respondents, there are no respondents who may be required to
file a comment on the petition, pursuant to Section 8 of Rule 43. Hence, this Petition for
Review on Certiorari.
ISSUES:
1. WON CA erred in dismissing petitioner Viva Shipping Lines’ Petition for Review
on procedural grounds; and
2. WON the RTC should have allowed petitioner to clarify its Amended Petition
with respect to details regarding its assets and its liabilities to its creditors
instead of dismissing the Petition outright.
RULING:
1. NO. Liberality in corporate rehabilitation procedure only generally refers to the trial
court, not to the proceedings before the appellate court. The Interim Rules of Procedure
on Corporate Rehabilitation covers petitions for rehabilitation filed before the Regional
Trial Court. Thus, Rule 2, Section 2 of the Interim Rules of Procedure on Corporate
Rehabilitation, which refers to liberal construction, is limited to the Regional Trial
Court. The liberality was given to assist the parties in obtaining a just, expeditious, and
inexpensive disposition of the case.
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. 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 next procedural rule that petitioner pleaded to suspend is the rule requiring it to
furnish all parties with copies of the Rule 43 Petition. Petitioner admitted its failure to
furnish its former employees with copies of the Petition because they belatedly filed
their claims before the RTC. This argument is specious at best; at worst, it foists a fraud
on this court. The former employees were unable to raise their claims on time because
petitioner did not declare them as creditors. Petitioner’s belated compliance with the
requirement to serve the Petition for Review on its former employees did not cure the
procedural lapse. The court cannot be a party to the inequitable way that petitioner’s
employees were treated.
Petitioner also pleaded to be excused from the requirement under Rule 6, Section 5 of
the Rules of Court to serve a copy of the Petition on the originating court. According to
petitioner, the annexes for the Petition for Review filed before the Court of Appeals
arrived from Lucena City on the last day of filing the petition. Petitioner’s
representative from Lucena City and petitioner’s counsel rushed to compile and
reproduce all the documents, and in such rush, failed to send a copy to the Regional
Trial Court. When petitioner realized that it failed to furnish the originating court with
a copy of the Petition, a copy was immediately sent by registered mail.
Again, petitioner’s excuse is unacceptable. Petitioner had 15 days to file a Rule 43
petition, which should include the proof of service to the originating court. Rushing the
compilation of the pleading with the annexes has nothing to do with being able to
comply with the requirement to submit a proof of service of the copy of the petition for
review to the originating court. If at all, it further reflects the unprofessional way that
petitioner and its counsel treated our rules.
As the court has consistently ruled, the right to appeal is not a natural right, nor a part
of due process; it is merely a statutory privilege and may be exercised only in the
manner and in accordance with the provisions of the law.
2. NO. The Regional Trial Court correctly dismissed the Amended Petition for
Corporate Rehabilitation. The dismissal of the Amended Petition did not emanate from
petitioner’s failure to provide complete details on its assets and liabilities but on the
trial court’s finding that rehabilitation is no longer viable for petitioner. Under the
Interim Rules of Procedure on Corporate Rehabilitation, a "petition shall be dismissed if
no rehabilitation plan is approved by the court upon the lapse of one hundred eighty
(180) days from the date of the initial hearing."143 The proceedings are also deemed
terminated upon the trial court’s disapproval of a rehabilitation plan, "or a
determination that the rehabilitation plan may no longer be implemented in accordance
with its terms, conditions, restrictions, or assumptions."
Here, the trial court 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. 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.

POINTS TO REMEMBER:

 Corporate rehabilitation is a remedy for corporations, partnerships, and

associations who foresee the impossibility of meeting their debts when they
respectively fall due.
 A corporation under rehabilitation continues with its corporate life and activities
to achieve solvency, or a position where the corporation is able to pay its
obligations as they fall due in the ordinary course of business.
 Solvency is a state where the businesses’ liabilities are less than its assets.
 Corporate rehabilitation is a type of proceeding available to a business that is
insolvent. In general, insolvency proceedings provide for predictability that
commercial obligations will be met despite business downturns.
 There are instances when corporate rehabilitation can no longer be achieved.
When rehabilitation will not result in a better present value recovery for the
creditors, the more appropriate remedy is liquidation.
 Liquidation is diametrically opposed to rehabilitation. Both cannot be
undertaken at the same time. In rehabilitation, corporations have to maintain
their assets to continue business operations. In liquidation, on the other hand,
corporations preserve their assets in order to sell them. Without these assets,
business operations are effectively discontinued. The proceeds of the sale are
distributed equitably among creditors, and surplus is divided, or losses are re-
allocated.

[G.R. No. 175844 July 29, 2013]

 BANK OF THE PHILIPPINE ISLANDS, vs.
SARABIA MANOR HOTEL CORPORATION.

FACTS:

Sarabia Hotel obtained a special loan package from 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 credit in addition to the loan 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, BPI assumed
all of FEBTC’s rights against Sarabia. Sarabia started to pay interests on its loans.

However, largely because of the delayed completion of the New Building, Sarabia
incurred various cash flow problems. Thus, even though it had more assets than
liabilities at that time, it, nevertheless, filed a Petition for corporate rehabilitation 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. The RTC approved
Sarabia’s rehabilitation plan as recommended by the Receiver, finding the same to be
feasible. The CA affirmed the RTC’s ruling with the modification of reinstating the
surety obligations of Sarabia’s stockholders to BPI as an additional safeguard for the
effective implementation of the approved rehabilitation plan.

ISSUE:

Whether or not the CA correctly affirmed Sarabia’s rehabilitation plan as approved by

the RTC.

RULING:

Yes. Recognizing the volatile nature of every business, the rules on corporate
rehabilitation have been crafted in order to give companies sufficient leeway to deal
with debilitating financial predicaments in the hope of restoring or reaching a
sustainable operating form if only to best accommodate the various interests of all its
stakeholders, may it be the corporation’s stockholders, its creditors and even the
general public.

In this light, case law has defined corporate rehabilitation as an attempt to conserve and
administer the assets of an insolvent corporation in the hope of its eventual return from
financial stress to solvency. It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former position of
successful operation and liquidity.

Verily, the purpose of rehabilitation proceedings is to enable the company to gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings. Thus,
rehabilitation shall be undertaken when it is shown that the continued operation of the
corporation is economically more feasible and its creditors can recover, by way of the
present value of payments projected in the plan, more, if the corporation continues as a
going concern than if it is immediately liquidated.

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim
Rules of Procedure on Corporate Rehabilitation states that a rehabilitation plan may be
approved even over the opposition of the creditors holding a majority of the
corporation’s total liabilities if there is a showing that rehabilitation is feasible and the
opposition of the creditors is manifestly unreasonable.
Also known as the “cram-down” clause, this provision, which is currently incorporated
in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their
own terms and conditions to the rehabilitation, absent due regard to the greater long-
term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the
terms and conditions of the rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery. It is within the parameters of the aforesaid
provision that the Court examines the approval of Sarabia’s rehabilitation.

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.

In this case, Sarabia has the financial capability to undergo rehabilitation. Despite its
financial constraints, Sarabia likewise continues to be profitable with its hotelier
business as its operations have not been disrupted. Second, Sarabia has the ability to
have sustainable profits over a long period of time. Third, the interests of Sarabia’s
creditors are well-protected. Therefore, based on the above-stated reasons, the Court
finds Sarabia’s rehabilitation to be feasible.

POINTS TO REMEMBER:

 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.
 CRAM-DOWN CLAUSE - 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. 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.

[G.R. No. 187581, October 20, 2014]

 PHILIPPINE BANK OF COMMUNICATIONS VS.
BASIC POLYPRINTERS AND PACKAGING CORPORATION.

FACTS:

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

Accordingly, Basic Polyprinters brought its individual petition, averring therein that: (a)
its business since incorporation had been very viable and financially profitable; (b) it
had obtained loans from various banks, and had owed accounts payable to various
creditors; (c) the Asian currency crisis, devaluation of the Philippine peso, and the
current state of affairs of the Philippine economy; (d) its operations would be hampered
and would render rehabilitation difficult should its creditors enforce their claims
through legal actions, including foreclosure proceedings; (e) included in its overall
Rehabilitation Program was the full payment of its outstanding loans in favor of
petitioner PBCOM and other banks.

ISSUE:

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

RULING:

No. Liquidity is not an issue in a petition for rehabilitation.

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.

On the one hand, they attempt to provide for the efficient and equitable distribution of
an insolvent debtor’s remaining assets to its creditors; and on the other, to provide
debtors with a “fresh start” by relieving them of the weight of their outstanding debts
and permitting them to reorganize their affairs. The purpose of rehabilitation
proceedings is to enable the company to gain a new lease on life and thereby allow
creditors to be paid their claims from its earnings.

Consequently, the basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation. The
determination of such issues was to be carried out by the court-appointed rehabilitation
receiver.

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

POINTS TO REMEMBER:

 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.”

 Two-pronged purpose of rehabilitation proceedings:

Equitable purpose: To efficiently and equitably distribute the assets of the

insolvent debtor to its creditors; and

Rehabilitative purpose: To provide the debtor with a fresh start.

[GR No. 184317 January 25, 2017]

 METROBANK VS. LIBERTY CORRUGATED BOXES
MANUFACTURING CORPORATION.

FACTS:

Respondent Liberty is a domestic corporation that produces corrugated packaging

boxes. It obtained various credit accommodations and loan facilities from petitioner
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 Petition for
corporate rehabilitation under P.D. 902-A before RTC Malabon.

Liberty claimed that it could not meet its obligations to Metrobank because of the Asian
Financial Crisis and the serious sickness of its Founder and President. On August 6,
2007, Metrobank filed its comment and opposition. It argued that Liberty was not
qualified for corporate rehabilitation. It claimed that Liberty filed the Petition solely to
avoid its obligations to the bank. Petitioner claims that Rule 4, Section 1 of the Interim
Rules restricts the kind of debtor who can file petitions for corporate rehabilitation.
Petitioner insists that the phrase “who foresees the impossibility of meeting its debts
when they respectively fall due” must be construed plainly to mean that an element of
foresight is required; thus, the debts of the corporation should not have matured.

The RTC approved the rehabilitation plan. Metrobank appealed to the Court of Appeals
but the CA affirmed the decision of RTC finding that debtor corporations could still
avail themselves of the remedy of rehabilitation under the Interim Rules of Procedure
on Corporate Rehabilitation even if they were already in default.  It held that even
insolvent corporations could still file a petition for rehabilitation.

ISSUE:

Whether respondent is qualified to file a petition for rehabilitation under P.D. No. 902-
A and Rule 4, Section 1 of the Interim Rules.

RULING:

Yes. Liberty is qualified to financially rehabilitate. 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. Under the maxim
noscitur a sociis, where a particular word or phrase is ambiguous in itself or is equally
susceptible of various meanings, its correct construction may be made clear and specific
by considering the company of words in which it is founded or which it is associated. In
this case, the phrase "when they respectively fall due" in Rule 4, Section 1 of the Interim
Rules need not refer to a specific period or point in time when the debts mature. It may
refer to the debtor corporation's general realization that it will not be able to fulfill its
obligations.

POINTS TO REMEMBER:

 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. Thus, corporations with debts that have
already matured may still file a petition for rehabilitation under the Interim
Rules of Procedure on Corporation Rehabilitation, since 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.
[G.R. No. 165675 September 30, 2005]

SPOUSES EDUARDO SOBREJUANITE AND FIDELA SOBREJUANITE

 VS. ASB DEVELOPMENT CORPORATION.

FACTS:

Spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite) filed a Complaint for rescission
of contract, refund of payments and damages, against ASB Development Corporation
(ASBDC) before the Housing and Land Use Regulatory Board (HLURB). 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 as agreed. ASBDC filed a motion to
dismiss or suspend proceedings in view of the approval by the Securities and Exchange
Commission (SEC) 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 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.
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. 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.

POINTS TO REMEMBER:

 It is well to note that even the execution of final judgments may be held in
abeyance when a corporation is under rehabilitation. As between creditors, the
key phrase is "equality is equity." When a corporation threatened by bankruptcy
is taken over by a receiver, all the creditors should stand on equal footing. Not
anyone of them should be given any preference by paying one or some of them
ahead of the others. This is precisely the reason for the suspension of all pending
claims against the corporation under receivership. Instead of creditors vexing the
courts with suits against the distressed firm, they are directed to file their claims
with the receiver who is a duly appointed officer of the SEC.

[GR No. 163156, December 10, 2008]

NEGROS NAVIGATION CO., INC. VS. CA.

FACTS:
NNC, a shipping company, engaged the services of THI for the repair of its vessels.
Upon failure to pay the repairman’s lien, THI filed an action against NNC and had
several vessels attached to which the RTC (Cebu) granted. NNC filed a petition for
corporate rehabilitation with prayer of suspension of payments with the RTC (Manila)
due to reverses experienced during the Asian Financial Crisis and the devaluation of
peso. RTC Manila granted the petition and issued a Stay Order stating that all claims
against NNC were covered by the order. In an appeal with the CA, THI claimed that the
issuance of the stay order impaired its right to collect the repairman’s lien from NNC,
however, the appellate court dismissed the petition of THI for lack of merit. 

ISSUE:

Whether the claim of THI against the vessels of NCC is covered by the stay order.

RULING:

Yes. PD 902-A mandates that upon appointment of a management committee,

rehabilitation receiver, board or body, all actions for claims against corporations,
partnerships or associations under management or receivership pending before any
court, tribunal, board or body shall be suspended. PD 902-A does not make any
distinction as to what claims are covered by the suspension of actions for claims
against corporations under rehabilitation. No exception is made therein in favor of
maritime claims. Thus, since the law does not make any exemptions or
distinctions, neither the courts should. Ubi lex non distinguit nec nos distinguere
debemos.

POINTS TO REMEMBER:

 When a distressed company is placed under rehabilitation, the appointment of a

management committee follows to avoid collusion between the previous
management and creditors it might favor, to the prejudice of the other creditors.
The stay order is effective on all creditors of the corporation without distinction,
whether secured or unsecured. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by the expediency of
attachment, execution or otherwise. As between the creditors, the key phrase is
equality in equity. Once the corporation threatened by bankruptcy is taken over
by a receiver, all the creditors ought to stand on equal footing. Not any one of
them should be paid ahead of the others. This is precisely the reason for
suspending all pending claims against the corporation under receivership.

[GR No. 169725, April 30, 2010]

CASTILLO VS. UNIWIDE WAREHOUSE CLUB.

FACTS:
On 26 August 2002, a complaint for illegal dismissal was filed by Ricardo Castillo before
the National Labor Relations Commission against Uniwide Warehouse Club, Inc. and
its president, Jimmy Gow. The complaint contained a prayer for the payment of worked
Saturdays for the year 2001; holiday pay; separation pay; actual, moral and exemplary
damages; and attorney’s fees. On 18 October 2002, the respondents submitted a Motion
to Suspend Proceedings, stating that in June 1999, the Uniwide Group of Companies
had petitioned the Securities and Exchange Commission for suspension of payments
and for approval of its proposed rehabilitation plan. It appears that the SEC ruled
favorable on the petition and ordered that all claims, actions and proceedings against
respondents be suspended, and that following the appointment of an interim receiver,
the suspension order had been extended to until 7 February 2000. The SEC approved
the rehabilitation plan on 11 April 2000. In an order, the labor arbiter denied the Motion
to Suspend Proceedings. The NLRC sustained the labor arbiter. However, the Court of
Appeals, on appeal, reversed the NLRC decision. Meanwhile, the labor arbiter also
issued a decision on the illegal dismissal of Castillo and ordered the respondents to pay
him his separation pay. The other claims of Castillo (i.e., holiday pay, worked Saturday
pay, etc.) were dismissed. Both Castillo and respondents appealed with the NLRC.

ISSUE:

Whether Castillo’s action for claim may be suspended while rehabilitation efforts on the
respondent company is ongoing.

RULING:

Yes, Castillo’s claim is a claim covered by the suspension order by the SEC. Corporate
rehabilitation connotes the restoration of the debtor to a position of successful operation
and solvency. An essential function of corporate rehabilitation is the mechanism of
suspension of all actions and claims against the distressed corporation, upon the due
appointment of a management committee or rehabilitation receiver. The actions that
were suspended cover all claims against a distressed corporation whether for damages
founded on a breach of contract of carriage, labor cases, collection suits or any other
claims of a pecuniary nature. Moreover, the new rules on corporate rehabilitation
provide an all-encompassing definition of the term and, thus, include all claims or
demands of whatever nature or character against a debtor or its property, whether for
money or otherwise. 

POINTS TO REMEMBER:

 Jurisprudence is settled that the suspension of proceedings referred to in the law

uniformly applies to "all actions for claims" filed against a corporation,
partnership or association under management or receivership, without
distinction, except only those expenses incurred in the ordinary course of
business. The Court noted that aside from the given exception, the law is clear
and makes no distinction as to the claims that are suspended once a management
committee is created or a rehabilitation receiver is appointed.

[G.R. No. 164856 January 20, 2009]

GARCIA VS. PHILIPPINE AIRLINES.

FACTS:
Petitioners Alberto J. Dumago and Juanito A. Garcia were employed by respondent
PAL as Aircraft Furnishers Master "C" and Aircraft Inspector, respectively. They were
assigned in the PAL Technical Center. A Notice of Administrative Charge was served
on petitioners. They were allegedly "caught in the act of sniffing shabu inside the
Toolroom Section," then placed under preventive suspension. Petitioners vehemently
denied the allegations. Petitioners were dismissed for violation of the PAL Code of
Discipline. Both simultaneously filed a case for illegal dismissal and damages. In the
meantime, the SEC placed PAL under an Interim Rehabilitation Receiver due to severe
financial losses. The Labor Arbiter rendered a decision in petitioners’ favor finding PAL
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 th and to pay jointly and severally unto the complainants backwages, 13
month pay and damages and attorney’s fees. Meanwhile, the SEC replaced the Interim
Rehabilitation Receiver with a Permanent Rehabilitation Receiver. The Labor Arbiter
issued a Writ of Execution and a Notice of Garnishment. PAL moved to quash the Writ
of Execution and to lift the Notice of Garnishment. NLRC declared the Writ of
Execution and Notice of Garnishment valid but suspended the said proceedings and
referred the same to the Receiver of PAL for appropriate action.

ISSUE:

Whether petitioners are entitled to execution of the Labor Arbiter’s order of

reinstatement even if PAL is under receivership. 

RULING:

No, 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. 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
extrajudicial interference that might unduly hinder or prevent the rescue of the
corporation. 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. 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. 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. No exception in favor of labor claims is mentioned in the
law.

POINTS TO REMEMBER:

 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.

 The parallelism between a judicial order of corporation rehabilitation as a

justification for the non-exercise of its options, on the one hand, and a claim of
actual and imminent substantial losses as ground for retrenchment, on the other
 hand, stops at the red line on the financial statements. Beyond the analogous
condition of financial gloom, as discussed by Justice Leonardo Quisumbing in his
Separate Opinion, are more salient distinctions. Unlike the ground of substantial
losses contemplated in a retrenchment case, the state of corporate rehabilitation
was judicially pre-determined by a competent court and not formulated for the
first time in this case by respondent.

[G.R. No. 211537, December 10, 2019]

LANDBANK VS. POLLILO PARADISE ISLAND CORPORATION.

FACTS:

Polillo Paradise Island Corp. obtained a loan from Landbank using two parcels of land
owned by Aimee and Chris Almeda as a security. The loan was used as additional
working capital of its hotel business. Respondent failed to pay its loan obligation. Thus,
petitioner was constrained to file a petition for extrajudicial foreclosure of the
mortgaged properties. Subsequently, the mortgaged properties were sold to the
petitioner as the highest bidder. A Certificate of Sale was issued and registered before
the Registry of Deeds. As the respondent failed to redeem said properties within the
redemption period, petitioner consolidated its title over the subject properties.
Allegedly, respondent filed a petition for corporate rehabilitation. It asserted that its
financial viability was greatly affected as the Province of Quezon was devastated by the
typhoon and flood, resulting in the cancellation of functions and decline in room
occupancy; and by the global crisis in 2008. As the decrease in financial revenues
deprived it of enough cash flow to service payment of its debts, respondent insisted that
rehabilitation is the only viable option for it to continue its operations and settle its
liabilities. RTC dismissed the petition for lack of merit, it took note that there is nothing
left to be rehabilitated considering that the subject properties subject of the foreclosure
sale comprises the bulk of respondent's assets. Respondents filed an amended petition
for corporate rehabilitation invoking the application of FRIA. The RTC granted the
petition and issued a Commencement/Suspension Order.

Petitioner filed its Opposition stating that it is no longer a creditor of respondent in

view of the consolidation of the ownership of the subject properties in its name
following the extrajudicial foreclosure sale; therefore, relieving respondent of any
liability arising from the loan it previously obtained from it. As such, the proceedings
concerning the sale of the subject properties is no longer covered by the FRIA. RTC
denied Petitioner’s opposition. The RTC explained that when such consolidation took
place after the date of the filing of the amended petition, the same and the proceedings
before it is void for being violative of Section 17 of the FRIA since the ownership of the
subject properties still lies with the respondent at the time that said petition was filed.
Hence the petition before SC.

ISSUE:

Whether or not the Commencement Order issued by the RTC has the effect of rendering
void the foreclosure sale of the subject properties and the effects thereof.

RULING:

No. The FRIA provides that the effects of the Commencement Order shall be reckoned
from the date of the filing of the petition for corporate rehabilitation, be it voluntary or
involuntary. Emphatically, the determination of the date of the filing of the petition for
rehabilitation is relevant in ascertaining the extent of the legal effects of a
Commencement Order. The October 18, 2012 Amended Petition is in reality not an
amendment to the earlier petition as it was filed only after the RTC dismissed the
August 22, 2012 petition. Verily, there was nothing more to amend when the petition
had already been dismissed. Likewise, it must be emphasized that it was the October
18, 2012 petition which was granted by the RTC and initiated the rehabilitation
proceedings. Thus the commencement date is reckoned on October 18, 2012. As the
commencement date is ascertained, it is indispensable to discern the period where the
extrajudicial foreclosure sale and its effects took place. It is undisputed that Certificate
of Sale was issued and registered on August 22, 2011. As such, the last day of the
redemption period is on August 22, 2012. The determination of such expiration date is
relevant insofar as the ownership of the subject properties is concerned. Case law
dictates that the purchaser in an extrajudicial foreclosure of real property becomes the
absolute owner of the property if no redemption is made within one year from the
registration of the Certificate of Sale by those entitled to redeem. The consolidation of
ownership in the name of the buyer and the issuance of the new certificate of title
merely entitles him to possession thereof as a matter of right. Nevertheless, upon the
purchase of the property and before the lapse of the redemption period, the buyer is
already considered as the owner. Hence, in this case, the ownership of the subject
properties was vested upon the petitioner on August 22, 2012 as its registered owners
failed to redeem the same. Notably, such period precedes the filing of the petition for
corporate rehabilitation on October 18, 2012.

POINTS TO REMEMBER:

 The FRIA provides that the effects of the Commencement Order shall be
reckoned from the date of the filing of the petition for corporate rehabilitation, be
it voluntary or involuntary. Emphatically, the determination of the date of the
filing of the petition for rehabilitation is relevant in ascertaining the extent of the
legal effects of a Commencement Order. 

[G.R. No. 167768, April 17, 2009]

MALAYAN INSURANCE COMPANY, INC. VS.

VICTORIAS MILLING COMPANY.

FACTS:

On July 8, 1997, the SEC issued a Stay Order, suspending all actions for claims against
the respondent. One month after, SEC constituted a Management Committee. On May
31, 1999, the Labor Arbiter rendered a decision in "Abelido v. Victorias Milling",
ordering respondent to pay Abelido the sum of ₱6,605,275.24. On July 16, 1999,
respondent procured from the petitioner a surety bond as a requisite to the filing of an
appeal with the NLRC from the Labor Arbiter’s decision. NLRC affirmed the decision
of the Labor Arbiter. Thereafter, a writ of execution was issued. Petitioner served a
demand upon BPI for the release of the bank deposits that respondent had assigned in
its favor, but BPI refused. Respondent advised petitioner that the enforcement of the
writ of execution was premature and without legal basis. The following day, petitioner
replied that the NLRC was bent on enforcing the writ, and sought from the respondent
a copy of a TRO, if any, issued by the Court of Appeals.

Petitioner filed a complaint for sum of money with the RTC for its failure to
obtain reimbursement from the respondent. Meanwhile, SEC issued an order
appointing a rehabilitation receiver for respondent. In line with this, RTC suspended
the proceedings against respondent, it also denied petitioner’s motion for
reconsideration. Petitioner filed a PC with the CA which was subsequently dismissed.
Meanwhile, the CA resolved the PC filed by the respondent assailing the NLRC
decision. The appellate court, while affirming the NLRC decision, set aside the latter’s
resolution on the respondent’s motion for reconsideration, and remanded the case to
the NLRC for suspension of the proceedings, ruling that the NLRC decision cannot be
enforced while the respondent is under a management committee. Hence the petition
before the SC, insisting that since its claim for reimbursement of the amount it released
to NLRC to satisfy the judgment on the labor claims of Abelido arose after the
respondent was placed under a management committee, such claim should not be
suspended nor covered by the SEC Stay Order.

ISSUE:

Whether or not the claim for reimbursement made by the petitioner after the
respondent was placed under a management committee should be suspended.

RULING:

Yes. Sec. 6 (c) of P.D. No. 902-A provides that: upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body, shall be suspended
accordingly. It uniformly applies to "all actions for claims" filed against a corporation,
partnership or association under management or receivership, without distinction. The
suspension of action for claims against a corporation under rehabilitation receiver or
management committee embraces all phases of the suit, be it before the trial court or
any tribunal or before this Court. Otherwise stated, what are automatically stayed or
suspended are the proceedings of an action or suit and not just the payment of claims.
Furthermore, the actions that are suspended cover all claims against a distressed
corporation whether for damages founded on a breach of contract of carriage, labor
cases, collection suits or any other claims of a pecuniary nature.

POINTS TO REMEMBER:

 As long as the corporation is under a management committee or a rehabilitation

receiver, all actions for claims against it --- for money or otherwise --- must yield
to the greater imperative of corporate rehabilitation, excepting only, as already
mentioned, claims for payment of obligations incurred by the corporation in the
ordinary course of business. Enforcement of writs of execution issued by judicial
or quasi-judicial tribunals, since such writs emanate from "actions for claims,"
must, likewise, be suspended.
 [G.R. No. 206528, June 28, 2016]

PHILIPPINE ASSET GROWTH TWO, INC. (SUCCESSOR-IN-INTEREST OF

PLANTERS DEVELOPMENT BANK) AND PLANTERS DEVELOPMENT BANK
VS. FASTECH SYNERGY PHILIPPINES, INC.,

FACTS:

Respondents filed a verified Joint Petition for corporate rehabilitation, with prayer for
the issuance of a Stay or Suspension Order. They claimed that: (a) their business
operations and daily affairs are being managed by the same individuals; (b) they share a
majority of their common assets; and (c) they have common creditors and common
liabilities. Among the common creditors listed in the rehabilitation petition was
PDB, which had earlier filed a petition for extrajudicial foreclosure of mortgage over the
two (2) parcels of land, registered in the name of Fastech Properties listed as common
assets of respondents in the rehabilitation petition. PDB emerged as the highest bidder
in the foreclosure sale. Respondents claimed that this situation has impacted on their
chance to recover from the losses they have suffered over the years. Hence, respondents
submitted for the court's approval their proposed Rehabilitation Plan. RTC-Makati
issued a Commencement Order with Stay Order, and appointed a Rehabilitation
Receiver. After the creditors had filed their respective comments and/or oppositions to
the revised Rehabilitation Plan, and respondents had submitted their consolidated
reply thereto, the court-appointed Rehabilitation Receiver submitted her
comments, opining that respondents may be successfully rehabilitated, considering the
sufficiency of their assets to cover their liabilities and the underlying assumptions,
financial projections and procedures to accomplish said goals in their Rehabilitation
Plan.

The RTC-Makati dismissed the rehabilitation petition despite the favorable

recommendation of its appointed Rehabilitation Receiver. It found the facts and figures
submitted by respondents to be unreliable in view of the disclaimer of opinion of the
independent auditors who reviewed respondents' 2009 financial statements, which it
considered as amounting to a "straightforward unqualified adverse opinion." In the
same vein, it did not give credence to the unaudited 2010 financial statements as the
same were mere photocopied documents and unsigned by any of respondents'
responsible officers. It also observed that respondents added new accounts and/or
deleted/omitted certain accounts. Furthermore, it rejected the revised financial
projections as the bases for which were not submitted for its evaluation on the ground
of confidentiality. On appeal, the CA issued rendered a Decision, reversing and setting
aside the RTC-Makati ruling. The CA reinstated the rehabilitation petition, approved
respondents' Rehabilitation Plan, and remanded the case to the RTC-Makati to
supervise its implementation. Considering that respondents' creditors are placed in
equal footing as a necessary consequence, it permanently enjoined PDB from "effecting
the foreclosure" of the subject properties during the implementation of the
Rehabilitation Plan.

ISSUE:

Whether or not the Rehabilitation Plan is feasible.

RULING:

No. In the present case, the Rehabilitation Plan failed to comply with the minimum
requirements, i.e.: (a) material financial commitments to support the rehabilitation plan;
and (b) a proper liquidation analysis, under Section 18, Rule 3 of the 2008 Rules of
Procedure on Corporate Rehabilitation, which Rules were in force at the time
respondents' rehabilitation petition was filed on April 8, 2011.

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.

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.

POINTS TO REMEMBER:

 The test in evaluating the economic feasibility of the plan was laid down in Bank
of the Philippine Islands v. Sarabia Manor Hotel Corporation, to wit: 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.

[G.R. No. 191939, March 14, 2018]

ALLIED BANKING VS. IN THE MATTER OF THE PETITION TO HAVE

STEEL CORP PLACED UNDER CORPORATE REHABILITATION.

FACTS:

n 11 September 2006, Equitable PCI Bank, Inc. (EPCIB), as creditor, filed a petition for
the corporate rehabilitation of its debtor SCP with the RTC. EPCIB alleged, among
others, that due to the onslaught of the 1997 Asian Financial Crisis, SCP began
experiencing a downward trend in its financial condition which prompted various
banks and financial institutions to grant it with term loan facilities and working capital
lines; that SCP failed to make timely payments on its term loan facilities; that SCP also
defaulted on its loan obligations under the December 2002 Omnibus Agreement. On 12
September 2006, the RTC issued an Order granting the petition for rehabilitation of
EPCIB.
 
On 15 September 2006, petitioner applied the remaining proceeds of SCP's Current
Account No. 1801-004-87-6 in the amount of P6,750,000.00, maintained with its Aguirre
Branch, to its obligations under the TR. On 29 October 2006, SCP filed an urgent
omnibus motion alleging that petitioner violated the rehabilitation court's stay order
when it applied the proceeds of its current account to the payment of obligations
covered by the stay order. Consequently, it prayed for ABC to immediately restore its
current account, credit back to said account the amount of P6,750,000.00, and honor any
and all transactions of SCP in said account.

On 2 November 2006, ABC filed an opposition, mainly contending that SCP's

obligations with it had become due and demandable, rendering legal compensation
valid and proper; that petitioner did not violate the stay order, as it had no notice of its
issuance at the time of the legal compensation; and that petitioner cannot be legally
compelled to extend credit to SCP against its will. The RTC issued a resolution finding
merit in SCP's position. Aggrieved, ABC filed a petition for review under Rule 43 with
the CA. The CA affirmed the resolution of the RTC. Hence, the issue was raised to the
SC.
 
ABC contends that it was deprived of its right to due process when the RTC ordered
ABC to restore SCP's current account and to credit back the amount previously set off.
ABC asserts that it was not yet bound by the 12 September 2006 stay order when it
made the setoff on 15 September 2006 because jurisdiction over it had not yet been
acquired by the rehabilitation court; the stay order was only published on 16 September
2006.

ISSUE:

Whether the stay order issued by RTC violated the right to due process.

RULING:

No. Taking into consideration the laudable objectives of rehabilitation proceedings, the
immediate effectivity of the stay order means that the RTC, through an order
commencing rehabilitation and staying claims against the debtor, acknowledges that
the debtor requires rehabilitation immediately and therefore it can not only prohibit but
also nullify acts made after its effectivity, when such acts are violative of the stay order,
to prevent any irreparable detriment to the debtor's successful restoration.

The foregoing is validated by the Interim Rules, where the court can declare void any
transaction made in violation of the stay order, viz:
Sec. 8.  Voidability of Illegal Transfers and Preferences. - Upon motion or motu proprio,  the
court may declare void any transfer of property or any other conveyance, sale, payment, or
agreement made in violation of its stay order or in violation of these Rules. (emphasis supplied)

The publication requirement only means that all affected persons must, to satisfy the
requirements of due process, be notified that as of a particular date, the debtor in
question requires rehabilitation and should temporarily be exempt from paying its
obligations, unless allowed by the court. Once due notice is made, the rehabilitation
court may nullify actions inconsistent with the stay order but which may have been
taken prior to publication, precisely because prior to publication, creditors may not yet
be aware that they are to desist from pursuing claims against the insolvent debtor. It is
also clear from the previous discussion that ABC was not deprived of due process when
the RTC issued the subject resolution.
The essence of procedural due process is one which hears before it condemns, which
proceeds upon inquiry and renders judgment only upon trial. It contemplates notice
and opportunity to be heard before judgment is rendered affecting one's person or
property.
Rehabilitation proceedings are considered in rem. In rem actions are against the thing
itself and they are binding upon the whole world, unlike in personam actions, which
are against a person on the basis of his personal liability. "Against the thing" means that
the resolution of the case affects the direct or indirect interests of others and assumes
that those interests attach to the thing which is the subject matter of the litigation.

POINTS TO REMEMBER:

 Taking into consideration the laudable objectives of rehabilitation proceedings,

the immediate effectivity of the stay order means that the RTC, through an order
commencing rehabilitation and staying claims against the debtor, acknowledges
that the debtor requires rehabilitation immediately and therefore it can not only
prohibit but also nullify acts made after its effectivity, when such acts are
violative of the stay order, to prevent any irreparable detriment to the debtor's
successful restoration. Again, the immediate effectivity of the stay order can be
traced to the purpose of rehabilitation: once the necessity of rehabilitating the
debtor is recognized, through a petition duly granted, it is imperative that the
necessary steps to preserve its assets are taken at the earliest possible time.

[G.R. No. 185024, April 24, 2017]

JOSELITO BUSTOS VS. MILLIANS SHOE INC.,

FACTS:

Spouses Fernando and Amelia Cruz owned a 464-square-meter lot. The City
Government of Marikina levied the property for nonpayment of real estate taxes.
Thereafter, the City Treasurer of Marikina auctioned off the property, with petitioner
Joselito Hernand M. Bustos emerging 'as the winning bidder. Marikina RTC then
ordered the cancellation of the previous title and the issuance of a new one under the
name of petitioner.

Meanwhile, notices of lis pendens were annotated on the title. These markings indicated
that SEC Corp. Case, which was filed before the RTC and involved the rehabilitation
proceedings for MSI, covered the subject property and included it in the Stay Order
issued by the RTC.

Petitioner moved for the exclusion of the subject property from the Stay Order. He
claimed that the lot belonged to Spouses Cruz who were mere stockholders and officers
of MSI. The RTC denied the entreaty of petitioner. He then filed an action for certiorari
before the CA. He asserted that the Stay Order undermined the taxing powers of the
local government unit. He also reiterated his arguments that Spouses Cruz owned the
property, and that the lot had already been auctioned to him.

In the assailed Decision dated 12 June 2008, the CA brushed aside the claim that the
suspension orders undermined the power to tax. The CA ruled that the said parcel of
land which secured several mortgage liens for the account of MSI remains to be an asset
of the Cruz Spouses, who are the stockholders and/or officers of MSI, a close
corporation. Incidentally, as an exception to the general rule, in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are
subject to all liabilities of directors. Thus, the Cruz Spouses being stockholders of MSI
are personally liable for the latter's debt and obligations.

ISSUE:

Whether the CA correctly considered the properties of Spouses Cruz answerable for the
obligations of MSI.

RULING:

No. In finding the subject property answerable for the obligations of MSI, the CA
characterized respondent spouses as stockholders of a close corporation who, as such,
are liable for its debts. This conclusion is baseless. Here, neither the CA nor the R TC
showed its basis for finding that MSI is a close corporation. The courts a quo did not at
all refer to the Articles of Incorporation of MSI. In effect, the CA and the RTC deemed
MSI a close corporation based on the allegation of Spouses Cruz that it was so.
However, mere allegation is not evidence and is not equivalent to proof.

We thus apply the general doctrine of separate juridical personality, which provides
that a corporation has a legal personality separate and distinct from that of people
comprising it. By virtue of that doctrine, stockholders of a corporation enjoy the
principle of limited liability: the corporate debt is not the debt of the stockholder. Thus,
being an officer or a stockholder of a corporation does not make one's property the
property also of the corporation.
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, the Court 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. To repeat, properties merely owned by stockholders cannot be included in
the inventory of assets of a corporation under rehabilitation. 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.

POINTS TO REMEMBER:

 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, the Court 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. To repeat, properties merely owned by
stockholders cannot be included in the inventory of assets of a corporation under
rehabilitation.

[G.R. No. 205469 March 25, 2015]

BPI FAMILY SAVINGS BANK, INC. VS.

ST. MICHAEL MEDICAL CENTER, INC.,

FACTS:

Spouses Virgilio and Yolanda Rodil are the owners and sole proprietors of St. Michael
Diagnostic and Skin Care Laboratory Services and Hospital (St. Michael Hospital), with
a vision to upgrade St. Michael Hospital into a modern, well-equipped and full service
tertiary 11-storey hospital, Sps. Rodil purchased two parcels of land adjoining their
existing property and, 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.

To finance the costs of building construction, SMMCI applied for a loan with petitioner
BPI Family Savings Bank, Inc. which gave a credit line of up to P35,000,000.00, secured
by a Real Estate Mortgage over three parcels of land 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, 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.

The lack of funds for the finishing works of the 3rd, 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 obligation and, soon after, filed a petition for
extrajudicial foreclosure of the real properties covered by the mortgage. 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. RTC
approved the Rehabilitation Plan with the modifications recommended by the
Rehabilitation Receiver. CA affirmed the RTC’s approval of the Rehabilitation Plan.

ISSUE:

Whether the CA correctly affirmed the decision of the RTC in approving SMMCI’s
Rehabilitation Plan.

RULING:

NO. 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.” 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.
Consistent therewith is the term’s statutory definition under Republic Act No. 10142,44
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.

Thus, the basic issues in rehabilitation proceedings concern the viability and desirability
of continuing the business operations of the distressed corporation, all with a view of
effectively restoring it to a state of solvency or to its former healthy financial condition
through the adoption of a rehabilitation plan. In this case, it cannot be said that the
petitioning corporation, SMMCI, had been in a position of successful operation and
solvency at the time the Rehabilitation Petition was filed. 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.

POINTS TO REMEMBER:

 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. Thus,
the basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the distressed corporation,
all with a view of effectively restoring it to a state of solvency or to its former
healthy financial condition through the adoption of a rehabilitation plan.

[G.R. No. 180036, July 25, 2012]

SITUS DEVELOPMENT CORPORATION VS. ASIATRUST BANK.

FACTS:

In 1972, the Chua Family, headed by its patriarch, Cua Yong Hu, a.k.a. Tony Chua,
started a printing business and put up Color Lithographic Press, Inc. (COLOR). On June
6, 1995, the Chua Family ventured into real estate development/leasing by organizing
Situs Development Corporation (SITUS) in order to build a shopping mall complex,
known as Metrolane Complex (COMPLEX) at 20th Avenue corner Cubao, Quezon City.
To finance the construction of the COMPLEX, SITUS, COLOR and Tony Chua and his
wife, Siok Lu Chua, obtained several loans from o ALLIED secured by real estate
mortgages over two lots from ASIATRUST secured by a real estate mortgage over a lot
and from METROBANK, secured by a real estate mortgage over a lot.
The COMPLEX was built on said four (4) lots, all of which are registered in the names
of Tony Chua and his wife, Siok Lu Chua. On March 21, 1996, the Chua Family
expanded into retail merchandising and organized Daily Supermarket, Inc. (DAILY).
All three (3) corporations have interlocking directors and are all housed in the
COMPLEX. The Chua Family also resides in the COMPLEX, while the other units are
being leased to tenants. SITUS, COLOR and DAILY obtained additional loans from
ALLIED, ASIATRUST and METROBANK and their real estate mortgages were updated
and/or amended. Spouses Chua likewise executed five (5) Continuing
Guarantee/Comprehensive Surety in favor of ALLIED to guarantee the payment of the
loans of SITUS and DAILY. SITUS, COLOR, DAILY and the spouses Chua failed to pay
their obligations as they fell due, despite demands.

ALLIED filed for extrajudicial foreclosure of the mortgage on the properties of spouses
Chua. The auction sale was scheduled on February 6, 2001. However, on February 5,
2001, SITUS, COLOR and spouses Chua filed a complaint for nullification of foreclosure
proceedings, with prayer for temporary restraining order/injunction, with the Regional
Trial Court. As no temporary restraining order was issued, the scheduled auction sale
proceeded wherein ALLIED emerged as the highest bidder in the amount of
P88,958,700.00. The Certificate of Sale dated March 9, 2001 in favor of ALLIED was
approved by the Executive Judge of the Regional Trial Court of Quezon City on
September 9, 2002 and the same was annotated on TCT Nos. RT-13620 and RT-13621 on
September 23, 2002.

METROBANK likewise filed an application for extrajudicial foreclosure of the

mortgage on the property of spouses Chua covered by TCT No. 79916. The auction sale
was conducted on September 18, 2001, with METROBANK as the highest bidder in the
amount of P95,282,563.86. ASIATRUST sent a demand letter to DAILY and COLOR for
the payment of their outstanding obligations. On June 11, 2002, SITUS, DAILY and
COLOR, herein petitioners, filed a petition for the declaration of state of suspension of
payments with approval of proposed rehabilitation plan. Petitioners alleged that due to
the 1997 Asian financial crisis, peso devaluation and high interest rate, their loan
obligations ballooned and they foresee their inability to meet their obligations as they
fall due; that their loan obligations are secured by the real properties of their major
stockholder, Tony Chua; that ALLIED has already initiated foreclosure proceedings;
that Global Banking Corporation, now METROBANK, and ASIATRUST made final
demands for payment of their obligations; that they foresee a very good future ahead of
them if they would be given a "breathing spell" from their obligations as they fall due;
and that their assets are more than sufficient to pay off their debts. Petitioners
submitted a program of rehabilitation for the approval of creditors and the court a quo.
A Stay Order dated June 17, 2002, was issued by the court a quo.  petitioners filed a
motion for the cancellation of the certificate of sale approved on September 9, 2002 by
the Executive Judge of the RTC of Quezon City and the annotation thereof on TCT Nos.
RT-13620 and RT-13621, as the same were done in violation of the Stay Order dated
June 17, 2002.

A vehement opposition was filed by ALLIED arguing that the foreclosure proceedings
cannot be considered as a "claim", as understood under Section 1, Rule 2 of the Interim
Rules of Procedure on Corporate Rehabilitation, since the issuance of the Certificate of
Sale and annotation thereof on the certificates of titles do not constitute demands for
payment of debt or enforcement of pecuniary liabilities; that the auction sale was
conducted more than one year before the filing of the petition for rehabilitation; and
that TCT Nos. RT-13620 and RT-13621 are registered in the names of "Cua Yong
Hu/Tony Chua and Siok Lu Chua", hence, should not have been included in the
Inventory of Assets of petitioners. Petitioners amended their rehabilitation plan twice.

ALLIED filed a motion praying for the dismissal of the petition as no Rehabilitation
Plan was approved upon the lapse of 180 days from the date of the initial hearing on
August 2, 2002, as mandated in Section 11 of the Interim Rules of Procedure on
Corporate Rehabilitation. On August 14, 2003, the court a quo rendered an
ADJUDICATION approving the Second Amended Rehabilitation Program as SITUS
deserves a sporting chance at rehabilitation.

Aggrieved, ALLIED, ASIATRUST and METROBANK filed their separate notices of

appeal. Petitioners filed with the court a quo a motion for declaration of nullity of the
certificate of sale in favor of ALLIED alleging that the issuance thereof was in violation
of the Stay Order. Said motions were opposed by ALLIED on the grounds that the
properties foreclosed by it belonged to spouses Chua and not to petitioners; that the
auction sale was conducted on February 6, 2001, or more than a year prior to the filing
of the petition for rehabilitation; and that the issuance of the Certificate of Sale and its
annotation on the certificates of title are merely incidental to the foreclosure
proceedings; and that the Stay Order does not cover the issuance of the Certificate of
Sale and the registration thereof on the certificates of title as they do not in any way
refer to its enforcement of a monetary claim against petitioners. In Separate Orders the
court a quo granted the motion of petitioners.

The court a quo held that while the foreclosure was conducted prior to the issuance of
the Stay Order, however, the foreclosure does not fully and effectively terminate until
after the issuance of the title in the name of the creditor, such that until a new title is
issued, any action in the interregnum, judicial or not, is deemed an enforcement of the
claim arising from such foreclosure, which in this case will be in patent violation of the
Stay Order. The CA reversed and set aside the decision of the RTC.

ISSUE:

1. Whether the dismissal of the Petition for Rehabilitation is in order; and

2. Whether the Stay Order affects foreclosure proceedings involving properties
mortgaged by stockholders to secure corporate debts.

RULING:

1. YES. The Rules provide that "the petition shall be dismissed if no rehabilitation
plan is approved by the court upon the lapse of one hundred eighty (180) days
from the date of the initial hearing." 8 While the Rules expressly provide that the
180-day period may be extended, such extension may be granted only "if it
appears by convincing and compelling evidence that the debtor may successfully
be rehabilitated.

In this case, the Second Amended Rehabilitation Program was approved by the
trial court beyond the 180-day period counted from the date of the initial
hearing. However, the evidence on record does not support the lower court’s
finding that the debtor corporations may still be successfully rehabilitated.

2. NO. The Stay Order does not suspend the foreclosure of a mortgage constituted
over the property of a third-party mortgagor. Petitioners insist that the Stay
Order covers the mortgaged properties, citing the Interim Rules on Corporate
Rehabilitation. Under the Rules, one of the effects of a Stay Order is the stay of
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." Based on a reading
of the Rules, we rule that the Stay Order cannot suspend foreclosure proceedings
already commenced over properties belonging to spouses Chua. The Stay Order
can only cover those claims directed against petitioner corporations or their
properties, against petitioners’ guarantors, or against petitioners’ sureties who
are not solidarily liable with them. Spouses Chua may not be considered as
"debtors." The Interim Rules on Corporate Rehabilitation define the term
"debtor" as follows: "Debtor" shall mean any corporation, partnership, or
association, whether supervised or regulated by the Securities and Exchange
 Commission or other government agencies, on whose behalf a petition for
rehabilitation has been filed under these Rules.

POINTS TO REMEMBER:

 The Rules provide that "the petition shall be dismissed if no rehabilitation plan is
approved by the court upon the lapse of one hundred eighty (180) days from the
date of the initial hearing."8 While the Rules expressly provide that the 180-day
period may be extended, such extension may be granted only "if it appears by
convincing and compelling evidence that the debtor may successfully be
rehabilitated."
 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. However, if the continued existence of the corporation is
no longer viable, rehabilitation can no longer be an option. The purpose of
rehabilitation proceedings is to enable the company to gain a new lease on life,
and not to prolong its inevitable demise.
 Issuance of a Stay Order cannot suspend the foreclosure of accommodation
mortgages, because the Stay Order may only cover the suspension of the
enforcement of all claims against the debtor, its guarantors, and sureties not
solidarily liable with the debtor. Thus, the suspension of enforcement of claims
does not extend to the foreclosure of accommodation mortgages.