SPECCOM DIGESTS

FRIA (RA 10142)

Xavier University College of Law
|AGOT GAID|

CASE FACTS ISSUE FRIA RELATED-RULING

1. Metropolitan Bank vs. S.F. Nagulat, Spouses Naguiat and S.F. Naguiat Enter- Whether or not the approval and YES, the approval is needed. With the
G.R. No. 178407, March 18, 2015 prises, Inc. executed a REM in favor of Me- consent of the insolvency court is declaration of insolvency of the debtor,
trobank to secure the P17 million loan. S.F. required under Act No. 1956, other- insolvency courts “obtain full and complete
Naguiat filed a Petition for Voluntary Insol- wise known as the Insolvency Law, jurisdiction over all property of the insol-
vency with Application
plication for the Appointment of before a secured creditor like peti- vent and of all claims by and against [it.]” It
a Receiver pursuant before the RTC Angeles tioner Metropolitan Bank and Trust follows that the insolvency court has ex-
City.Among the assets declared in the Peti- Company can proceed with the ex- clusive jurisdiction to deal with the proper-
tion was the property mortgaged to Metro- trajudicial foreclosure of the mort- ty of the insolvent. Consequently, after the
bank. gaged property. mortgagor-debtor has been declared in-
solvent and the insolvency court has ac-
In lieu of a Comment, Metrobank filed a Ma- quired control of his estate, a mortgagee
nifestation and Motion to withdraw from the may not, without the permission of the in-
insolvency proceedings because it intended solvency court, institute proceedings to
to extrajudicially foreclose the mortgaged enforce its lien. In so doing, it would inter-
property. The property was foreclosed and fere with the insolvency court’s possession
was sold to Phoenix Global Energy, and orderly administration of the insol-
Inc.However, the Executive judge denied the vent’s properties.
application for the Certificate of Sale in view
of the July 12, 2005 Order issued by the in- The purpose of insolvency proceedings is
solvency court. MB appealed via certiorari. “to encourage debtors . . . and their credi-
CA dismissed the petition for Metrobank’s tors to collectively and realistically resolve
failure to “obtain the permission of the insol- and adjust competing claims and property
vency court to extrajudicially
extraj foreclose the rights” while “maintain[ing] certainty and
mortgaged property.”
erty.” predictability in commercial affairs, pre-
serv[ing] and maximiz[ing] the value of the
assets of these debtors, recogniz[ing]
creditor rights and respect[ing] priority of
claims, and ensur[ing] equitable treatment
of creditors who are similarly situated.” It
has also been provided that whenever
rehabilitation is no longer feasible, “it is in

“It doesn’t matter how slowly you go as long as you do not stop.”
 the interest of the State to facilitate a
speedy and orderly liquidation of [the] deb-
tors’ assets and the settlement of their
obligations.”

The relevant proceedings in this case took

place prior to Republic Act No. 10142;
hence, the issue will be resolved Act No.
1956 impliedly requires a secured creditor
to ask the permission of the insolvent
court before said creditor can foreclose
the mortgaged property. When read to-
gether, the following provisions of Act No.
1956 reveal the necessity for leave of the
insolvency court:

Petitioner should have waited for the in-

solvency court to act on its Manifestation
and Motion before foreclosing the mort-
gaged property and its lien (assuming va-
lid) would not be impaired or its claim in
any way jeopardized by any reasonable
delay. There are mechanisms within Act
No. 1956 such as Section 59 that ensure
that the interests of the secured creditor
are adequately protected. Mortgage liens
are retained in insolvency proceedings.
What is merely suspended until court ap-
proval is obtained is the creditor’s en-
forcement of such preference.

2. Viva Shipping Lines vs. Keppel Petitioner filed a Petition for Corporate Reha- Whether or not creditors need to be Procedural Issue
Phil. Mining, GR No. 177382, Feb- bilitation. Regional Trial Court found that res- impleaded as respondents in the
ruary 17, 2016 pondents Amended Petition to be “sufficient in appeal (PROCEDURAL) YES. New Frontier Sugar doctrinally re-
form and substance,” and issued a stay order. quires compliance with the procedural
Before the initial hearing, the City of Batan- Whether petitioner can be rehabili- rules for appealing corporate rehabilitation
gas, Keppel Philippines Marine, Inc., and Me- tated (SUBSTANTIVE) decisions. It is true that Rule 1, Section 6
trobank filed their respective comments and of the Rules of Court provides that the
oppositions to Viva Shipping Lines’ Amended “[r]ules shall be liberally construed in order
Petition. to promote their objective of securing a
just, speedy and inexpensive disposition

“It doesn’t matter how slowly you go as long as you do not stop.”
 Metrobank filed a Motion for Production or of every action and proceeding.” However,
Inspection of relevant documents relating to this provision does not negate the entire
Viva Shipping Lines’ business operations.Viva Rules of Court by providing a license to
Shipping Lines filed its opposition. RTC disregard all the other provisions. Resort
granted Metrobank’s Motion. Viva Shipping to liberal construction must be rational and
Lines failed to comply with the Order to pro- well-grounded, and its factual bases must
duce the documents, as well as with the Re- be so clear such that they outweigh the
gional Trial Court Order to submit a memo- intent or purpose of an apparent reading
randum. of the rules.Clearly then, there are in-
stances when corporate rehabilitation can
RTC lifted the stay order and dismissed Viva no longer be achieved. When rehabilita-
Shipping Lines Amended Petition for failure to tion will not result in a better present value
show the company’s viability and the feasibili- recovery for the creditors, the more ap-
ty of rehabilitation. RTC found that Viva Ship- propriate remedy is liquidation.
ping Lines’ assets all appeared to be nonper-
forming. Further, it noted that Viva Shipping A corporate rehabilitation case cannot be
Lines failed to show any evidence of consent decided without the creditors’ participation.
to sell real properties belonging to its sister The court’s role is to balance the interests
company. of the corporation, the creditors, and the
general public. Impleading creditors as
Viva Shipping Lines filed a Petition for Review respondents on appeal will give them the
under Rule 43 of the Rules of Court before opportunity to present their legal argu-
the CA. It only impleaded the Presiding Judge ments before the appellate court. The
of the trial court that rendered the assailed courts will not be able to balance these
decision. It did not implead any of its credi- interests if the creditors are not parties to
tors. a case. Ruling on petitioner’s appeal in the
absence of its creditors will not result in
CA dismissed Viva Shipping Lines’ petition. judgment that is effective, complete, and
Viva Shipping Lines failed to comply with pro- equitable.
cedural requirements under Rule 43. CA ruled
that due to the failure of Viva Shipping Lines Substantive issue
to implead its creditors as respondents, “there
are no respondents who may be required to No.The Regional Trial Court correctly dis-
file a comment on the petition, pursuant to missed the Amended Petition for Corpo-
Section 8 of Rule 43.” rate Rehabilitation. The dismissal of the
Amended Petition did not emanate from
petitioner’s failure to provide complete de-
tails on its assets and liabilities but on the
trial court’s finding that rehabilitation is no
longer viable for petitioner. Under the Inte-
rim Rules of Procedure on Corporate Re-

“It doesn’t matter how slowly you go as long as you do not stop.”
 habilitation, a “petition shall be dismissed
if no rehabilitation plan is approved by the
court upon the lapse of one hundred eigh-
ty (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 accor-
dance with its terms, conditions, restric-
tions, or assumptions.”

Petitioner’s RP 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 peti-
tioner’s main business cannot result in
rehabilitation. A business primarily en-
gaged 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 con-
trary 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.

“It doesn’t matter how slowly you go as long as you do not stop.”
3. Wonder Book Corp. Vs. Phil. Bank Wonder Book filed a petition for rehabilitation. Whether or not Wonder Book’s peti- NO. Rehabilitation contemplates a conti-
of Communications, GR No. Wonder Book cited the following as causes tion for rehabilitation is impressed nuance of corporate life and activities in
187316, July 16, 2012 for its inability to pay its debts as they fall due: with merit and this Court rules in the an effort to restore and reinstate the cor-
(a) high interest rates, penalties and charges poration to its former position of success-
negative.
imposed by its creditors; (b) low demand for ful operation and solvency. The purpose of
gift items and greeting cards due to the wide- rehabilitation proceedings is to enable the
spread use of cellular phones and economic company to gain a new lease on life and
recession; (c) competition posed by other thereby allow creditors to be paid their
stores; and (d) the fire on July 19, 2002 that claims from its earnings. The rehabilitation
destroyed its inventories worth P264 Million, of a financially distressed corporation
which are insured for P245 Million but yet to benefits its employees, creditors, stock-
be collected. Wonder Book’s rehabilitation holders and, in a larger sense, the general
plan put forward a payment program that public.
guaranteed full payment of its loan from
PBCOM after fifteen (15) years at a reduced Rehabilitation is therefore available to a
interest. corporation who, while illiquid, has assets
that can generate more cash if used in its
RTC approved the RP. daily operations than sold. Its liquidity is-
sues can be addressed by a practicable
PBCOM filed a petition for review of the ap- business plan that will generate enough
proval of Wonder Book’s rehabilitation plan, cash to sustain daily operations, has a
which the CA granted. According to the CA, definite source of financing for its proper
Wonder Book’s financial statements reveal and full implementation, and anchored on
that it is not merely illiquid but in a state of realistic assumptions and goals.
insolvency. The CA noted that Wonder Book
failed to support its petition with reassuring The figures appearing on Wonder Book’s
“material financial commitments”. The CA al- financial documents and the nature and
so noted that Wonder Book’s expected profits value of its assets are indeed discouraging
during the rehabilitation period are not suffi- 
cient to cover its liabilities and reverse its
dismal financial state.

4. BPI vs. Sarabia Manor Hotel, GR Respondent Sarabia is a corporation duly or- Whether or not the CA correctly af- YES. Records show that Sarabia has
No. 175844, July 29, 2013 ganized for the primary purpose of owning, firmed Sarabia’s rehabilitation plan been in the hotel business for over thirty
leasing, managing and/or operating hotels, as approved by the RTC, with the years, tracing its operations back to 1972.
restaurants, barber shops, beauty parlors, modification on the reinstatement of Its hotel building has been even consi-
sauna and steam baths, massage parlors and the surety obligations of Sarabia’s dered a landmark in Iloilo, being one of its
such other businesses incident to or neces- stockholders. kind in the province and having helped
sary in the management or operation of ho- bring progress to the community. Since
tels. then, its expansion was continuous which
led to its decision to commence with the

“It doesn’t matter how slowly you go as long as you do not stop.”
 Sarabia obtained a P150,000,000.00 special construction of a new hotel building. Un-
loan package from Far East Bank and Trust fortunately, its contractor defaulted which
Company (FEBTC), now merged with BPI. impelled Sarabia to take-over the same.
However, largely because of the delayed This significantly skewed its projected rev-
completion of the New Building, Sarabia in- enues and led to various cash flow difficul-
curred various cash flow problems. Thus, de- ties, resulting in its incapacity to meet its
spite the fact that it had more assets than lia- maturing obligations.
bilities at that time, it, nevertheless, filed, for
corporate rehabilitation. Recognizing the volatile nature of every
business, the rules on corporate rehabilita-
RTC approved the rehabilitation petition. It tion have been crafted in order to give
found to be viable since, based on the extra- companies sufficient leeway to deal with
polations made by the Receiver, Sarabia’s debilitating financial predicaments in the
revenue projections, albeit projected to slow hope of restoring or reaching a sustaina-
down, remained to have a positive busi- ble operating form if only to bestaccom-
ness/profit outlook altogether. modate the various interests of all its
stakeholders, may it be the corporation’s
CA affirmed RTC with the modification of stockholders, its creditors and even the
reinstating the surety obligations of Sarabia’s general public.
stockholders to BPI as an additional safe-
guard for the effective implementation of the Interim Rules states that a rehabilitation
approved rehabilitation plan. plan may be approved even over the
opposition of the creditors holding a
BPI mainly argues that the approved rehabili- majority of the corporation’s total liabil-
tation plan did not give due regard to its inter- ities if there is a showing that rehabili-
ests as a secured creditor in view of the im- tation is feasible and the opposition of
position of a fixed interest rate of 6.75% p.a. the creditors is manifestly unreasona-
and the extended loan repayment period. It ble. Also known as the “cram-down”
likewise avers that Sarabia’s misrepresenta- clause, this provision, which is currently
tions in its rehabilitation petition remain unre- incorporated in the FRIA, is necessary to
solved. curb the majority creditors’ natural tenden-
cy to dictate their own terms and condi-
On the contrary, Sarabia essentially maintains tions to the rehabilitation, absent due re-
that: (a) the present petition improperly raises gard to the greater long-term benefit of all
questions of fact; (b) the approved rehabilita- stakeholders.
tion plan takes into consideration all the inter-
ests of the parties and the terms and condi-
tions stated therein are more reasonable than
what BPI proposes; and (c) BPI’s allegations
of misrepresentation are mere desperation
moves to convince the Court to overturn the

“It doesn’t matter how slowly you go as long as you do not stop.”
 rulings of the courts a quo.

5. Victorio-Aquino vs. Pacific Plans Respondent Pacific Plans, Inc. Is engaged in Whether or not it was beyond the NO. Petitioner’s argument is misplaced.
Inc., GR No. 193108, December the business of selling pre-need plans and authority of the Rehabilitation Court The “cram-down” power of the Rehabilita-
10, 2014 educational plans, including traditional open- to sanction a rehabilitation plan, or tion Court has long been established and
ended educational plans (PEPTrads). Peti- the modification thereof, when the even codified under Section 23, Rule 4 of
tioner is a holder of 2 units of respondent’s essential feature of the plan involves the Interim Rules, to wit:
PEPTrads. Respondent then filed a Petition forcing creditors to reduce their Section 23. Approval of the Rehabilitation
for Corporate Rehabilitation. The Rehabilita- claims against respondent. Plan.—The court may approve a rehabili-
tion Court issued a Stay Order, directing the tation plan over the opposition of creditors,
suspension of payments of the obligations of holding a majority of the total liabilities of
respondent and ordering all creditors and in- the debtor if, in its judgment, the rehabilita-
terested parties to file their com- tion of the debtor is feasible and the oppo-
ments/oppositions, respectively, to the Peti- sition of the creditors is manifestly unrea-
tion for Corporate Rehabilitation. sonable.

Respondent proposed the implementation of Also known as the “cram-down” clause,

a “Swap,” which will essentially give the plan- this provision, which is currently incorpo-
holder a means to exit from the PEPTrads at rated in the FRIA, is necessary to curb the
terms and conditions relative to a termination majority creditors’ natural tendency to dic-
value that is more advantageous than those tate their own terms and conditions to the
provided under the educational plan in case rehabilitation, absent due regard to the
of voluntary termination. Because of the ap- greater long-term benefit of all stakehold-
preciation of the value of Peso affecting the ers. Otherwise stated, it forces the credi-
US denominated bonds of the respondent, tors to accept the terms and conditions of
they submitted a Modified Rehabilitation the rehabilitation plan, preferring long-term
Plan.Petitioner questioned the MRP. viability over immediate but incomplete
recovery.
CA dismissed petition for review : (a) petition-
er did not pay the proper amount of docket This defense mechanism is reasonable
fees; (b) a Petition for Review under Rule 43 because sustaining the current terms of
is an improper remedy to question the ap- the ARP would render the trust fund of no
proval of a modified rehabilitation plan; (c) value given the high probability of its dilu-
contrary to petitioner’s claim, the alterations in tion. Resultantly, the very foundation of
the MRP are consistent with the goals of the the rehabilitation plan, which is to minim-
ARP; and (d) the approval of the MRP did not ize the loss of all stakeholders, would be
amount to an impairment of the contract be- rendered in futile since the trust funds may
tween petitioner and respondent. no longer be sufficient to meet the basic
terms of the ARP.

“It doesn’t matter how slowly you go as long as you do not stop.”
6. Phil. Bank of Communications vs. Respondent was a domestic corporation en- Whether or not the approval of the NO. The approval was improper, but li-
Basic Polyprinters, GR No. 187581, gaged in the business of printing greeting rehabilitation plan was proper de- quidity was not an issue in a petition for
October 20, 2014 cards, gift wrappers, gift bags, calendars, spite: (a) the alleged insolvency of rehabilitation. The purpose of rehabilitation
posters, labels and other novelty items. Basic Polyprinters; and (b) absence proceedings is to enable the company to
of a material financial commitment gain a new lease on life and thereby allow
Respondent, along with the 8 other corpora- pursuant to Section 5, Rule 4 of the creditors to be paid their claims from its
tions belonging to the Limtong Group of Interim Rules. earnings.24 Consequently, the basic is-
Companies (along with WonderBook Corp. in sues in rehabilitation proceedings concern
case no. 3) filed a joint petition for suspension the viability and desirability of continuing
of payments. The RTC issued a stay order, the business operations of the petitioning
and eventually approved the RP, but the CA corporation.
reversed the RTC directed the petitioning
corporations to file their individual petitions for Moreover, FRIA has defined a corporate
suspension of payments and rehabilitation in debtor as a corporation duly organized
the appropriate courts. and existing under Philippine laws that has
become insolvent.The term insolvent is
Basic Polyprinters brought its individual peti- defined in R.A.No. 10142 as “the financial
tion, averring that:.. (c) the Asian currency condition of a debtor that is generally una-
crisis, devaluation of the Philippine peso, and ble to pay its or his liabilities as they fall
the current state of affairs of the Philippine due in the ordinary course of business or
economy, coupled with: (i) high interest rates, has liabilities that are greater than its or
penalties and charges by its creditors; (ii) low his assets.”28 As such, the contention that
demand for gift items and cards due to the rehabilitation becomes inappropriate be-
economic recession and the use of cellular cause of the perceived insolvency of Basic
phones; (iii) direct competition from stores like Polyprinters was incorrect.
SM, Gaisano, Robinsons, and other malls, fire
etc.. (e) included in its overall RP was the full A material financial commitment is signifi-
payment of its outstanding loans in favor of cant in a rehabilitation plan. A material
petitioner, And other banks via repayment financial commitment becomes significant
over 15 years with moratorium of two years in gauging the resolve, determination,
for the interest and five years for the principal earnestness and good faith of the dis-
at 5% interest p.a. tressed corporation in financing the pro-
posed rehabilitation plan.
RTC approved the RP. PBCOM appealed to
the CA in due course. CA affirmed RTC. The commitment to add P10,000,000.00
working capital appeared to be doubtful
The petitioner contends that the sole issue in considering that the insurance claim from
corporate rehabilitation is one of liquidity; which said working capital would be
hence, the petitioning corporation should sourced had already been written off by
have sufficient assets to cover all its indeb- Basic Polyprinters’s affiliate, Wonder Book
tedness because it only foresees the impos- Corporation.34 A claim that has been writ-

“It doesn’t matter how slowly you go as long as you do not stop.”
 sibility of paying the indebtedness falling due. ten off is considered a bad debt or a
worthless asset,35 and cannot be deemed
The petitioner also argues that respondent did a material financial commitment for pur-
not present any material financial commitment poses of rehabilitation.
in the rehabilitation plan.
Basic Polyprinters’s rehabilitation plan
likewise failed to offer any proposal on
how it intended to address the low de-
mands for their products and the effect of
direct competition from stores like SM,
Gaisano, Robinsons, and other malls.
Even the P245 million insurance claim that
was supposed to cover the destroyed in-
ventories worth P264 million appears to
have been written off with no probability of
being realized later on.

7. Phil. Asset Growth vs. Fastech Respondents filed a verified Joint Petition for Whether or not the Rehabilitation NO. Rehabilitation shall refer to the resto-
Synergy Phil., GR No. 206528, corporate rehabilitation. Among the common Plan is feasible. ration of the debtor to a condition of
June 28, 2016 creditors listed in the rehabilitation petition successful operation and solvency, if it
was Planters Development Bank (PDB), is shown that its continuance of operation
which had earlier filed a petition for extrajudi- is economically feasible and its creditors
cial foreclosure of mortgage over the two (2) can recover by way of the present value of
parcels of land and registered in the name of payments projected in the plan, more if the
Fastech Properties (subject properties), listed debtor continues as a going concern than
as common assets of respondents in the re- if it is immediately liquidated. Thus, the
habilitation petition. PDB was the highest bid- basic issues in rehabilitation proceedings
der. Respondents claimed that this situation concern the viability and desirability of
has impacted on their chance to recover from continuing the business operations of the
the losses they have suffered over the years, distressed corporation,79 all with a view of
since the said properties are being used by effectively restoring it to a state of solven-
Fastech Microassembly and Fastech Electro- cy or to its former healthy financial condi-
nique17 in their business operations, and a tion through the adoption of a rehabilita-
source of significant revenue for their owner- tion plan.
lessor, Fastech Properties.
In the present case, however, the Rehabil-
RTC Makati dismissed the rehabilitation peti- itation Plan failed to comply with the mini-
tion despite the favourable recommendation mum requirements, i.e.: (a) material finan-
of its appointed Rehabilitation Receiver. It cial commitments (same with Basic Poly-
found the facts and figures submitted by res- printers case) to support the rehabilitation
pondents to be unreliable in view of the dis- plan; and (b) a proper liquidation analysis.

“It doesn’t matter how slowly you go as long as you do not stop.”
 claimer of opinion of the independent auditors
who reviewed respondents’ 2009 financial The Court also notes that while respon-
statements, which it considered as amounting dents have substantial total assets, a large
to a “straightforward unqualified adverse opi- portion of the assets of Fastech Synergy
nion. and Fastech Properties is comprised of
noncurrent assets. Respondents likewise
CA reversed RTC. It ruled that the RTC- failed to include any liquidation analysis in
Makati grievously erred in disregarding the their Rehabilitation Plan. The total liquida-
report/opinion of the Rehabilitation Receiver tion assets and the estimated liquidation
that respondents may be successfully rehabi- return to the creditors, as well as the fair
litated, despite being highly qualified to make market value vis-à-vis the forced liquida-
an opinion on accounting in relation to reha- tion value of the fixed assets were not
bilitation matters. shown.

Considering that respondents’ creditors are (The test in evaluating the economic fea-
placed in equal footing as a necessary con- sibility was mentioned; it was laid down in
sequence, it permanently enjoined PDB from BPI v. Sarabia Manor Hotel Corporation,
“effecting the foreclosure” of the subject prop- case no. 4) In order to determine the fea-
erties during the implementation of the Reha- sibility of a proposed rehabilitation plan, it
bilitation Plan. is imperative that a thorough examination
and analysis of the distressed corpora-
Petitioners are now claiming that the CA erred tion’s financial data must be conducted.
in not upholding the dismissal of the rehabili-
tation petition despite the insufficiency of the
RP which was based on financial statements
that contained misleading statements, and
financial projections that are mere unfounded
assumptions/speculations.

8. Bustos vs, Millians Shoe Inc., GR Spouses Cruz owned a 464- square-meter Whether or not the CA correctly con- NO. In rehabilitation proceedings, claims
No. 185024, April 4, 2017 lot. The City Government of Marikina levied sidered the properties of Spouses of creditors are limited to demands of
the property for nonpayment of real estate Cruz answerable for the obligations whatever nature or character against a
taxes. The Notice of Levy was annotated on of MSI. If yes, then it is properly in- debtor or its property, whether for mon-
the title on. On 14 October 2004, the City cluded in the Stay Order. ey or otherwise. In several cases, we have
Treasurer of Marikina auctioned off the prop- already held that stay orders should only
erty, with petitioner emerging as the winning cover those claims directed against corpo-
bidder. rations or their properties, against their
guarantors, or their sureties who are not
Petitioner then applied for the cancellation of solidarily liable with them, to the exclusion
TCT. The RTC Marikina ordered the cancella- of accommodation mortgagors.
tion of the previous title and the issuance of a

“It doesn’t matter how slowly you go as long as you do not stop.”
 new one under the name of petitioner. Mean- Properties merely owned by stockholders
while, notices of lis pendens were annotated cannot be included in the inventory of as-
on the TCT. It involved the rehabilitation pro- sets of a corporation under rehabilitation.
ceedings for MSI, covered the subject proper- Given that the true owner the subject
ty and included it in the Stay Order issued by property is not the corporation, petitioner
the RTC dated 25 October 2004. cannot be considered a creditor of MSI but
a holder of a claim against respondent
Petitioner moved for the exclusion of the sub- spouses.
ject property from the Stay Order. He claimed
that the lot belonged to Spouses Cruz who
were mere stockholders and officers of MSI.
He further argued that since he had won the
bidding of the property on 14 October 2004,
or before the annotation of the title on 9 Feb-
ruary 2005, the auctioned property could no
longer be part of the Stay Order.

RTC denied the entreaty of petitioner: the pe-

riod of redemption up to 15 October 2005 had
not yet lapsed at the time of the issuance of
the Stay Order on 25 October 2004, the own-
ership thereof had not yet been transferred to
petitioner.

CA : The Cruz Spouses were still the owners

of the land at the time of the issuance of the
stay order. The said parcel of land which se-
cured 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. As an
exception to the general rule, in a close cor-
poration, the stockholders and/or officers
usually manage the business of the corpora-
tion and are subject to all liabilities of direc-
tors, i.e., personally liable for corporate debts
and obligations. Thus, the Cruz Spouses be-
ing stockholders of MSI are personally liable
for the latter’s debt and obligations.

9. Allied Banking Corp. vs. Equitable Respondent Equitable PCI Bank, Inc., as Whether or not the rehabilitation YES. The petition itself, when granted by

“It doesn’t matter how slowly you go as long as you do not stop.”
 PCI Bank, GR No. 191939, March creditor, filed a petition for the corporate court can reverse or invalidate acts the court, is already recognition of the
14, 2018 rehabilitation of its debtor Steel Corporation of that are inconsistent with its stay debtor’s distressed financial status not
the Phil. with the RTC. It alleged that due to order and are made after its is- only at the time the order is issued, but
the onslaught of the 1997 Asian Financial Cri- suance but prior to its publication. also at the time the petition is filed. It is,
sis, ....; that SCP also defaulted on its loan therefore, more consistent with the objec-
obligations and that the petition for corporate tives of rehabilitation to recognize that the
rehabilitation is grounded on the Interim Rules effects of an order commencing rehabilita-
of Corporate Rehabilitation, which provides tion proceedings and staying claims
that “.....or any creditor or creditors holding at against the debtor should retroact to the
least 25% of the debtor’s total liabilities, may date the petition is filed.
petition the proper Regional Trial Court to
have the debtor placed under rehabilitation.” The immediate effectivity of the stay order
means that the RTC, through an order
On the other hand, petitionerAllied Banking commencing rehabilitation and staying
Corporation (ABC) granted SCP with a revolv- claims against the debtor, acknowledges
ing credit facility denominated as a letter of that the debtor requires rehabilitation im-
credit/trust receipt line in the amount of P100 mediately and therefore it can not only
million, which SCP availed of to finance the prohibit but also nullify acts made after its
importation of its raw materials. effectivity, when such acts are violative of
the stay order, to prevent any irreparable
RTC issued an Order granted EPCIB’s peti- detriment to the debtor’s successful resto-
tion. ration.

Petitioner applied the remaining proceeds of

SCP’s Current Account in the amount of
P6,750,000.00, maintained with its Aguirre
Branch, to its obligations under the TR. 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 pay-
ment of obligations covered by the stay order.
Petitioner ABC filed an opposition, mainly
contending that SCP’s obligations with it had
become due and demandable, rendering legal
compensation valid and proper;
RTC granted SCP’motion. CA affirmed RTC
and further ruled that the subject account was
already under custodia legis by virtue of the
stay order, rendering ABC’s unilateral applica-
tion of the proceeds in the subject account

“It doesn’t matter how slowly you go as long as you do not stop.”
 improper.

10. Metropolitan Bank vs. Fortuna Pa- MBTC extended various credit accommoda- Whether or not the CA erred in af- YES, BUT CASE WAS DISMISSED FOR
per Mill, GR No. 190800, Novem- tions and loan facilities to Fortuna. Fortuna, firming the Rehabilitation Plan ap- BEING MOOT AND ACADEMIC. The
ber 7, 2018 before the closure of its business and cessa- proved by the RTC. RTC's Order terminating the rehabilitation
tion of its operations in 2006, was organized proceedings effectively puts an end to the
to manufacture special and craft papers from, judicial controversy between the parties.
waste and scrap materials, and which it used Nonetheless, this Court still considers it
to sell its products principally to manufactur- necessary to touch on the question of
ers of corrugated boxes, cement paper bags, whether or not a corporation in debt may
and other stationary paper products. qualify for coiporate rehabilitation, Fortuna
in this case, despite the finding of the low-
Fortuna mortgaged to MBTC its real and er court, belatedly brought to this Court's
movable properties as well as several pieces attention. Ruling on the merits despite a
of realty owned by several sister companies. ruling of the lower court rendering the
Fortuna defaulted on its obligations to MBTC, case moot and academic, is not novel.
and failed to pay said indebtedness despite
repeated demands on the part of MBTC. Fortuna is qualified to file for corporate
rehabilitation. Rehabilitation refers to the
Instead of paying the overdue obligations to restoration of the debtor to a condition of
MBTC, Fortuna filed a Petition for Corporate successful operation and solvency, if it is
Rehabilitation. Attached therein was Fortuna's shown that its continuance of operation is
proposed RP, which consisted mainly of (i) economically feasible and its creditors can
the resumption and continuance of its busi- recover by way of the present value of
ness, to be made possible by the entry of a payments projected in the plan, more if the
supposed investor and a debt moratorium on debtor continues as a going concern than
principal interest, and (ii) entry into the busi- if it is immediately liquidated.
ness condominium development.
A plain reading of the provision shows that
RTC approved the RP. The CA affirmed RTC the Interim Rules does not make any dis-
as it found that the rehabilitation was feasible, tinction between a corporation which is
and the opposition of the petitioning creditors already in debt and a corporation which
was manifestly unreasonable. foresees the possibility of debt, or which
would eventually yet surely fall into the
MBTC argues that a corporation may petition same, but may at present be free from any
that it be placed under rehabilitation only if it financial liability.
is in the financial condition of a debtor who
foresees the majority of its debts and its fail- Upon cursory reading of the report and
ure to meet them. recommendation of Atty. Teston, it can be
seen that Fortuna maintains a status of
solvency, having more assets than its lia-

“It doesn’t matter how slowly you go as long as you do not stop.”
 bilities with a 71M margin. However, even
hypothetically granting that Fortuna is al-
ready in a state of insolvency, the Court
finds that is not precluded from filing its
Rehabilitation Petition to facilitate its resto-
ration to its former business' stability. For-
tuna is seeking a fresh start to lift itself
from its present financial predicament.
Thus, the foreseen viable rehabilitation of
Fortuna would be more advantageous to
the business community and its creditors
rather than proceed with its liquidation
which may possibly lead to its eventual
corporate death.

“It doesn’t matter how slowly you go as long as you do not stop.”