PHILIPPINE BANK OF COMMUNICATIONS vs.

BASIC POLYPRINTERS AND PACKAGING

CORPORATION

FACTS:

Respondent Basic Polyprinters was a domestic corporation engaged in the business of printing
greeting cards, gift wrappers, gift bags, calendars, posters, labels and other novelty items. Basic
Polyprinters, along with the eight other corporations belonging to the Limtong Group of
Companies filed a joint petition for suspension of payments with approval of the proposed
rehabilitation in the RTC (docketed as SEC Case No. 031-04). 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. The rehabilitation receiver
submitted his report recommending the approval of the rehabilitation plan. The RTC issued an
order approving the rehabilitation plan. The CA affirmed the questioned order of the RTC,
agreeing with the finding of the rehabilitation receiver that there were sufficient evidence, factors
and actual opportunities in the rehabilitation plan indicating that Basic Polyprinters could be
successfully rehabilitated in due time.

The petitioner PBCOM contends that the sole issue in corporate rehabilitation is one of liquidity;
hence, the petitioning corporation should have sufficient assets to cover all its indebtedness
because it only foresees the impossibility of paying the indebtedness falling due. It claims that
rehabilitation became inappropriate because Basic Polyprinters was insolvent due to its assets
being inadequate to cover the outstanding obligations.

ISSUE:

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

HELD:

We disagree with the contention of the petitioner.

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.

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

Consequently, the basic issues in rehabilitation proceedings concern the viability and desirability
of continuing the business operations of the petitioning corporation.

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (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
Republic Act No. 10142 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.
VIVA SHIPPPING LINES V. KEPPEL PHILIPPINES MININGS

FACTS:

Viva Shipping Lines filed a Petition for Corporate Rehabilitation before RTC Lucena. It claimed
to own and operate 19 maritime vessels and a shopping mall in downtown Lucena. It declared
its total properties’ assessed value at about P45M. However, these allegations were contrary to
the documentary evidence. It appears that there were only 2 maritime vessels and the FMV of
the vessels is at around P447M, 400M more than what was alleged in the petition. Some of the
properties were also marked as encumbered so only P147M of the assets were marked as free
assets.

Viva Shipping stated the devaluation of the Philippine peso, increased competition and
mismanagement of its business made it difficult to pay its debts. 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.

It enumerated possible sources of funding such as the sale of old vessels and commercial lots
of its sister company, the conversion of the mall they operate into a hotel, acquisition of 2 new
vessels for operation and the re-operation of its oil mill. The court found the petition sufficient in
form and substance and issued a stay order, staying the enforcement of all monetary and
judicial claims against Viva and prohibited Viva Shipping Lines from selling, encumbering,
transferring, or disposing any of its properties except in the ordinary course of business.

RTC: Dismissed the petition for failure to show the company’s viability and feasibility of
rehabilitation. It found that ALL THE ASSETS of Viva Shipping Lines are non-performing. Viva
failed to show any evidence of consent to sell properties belonging to its sister company.

CA: Dismissed the Petition for Review.

ISSUE: Whether or not the RTC erred in dismissing the petition for rehabilitation.

HELD: NO, it did not.

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.

The rationale in corporate rehabilitation is to resuscitate businesses in financial distress

because "assets . . . are often more valuable when so maintained than they would be when
liquidated." Rehabilitation assumes that assets are still serviceable to meet the purposes of the
business. The corporation receives assistance from the court and a disinterested rehabilitation
receiver to balance the interest to recover and continue ordinary business, all the while
attending to the interest of its creditors to be paid equitably. These interests are also referred to
as the rehabilitative and the equitable purposes of corporate rehabilitation.

Necessarily, a business in the red and about to incur tremendous losses may not be able to pay
all its creditors. Rather than leave it to the strongest or most resourceful amongst all of them,
the state steps in to equitably distribute the corporation’s limited resources.

Rather than let struggling corporations slip and vanish, the better option is to allow commercial
courts to come in and apply the process for corporate rehabilitation.

Clearly then, 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.

The Regional Trial Court correctly dismissed the Amended Petition for Corporate Rehabilitation.
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." 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."

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.

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.

In Wonder Book Corporation v. Philippine Bank of Communications,154 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.

The other part of the rehabilitation plan entails selling properties of petitioner’s sister company.
As pointed out by the Regional Trial Court, this plan requires conformity from the sister
company. Even if the two companies have the same directorship and ownership, they are still
two separate juridical entities. In BPI Family Savings Bank v. St. Michael Medical Center, this
court refused to include in the financial and liquidity assessment the financial statements of
another corporation that the petitioning-corporation plans to merge with.

As pointed out by respondents, petitioner’s rehabilitation plan is almost impossible to implement.

Even an ordinary individual with no business acumen can discern the groundlessness of
petitioner’s rehabilitation plan. Petitioner should have presented a more realistic and practicable
rehabilitation plan within the time periods allotted after initiatory hearing, or otherwise, should
have opted for liquidation.
JUANITO A. GARCIA and ALBERTO J. DUMAGO vs. PHILIPPINE AIRLINES, INC.,

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 and to pay jointly and severally unto
the complainants backwages, 13th 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.

HELD:
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 extra-judicial 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.19 No exception in favor of labor claims is mentioned in the
law.
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM (MWSS) v. HON. REYNALDO
B. DAWAY AND MAYNILAD WATER SERVIES, INC.

FACTS:
MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage,
operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage
services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding
concession fees on the dates agreed upon in said agreement, which, among other things,
consisted of payments of petitioners mostly foreign loans.
To secure the concessionaire’s performance of its obligations under the Concession Agreement,
Maynilad was required to put up a bond, bank guarantee or other security acceptable to MWSS.
In compliance therewith, Maynilad arranged for a three-year facility with a number of foreign
banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of
Credit in the amount of 120 million USD in favor of MWSS for the full and prompt performance
of Maynilad’s obligations to MWSS.
Maynilad filed a Notice of Early Termination of the concession, which was brought before the
Appeals Panel by MWSS. The panel ruled that there was no Event of Termination and as such,
Maynilad should pay the concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter,
submitted a written notice on November 24, 2003, to Citicorp International Limited, as agent for
the participating banks, that by virtue of Maynilad’s failure to perform its obligations under the
Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby
demanded payment in the amount of US$98,923,640.15.
The public respondent, acting on two urgent ex parte motions filed by Maynilad, issued an Order
stating that the act of MWSS in drawing payment under the Irrevocable Letter of Credit is
violative of the Court’s Stay Order issued on November 17, 2003, the dispositive portion of
which states that the enforcement of all claims is stayed, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the petitioner, its guarantors
and sureties not solidarily liable with the petitioner. This Stay Order was issued upon a
determination that the Petition for Rehabilitation filed by Maynilad on November 13, 2013
substantially complies with the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation.
Hence, this Petition for Certiorari under Rule 65 filed by Petitioner.
Petitioner’s arguments: MWSS maintains that as a matter of law, Standby Letter of Credit and
Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not
subject to the in rem rehabilitation jurisdiction of the trial court. It argues that a call made on the
Standby Letter of Credit does not involve any asset of Maynilad but only assets of the banks,
and that a call on the Standby Letter of Credit cannot also be considered a claim falling under
the purview of the stay order as alleged by respondent as it is not directed against the assets of
respondent Maynilad.

Respondent’s arguments: Maynilad avers that what is relevant is not whether the performance
bond or assets of the issuing banks are part of the estate of respondent Maynilad but whether
the act of petitioner in commencing the process for the payment by the banks is prohibited by
the Stay Order. It maintains that the jurisdiction of public respondent extends not only to the
assets of respondent Maynilad but also over persons and assets of all those affected by the
proceedings, upon publication of the notice of commencement, and the obligations under the
Standby Letter of Credit are not solidary and are not exempt from the coverage of the stay
order.

ISSUE:
Did the rehabilitation court act in excess of its authority or jurisdiction when it enjoined MWSS
from seeking the payment of the Irrevocable Standby Letter of Credit in its favor and for the
account of respondent Maynilad?
HELD:
YES. Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims
against guarantors and sureties, but only those claims against guarantors and sureties who are
not solidarily liable with the debtor.
The claim is not one against the debtor but against an entity that respondent Maynilad has
procured to answer for its non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the
banks are not solidary with those of respondent Maynilad. Taking into consideration our own
rulings on the nature of letters of credit and the customs and usage developed over the years in
the banking and commercial practice of letters of credit, we hold that except when a letter of
credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are
solidary with that of the person or entity requesting for its issuance, the same being a direct,
primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the
set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to
act on the obligation of the banks under the Letter of Credit under the argument that this was
not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is
excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from
proceeding against the Standby Letters of Credit to which it had a clear right under the law and
the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.
Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable
Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own
admission it is not. In issuing the order enjoining MWSS from claiming from an asset that did not
belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted
in excess of its jurisdiction.
BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO V. MISAJON,
GROUP SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER REYNANTE DP.
MARTIREZ vs. LEPANTO CERAMICS, INC.

Facts:

Respondent Lepanto Ceramics, Inc. (LCI) filed a petition for corporate rehabilitation before the
RTC of Calamba City, Branch 34, the designated Special Commercial Court in Laguna. 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. 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.

The Rehabilitation Court issued a Commencement Order which was subsequently 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.

Despite the foregoing, petitioners sent LCI a notice of informal conference, informing the latter
of its deficiency internal tax liabilities for the Fiscal Year ending June 30, 2010. LCI’s court-
appointed receiver, Roberto L. Mendoza, sent BIR a letter-reply, reminding the latter of the
pendency of LCI’s corporate rehabilitation proceedings, as well as the issuance of a
Commencement Order in connection therewith. Undaunted, the BIR sent LCI a Formal Letter of
Demand. This prompted LCI to file a petition for indirect contempt against petitioners before
RTC of Calamba City Br. 35. 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.

RTC Calamba Br. 35: found petitioners guilty of indirect contempt

Issue: Whether or not RTC correctly found petitioners to have defied the Commencement Order
and, accordingly, cited them for indirect contempt

Ruling:

The petition is without merit.

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. The
inherent purpose of rehabilitation is to find ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period by providing the best possible framework
for the corporation to gradually regain or achieve a sustainable operating form.
In order to achieve such objective, Section 16 of RA 10142 provides, inter alia, that upon the
issuance of a Commencement Order - which includes a Stay or Suspension Order - all actions
or proceedings, in court or otherwise, for the enforcement of “claims” against the distressed
company shall be suspended. Under the same law, 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”

The creditors must ventilate their claims before the rehabilitation court and any “attempt to seek
legal or other resource against the distressed corporation shall be sufficient to support a finding
of indirect contempt of court.”

In the case at bar, the acts of sending a notice of informal conference and a Formal Letter of
Demand are part and parcel of the entire process for the assessment and collection of
deficiency taxes from a delinquent taxpayer, - an action or proceeding for the enforcement of a
claim which should have been suspended pursuant to the Commencement Order.
Unmistakably, petitioner’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.