PERSONS Doctrine:

Title GR No. 191939

Allied Banking Corp. v. Equitable PCI Bank Date: March 14, 2018
Ponente: MARTIRES, J
ALLIED BANKING CORPORATION, IN THE MATTER OF THE PETITION TO
petitioner, HAVE STEEL CORPORATION OF THE
PHILIPPINES PLACED UNDER CORPORATE
REHABILITATION WITH PRAYER FOR THE
APPROVAL OF THE PROPOSED
REHABILITATION PLAN, EQUITABLE PCI
BANK, INC., respondent.
Nature of the case: This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing
the 22 July 2008 Decision 2 and 12 April 2010 Resolution 3 of the Court of Appeals (CA) in CA-G.R. SP
No. 97206. The CA affirmed the 22 November 2006 Resolution of the Regional Trial Court (RTC or the
rehabilitation court), Branch 2, Batangas City, in Spec. Proc. No. 06-7993, which ordered the bank creditors
of Steel Corporation of the Philippines (SCP) to unfreeze and restore the latter's bank accounts to the
possession, control, and custody of the rehabilitation receiver.
FACTS
11 September 2006 - Equitable PCI Bank, Inc. as creditor, filed a petition for the corporate rehabilitation
of its debtor Steel Corporation of the Philippines with the RTC.
Equitable Bank’s assertions:
• Due to 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;
• SCP failed to make timely payments on its term loan facilities;
• SCP defaulted on its loan obligations under the December 2002 Omnibus Agreement, where some
financial institutions, including lending banks, agreed to reschedule and restructure SCP's payments on the
principal loan and interest, reinstate its working capital lines and establish a new trade financing line;
• The petition for corporate rehabilitation is grounded on Section 1, Rule 4 of the Interim Rules of
Corporate Rehabilitation, which provides that "any debtor who foresees the impossibility of meeting its
debts when they respectively fall due, or any creditor or creditors holding at least twenty-five percent
(25%) of the debtor's total liabilities, may petition the proper Regional Trial Court to have the debtor
placed under rehabilitation."

Meanwhile, SCP availed of a revolving credit facility as a letter of credit/trust receipt from petitioner for
P100 million, to finance the importation of its raw materials. With this, SCP executed a trust receipt which
authorizes ABC to charge SCP's account in its possession under instances specified in paragraph 9
thereof(NOTES)

The RTC Ruling

RTC issued granted EPCIB's petition finding it to be sufficient in form and substance. It appointed
Santiago T. Gabionza Jr. as Rehabilitation Receiver of Steel Corporation of the Philippines, from
Villanueva Gabionza and De Santos Law Offices, and directs him to, among others:
xxx
(c) Staying all claims against SCP, by all other corporations, persons or entities insofar as
they may be affected by the present proceedings, until further notice from this Court,
pursuant to Sec. 6, of Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation.

15 September 2006 - petitioner applied the remaining proceeds to SCP's Current Account No. 1801-004-
87-6 for 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 payment of obligations covered by the stay order.
Furthermore, it prayed for ABC to immediately restore its current account, credit back to said account for
P6,750,000.00, and honor any transactions of SCP in said account.

ABC opposed:
• SCP's obligations 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;
• petitioner cannot be legally compelled to extend credit to SCP against its will.

On 22 November 2006, the RTC issued a resolution and ordered ABC to restore SCP’s Current Account,
and to credit back to the said account the entire deposit balance of P6,750.000.00

The CA Ruling
The CA affirmed the resolution of the RTC,
• RTC's stay order was effective on 12 September 2006, date of issuance, as per the Interim Rules of
Corporate Rehabilitation thus, ABC was bound to comply with it on said date.
• The subject account was already under custodia legis by virtue of the stay order, rendering ABC's
unilateral application of the proceeds in the subject account improper.
• No impairment of contractual rights exists because no changes were made in the amount or rate of
SCP's debt to ABC.
Unconvinced, ABC filed a motion for reconsideration of the CA decision, which was denied by the CA in
its resolution; hence, the instant petition.

The present petition

ABC’s contentions:
• deprived of its right to due process when the RTC ordered ABC to restore SCP's current account
• 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
ISSUE/S
1. Whether petitioner ABC is bound by the Sept. 12, 2006 stay order of the RTC
2. Whether petitioner ABC is prohibited from applying the proceeds of the deposit account of
Steel Corporation to its outstanding obligations from Sept. 12 2006, as the said proceeds are
already under custodia legis, by virtue of the Stay Order
RATIO
MAIN RULING:
Applying the provisions of the present Rehabilitation Rules, the rehabilitation court properly
invalidated ABC's action.
The rehabilitation petition was filed by EPCIB under 2000 Interim Rules of Procedure on Corporate
Rehabilitation. On 27 August 2013, the Court enacted Financial Rehabilitation Rules of Procedure which
amended and revised the Interim Rules and the subsequent 2008 Rules of Procedure on Corporate
Rehabilitation in order to incorporate the significant changes brought about by FRIA.

The Rehabilitation Rules provides that the court shall issue a commencement order once it finds the
petition for rehabilitation sufficient in form and substance. The rehabilitation proceedings shall be deemed
to have commenced from the date of filing of the petition, also known as the commencement date.
Moreover, the effects of the commencement order shall retroact to the date when the petition was filed,
and any attempt to collect or enforce a claim against the debtor or to set off any debt by the debtor's
creditors after it shall be void.(NOTES). The order issued by the RTC on 12 September 2006, is akin
to the commencement order under the Rehabilitation Rules.

Clearly, if the Rehabilitation Rules were to be applied, the directive of the rehabilitation court restoring
SCP's current account and crediting back the offset amount is valid and proper, since the 1) offsetting was
made on 15 September 2006, 2) after the commencement date on 11 September 2006, when the petition
for rehabilitation was filed.

QUESTION: May the Rehabilitation Rules be applied to resolve the present petition? Yes.
Section 2, Rule 1 of the Rehabilitation Rules governs rehabilitation cases already pending, except when its
application would not prove feasible or would work injustice.

This is consistent with R.A. No. 10142:

SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases.
— xxx. All further proceedings in insolvency, suspension of payments and rehabilitation
cases then pending, except to the extent that in the opinion of the court their application
would not be feasible or would work injustice, in which event the procedures set forth in
prior laws and regulations shall apply.

In Philippine Bank of Communications v. Basic Polyprinters and Packaging Corporation, the Court said
that rehabilitation proceedings seek to give insolvent debtors the opportunity to reorganize their affairs and
to efficiently and equitably distribute its remaining assets.
PURPOSE:
(1) that it is currently financially distressed; and
(2) an attempt to conserve and administer its assets hoping that it will go back on its former state of being
financially fluid.
Its purpose will be defeated if debtors are still allowed to dispose of their property and pay their
liabilities, after the filing of the said petition.

Even the Interim Rules provides for the immediate effectivity of a stay order.
Even if the retroactive effect under the Rehabilitation Rules is inapplicable to the case at bar, the Interim
Rules expressly provides that the stay order is effective upon its issuance, as per Sec. 11 of the Interim
Rules. This finds support under Sec. 5 Rule 3 of the same rules stating that it is immediately executory. A
stay order issued by the court in a corporate rehabilitation proceeding is effective from the date of its
issuance until the dismissal of the petition or the termination of the rehabilitation proceedings.

Here, the rehabilitation court correctly held that the appellant is bound by the September 12, 2006 Stay
Order, as such it is immediately executory and effective to compel compliance as per the Interim Rules. It
is true that publication of the notice of the commencement of the proceedings is necessary to acquire
jurisdiction over all persons affected, in which the nature of the proceedings shall be considered in rem.

QUESTION: Whether the immediate effectivity of the stay order is inconsistent with the publication
requirement, in which the rehabilitation court cannot invalidate acts made after its issuance but prior to its
publication. No.

REASON: The immediate effectivity of the stay order means that the RTC acknowledges that the debtor
requires rehabilitation immediately, and it can not only prohibit but also nullify acts made after its
effectivity, when such acts are violative of the stay order and to prevent any irreparable detriment to the
debtor's successful restoration. This is validated by the Interim Rules, where the court can declare void any
transaction made in violation of the stay order. Moreover, the publication requirement only means that all
affected persons must be notified, as a requirement for due process, that the debtor requires rehabilitation
and should temporarily be exempt from paying its obligations, unless allowed by the court.
SUPPLEMENTAL RATIO:
There was no impairment of contract
At the time the Trust Receipt Agreement was entered into by ABC and SCP, the law expressly allowed
corporations to be declared in a state of suspension of payments under specific instances. Consequently,
said law and its implementing rules are deemed incorporated in the Trust Receipt Agreement. Here, the
principle on inviolability of contracts was not violated. The subject order also did not eliminate or reduce
SCP's obligations to ABC, but merely suspended its enforcement while rehabilitation is pending.
Similarly, ABC was not deprived of its right to enforce its claim against SCP. The creditor's right to
enforce his claim despite the issuance of a stay order is even validated by Section 8 of the Rehabilitation
Rules:
xxx xxx xxx
The issuance of a stay order does not affect the right to commence actions or proceedings in
order to preserve ad cautelam a claim against the debtor and to toll the running of the
prescriptive period to file the claim. xxx

There is no deprivation of due process

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. Under both the Rehabilitation Rules and the Interim Rules, publication of the notice of
the commencement of rehabilitation proceedings is the operative act which vests the court with
jurisdiction over all affected parties.

It is not disputed that the 12 September 2006 Order of the rehabilitation court was duly published on 16
September 2006; that said order contained a directive for all creditors to file their verified comment on the
petition within a stated period; and that ABC filed its verified comment on 17 October 2006. It is evident
that petitioner was notified of the rehabilitation proceedings and given an opportunity to be heard, as in
fact it filed a comment thereon, thereby satisfying due process requirements.
WHEREFORE, the petition is DENIED. The 22 July 2008 Decision and 12 April 2010 Resolution of the
Court of Appeals in CA-G.R. SP No. 97206 are AFFIRMED. SO ORDERED.
Notes
1. Par. 9: In the event of any bankruptcy, insolvency, suspension of payment, or failure, or
assignment for the benefit of creditors, on my/our part, or of the non-fulfillment of any obligation,
or of the non-payment at maturity of any acceptance specified hereon or under any credit issued by
the ALLIED BANKING CORPORATION for my/our account, or of the non-payment of any
indebtedness on my/our part to the said bank, all obligations, acceptances, indebtedness, and
liabilities whatsoever shall thereupon (with or without notice) mature and become due and payable.
The ALLIED BANKING CORPORATION is hereby constituted my/our attorney-in-fact, with
authority to examine my/our books and records, to charge my/our account or to sell any other
property of mine/ours in its possession, and to liquidate any or all of my/our obligations under this
Trust Receipt.
2. SEC. 9. EFFECTS OF THE COMMENCEMENT ORDER. — The effects of the court's
issuance of a Commencement Order shall retroact to the date of the filing of the petition and, in
addition to the effects of a Stay or Suspension Order described in the foregoing section, shallxxx
xxx xxx(B) prohibit or otherwise serve as the legal basis for rendering null and void the
results of any extrajudicial activity or process to seize property, sell encumbered property, or
otherwise attempt to collect on or enforce a claim against the debtor after the commencement
date unless otherwise allowed under these Rules, subject to the provisions of Section 49 of this
Rule;
(C) serve as legal basis for rendering null and void any set-off after the commencement date
of any debt owed to the debtor by any of the debtor's creditors; (emphasis supplied)
4SPL2 2020-2021 (RESURRECCION)