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JOSE MARCEL PANLILIO, ET AL. VS. REGIONAL TRIAL COURT, PEOPLE OF THE PHILIPPINES AND SOCIAL SECURITY SYSTEM, G.R. NO. 173846, FEBRUARY 2, 2011FACTS:The petitioners are corporate officers of Silahis International Hotel,Inc. (SIHI) who have filed a petition for Suspension of Payments and Rehabilitation before a commercial court. However, at the time of the filing of the petition for rehabilitation by the Silahis Hotel, there were a number of criminal charges pending against the corporate officers for violation of the SSS law. Subsequently, the officers filed with the criminal court a motion to suspend proceedings arguing that the stay order issued by the commercial court should also apply to the criminal cases then pending. The criminal court ruled against the petitioners on the ground that the Stay Order issued by the commercial court does not cover the prosecution of criminal offenses. On appeal, the Court of Appeals confirmed the criminal court’s ruling. Hence, the petitioners filed a petition for review on certiorari before the Supreme Court.ISSUE:Does the suspension of “all claims” as an incident to a corporate rehabilitation also contemplate the suspension of criminal charges filed against the corporate officers of the distressed corporation?HELD: No. The petition is not meritorious.RATIO: Corporate rehabilitation connotes the restoration of the debtor to a position of successful operation and

solvency, if it is shown that its continued operation is economically feasible and its creditors can recover more, by way of the present value of payments projected in the rehabilitation plan, if the corporation continues as a going concern than if it is immediately liquidated. It contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency, the purpose being to enable the company to gain a new lease on life and allow its creditors to be paid their claims out of its earnings

A principal feature of corporate rehabilitation is the suspension of claims against the distressed corporation. The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground for the

extinction of petitioners’ criminal liabilities. There is no reason why criminal proceedings should be suspended during corporate rehabilitation, more so, since the prime purpose of the criminal action is to punish the offender in order to deter him and others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or, in general, to maintain social order. As correctly observed in Rosario, it would be absurd for one who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer.

The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the corporation, especially since they are charged in their individual capacities. Such being the case, the purpose of the law for the issuance of the stay order is not compromised, since the appointed rehabilitation receiver can still fully discharge his functions as mandated by law. It bears to stress that the rehabilitation receiver is not charged to defend the officers of the corporation. If there is anything that the rehabilitation receiver might be remotely interested in is whether the court also rules that petitioners are civilly liable. Such a scenario, however, is not a reason to suspend the criminal proceedings, because as aptly discussed in Rosario, should the court prosecuting the officers of the corporation find that an award or indemnification is warranted, such award would fall under the category of claims, the execution of which would be subject to the stay order issued by the rehabilitation court. The penal sanctions as a consequence of violation of the SSS law, in relation to the revised penal code can therefore be implemented if petitioners are found guilty after trial. However, any civil indemnity awarded as a result of their conviction would be subject to the stay order issued by the rehabilitation court. Only to this extent can the order of suspension be considered obligatory upon any court, tribunal, branch or body where there are pending actions for claims against the distressed corporation.

Congress has recently enacted Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010. Section 18 thereof explicitly provides that criminal actions against the individual officer of a corporation are not subject to the Stay or Suspension Order in rehabilitation proceedings.

Furthermore, the Court pointed out that Congress has recently enacted Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010 where Section 18 thereof explicitly provides that criminal actions against the individual officer of a corporation are not subject to the Stay or Suspension Order in rehabilitation proceedings.

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SAMUEL U. LEE, ET. AL. VS. BANGKOK BANK PUBLIC COMPANY, LIMITEDG.R. NO. 173349, FEB. 9, 2011FACTS:The petitioner and some members of his family owned, controlled and managed Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI). The corporations are engaged in the manufacturing and export of garments, ladies’ bags and apparel. The said corporations secured two credit line agreements with the respondent bank and they also secured several loans with AsiaTrust. The Lee family made guarantees that they shall be principally liable to the indebtedness of MDEC and MHI with the respondent. The Bangkok Bank, however, did not set aside any of the Lee’s properties as collateral to the loans they granted the said corporations. The Lee family had, however, mortgaged several properties that Samuel and his wife owned in Antipolo, Rizal with AsiaTrust to secure their loans with AsiaTrust. In connection therewith, Samuel and his wife executed a new deed of mortgage covering the properties in Antipolo. Thereafter, the said corporations defaulted on their loans not only with the said banks but as well as with their other creditors. This prompted the corporations to file a consolidated petition for the Declaration of a State of Suspension of Payments and for Appointment of a Management Committee/Rehabilitation Receiver before the Securities and Exchange Commission (SEC). The petition for suspension of payment further stated that the Lee family and their corporations had more than sufficient properties to cover all liabilities to their creditors; and presented a list of all their properties including the subject properties located in Antipolo, Rizal. Notably, the list of properties attached to the petition indicated that the subject Antipolo properties of the spouses Lee had already been earmarked, or that they had already served as security, for MDEC’s unpaid obligation with Asiatrust. Subsequently, SEC issued a Suspension Order which enjoined the Lee corporations from disposing of their property in any manner except in the ordinary course of business, and from making any payments outside the legitimate expenses of their business during the pendency of the petition. A month after the Suspension Order, the respondent bank filed a civil case against the petitioner’s corporations to recover the loans it granted under the guarantees the Lee family had made. The lower court partially ruled in favour of the respondent Bank but the bank’s execution over several of Lee’s properties was not sufficient to cover their loans. The said court likewise granted the respondent bank a writ of preliminary attachment against the Lee’s properties in Baguio, Cavite, Quezon City and those including in Antipolo which were mortgaged to AsiaTrust. Meanwhile, AsiaTrust foreclosed the mortgage of the Lee family’s properties in Antipolo for failure to pay the loans granted to the family. AsiaTrust subsequently won as the highest bidder in the auction sale to own the said properties in Antipolo. The respondent bank did not redeem the said properties believing that the real estate mortgage and the foreclosure sale to be fraudulent. Based on this belief, the respondent bank filed an action to rescind the Real Estate Mortgage over the properties in Antipolo, nullify the foreclosure sale and cancel the TCTs issued in favour of AsiaTrust. The lower court dismissed the case on the ground that there was no proof of fraud in the transactions involved in the real estate mortgage and the foreclosure sale. Furthermore, the respondent bank failed to exercise its right of redemption over the subject properties. The lower court further stated that the SEC Suspension Order does not cover the subject properties which therefore did not preclude the Lee family to mortgage the said properties to Asia Trust. Upon appeal, the Court of Appeals reversed the lower court’s decision and granted the respondent bank’s petition. The Court of Appeals ruled on the ground that the subject Antipolo properties, though personal assets of the Lee family, are covered by the Suspension Order of the SEC, since they are included in the list submitted to SEC by the Lee family; and that Samuel is a guarantor of the loans incurred by MDEC and MHI from Bangkok Bank. It ruled that Samuel, being a guarantor, is jointly and severally liable to Bangkok Bank for the corporate debts of MDEC and MHI, as he divested himself from the protection of the limited liability doctrine, which was shown (1) through the inclusion of the said subject Antipolo properties in the list submitted to the SEC; and (2) by Samuel, through the guarantees that he executed, thus voluntarily binding himself to the payment of the loans incurred from Bangkok Bank. Hence, the petition for review on certiorari was filed before the Supreme Court assailing the Court of Appeal’s decision.ISSUE:Whether the subject Antipolo properties are covered under SEC Suspension Order?HELD:The subject properties are not under the purview of the SEC Suspension Order. The Court of Appeal’s decision shall be reversed and set aside. The lower court’s decision shall be reinstated.RATIO: It can be clearly gleaned from the Secs. 3 and 5 of PD 902-A provisions that in cases of petitions for the

suspension of payments, the SEC has jurisdiction over corporations, partnerships and associations, which are grantees of primary franchise or license or permit issued by the government to operate in the Philippines, and their properties. And it is indubitably clear from the aforequoted Sec. 5(d) that only corporations, partnerships and associations—NOT private individuals—can file with the SEC, petitions for declaration in a state of suspension of payments. Thus, it logically follows that the SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other than corporations, partnerships or associations. Indeed, settled is the rule that it is axiomatic that jurisdiction is the authority to hear and determine a cause, which is conferred by law and not by the policy of any court or agency.

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Private individuals and their privately owned properties cannot be placed under the jurisdiction of the SEC in a petition for suspension of payments

In Chung Ka Bio v. Intermediate Appellate Court, this Court resolved in the negative the issue of whether private individuals can file with the SEC petitions for declaration in a state of suspension of payments. We held that Sec. 5(d) of PD 902-A clearly does not allow a mere individual to file the petition, which is limited to “corporations, partnerships or associations.” Besides, We pointed out that the SEC, being a mere administrative agency, is a tribunal of limited jurisdiction and, as such, can only exercise those powers, which are specifically granted to them by their enabling statutes. We, thus, concluded that where no authority is granted to hear petitions of individuals for suspension of payments, such petitions are beyond the competence of the SEC. In short, the SEC has no jurisdiction over private individuals relative to any petition for suspension of payments, whether the private individual is a petitioner or a co-petitioner. We have said time and again that the SEC’s “jurisdiction is limited only to corporations and corporate assets;” it has no jurisdiction over the properties of private individuals or natural persons, even if they are the corporation’s officers or sureties. We have, thus, consistently applied this ruling to the subsequent Ong v. Philippine Commercial International Bank, Modern Paper Products, Inc. v. Court of Appeals, and Union Bank of the Philippines v. Court of Appeals.

Here, it is undisputed that the petition for suspension of payments was collectively filed by the five corporations owned by the Lee family. It is likewise undisputed that together with the consolidated petition is a list of properties, which included the subject Antipolo properties owned by Samuel and Pauline Lee. The fact, however, that the subject properties were included in the list submitted to the SEC does not confer jurisdiction on the SEC over such properties. It is apparent that even if the members of the Lee family are joined as co-petitioners with the five corporations, still, this could not confer jurisdiction on the SEC over the Lee family members—as private individuals—nor could this affect their privately owned properties.

Further, the fact that the debts of MDEC and MHI to Bangkok Bank are secured by the Lee family through the guarantees will not likewise put the Lee family and their privately owned properties under the jurisdiction of the SEC through the consolidated petition for suspension of payments.

Therefore, the February 20, 1998 Suspension Order issued by the SEC did not and could not have included the subject properties.

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SIOCHI FISHERY ENTERPRISES, INC. ET. AL. VS. BANK OF PHILIPPINE ISLANDSG.R. NO. 193872, OCTOBER 19, 2011FACTS:Petitioners Siochi Fishery Enterprises, Inc., Jun-Jun Fishing Corporation, Dede Fishing Corporation, Blue Crest Aqua-Farms, Inc. and Iloilo Property Ventures, Inc. (petitioners) are domestic corporations of the Siochi family. Petitioners are engaged in various businesses and have interlocking stockholders and directors. In the course of their business, petitioners borrowed from respondent Bank of the Philippine Islands (BPI) and from Ayala Life Assurance, Inc. As of 30 June 2004, petitioners’ total obligation amounted to P85,362,262.05. On 15 July 2004, petitioners filed with the RTC a petition for corporate rehabilitation. Petitioners prayed that the RTC (1) issue a stay order; (2) declare petitioners in a state of suspension of payments; (3) approve petitioners’ proposed rehabilitation plan; and (4) appoint a rehabilitation receiver. The RTC granted the said petition and appointed Atty. Cesar C. Cruz as the petitioner’s rehabilitation receiver. The respondent Bank opposed the petition on the ground among others that the rehabilitation plan was unfeasible and prejudicial to its interest. Atty. Cruz, the rehabilitation receiver, prayed before the RTC to issue an order to call for a meeting between the petitioners and their creditor. RTC denied the motion. Thereafter, the RTC issued an order of approval of the petitioners’ rehabilitation plan. On appeal, the Court of Appeals set aside the RTC’s Order on the ground that the lower court’s order of granting the petition was rife with procedural infirmities. Hence, the present petition.ISSUE:Whether or not the RTC correctly gave due course in granting the petition for corporate rehabilitation?HELD:No. The petition is denied. The Court of Appeals’ decision is affirmed.RATIO: In the present case, the RTC hastily approved the rehabilitation plan in the same order giving due course to the

petition. The RTC confined the initial hearing to the issue of jurisdiction and failed to address other more important matters relating to the petition and comment. The RTC also failed to refer for evaluation the rehabilitation plan to the rehabilitation receiver. Thus, the rehabilitation receiver was unable to submit his recommendations and make modifications or revisions to the rehabilitation plan as necessary. Moreover, the RTC denied the rehabilitation receiver’s motion to issue an order directing petitioners and their creditors to attend a meeting. In its 20 October 2009 Decision, the Court of Appeals found:

The most glaring procedural infirmity committed by the court a quo, however, is its failure to refer respondent corporations’ petition for rehabilitation and Rehabilitation Plan to the rehabilitation receiver despite the explicit and clear mandate of the Interim Rules that if the court is satisfied that there is merit in the petition, it shall give due course to the petition and “immediately” refer the same and its annexes to the rehabilitation receiver x x x.

It is discernible from the foregoing that there are serious matters which should be determined before rehabilitation may be had. For this reason, the Interim Rules required the appointment of a rehabilitation receiver simultaneously with the issuance of the Stay Order and prescribed the following qualifications — expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor, knowledge in management, finance, and rehabilitation of distressed companies, and general familiarity with the rights of creditors in rehabilitation, etc. to further emphasize the significance of the role of the rehabilitation receiver in rehabilitation proceedings, the Interim Rules directed the rehabilitation receiver to evaluate the rehabilitation plan and submit his recommendations to the court. In fact, his recommendation bears much weight as it is one of the factors which must be considered by the court if it were to approve the rehabilitation plan. More importantly, it must be emphasized that the purpose of the law in directing the appointment of receivers is to protect the interests of the corporate investors and creditors. Thus, the court a quo committed serious error when it failed to refer the petition for rehabilitation and its annexes to the appointed receiver.

We have likewise observed that the court a quo made an unwarranted procedural shortcut as its finding that there was merit in respondent corporations’ petition for rehabilitation was made in the same Order approving their Rehabilitation Plan.

As an officer of the court and an expert, the rehabilitation receiver plays an important role in corporate rehabilitation proceedings. In Pryce Corporation v. Court of Appeals, the Court held that, “the purpose of the law in directing the appointment of receivers is to protect the interests of the corporate investors and creditors.” Section 14 of the Interim Rules of Procedure on Corporate Rehabilitation enumerates the powers and functions of the rehabilitation receiver: (1) verify the accuracy of the petition, including its annexes such as the schedule of debts and liabilities and the inventory of assets submitted in support of the petition; (2) accept and incorporate, when justified, amendments to the schedule of debts and liabilities; (3) recommend to the court the disallowance of claims and rejection of amendments to the schedule of debts and liabilities that lack sufficient proof and justification; (4) submit to the court and make available for review by the creditors a revised schedule of debts and liabilities; (5) investigate the acts, conduct, properties, liabilities, and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof, and any other matter relevant to the proceedings or to the formulation of a rehabilitation plan; (6) examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate; (7) make available to the creditors documents and notices necessary for them to follow and participate in the

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proceedings; (8) report to the court any fact ascertained by him pertaining to the causes of the debtor’s problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement, and irregularities committed by the stockholders, directors, management, or any other person; (9) employ such person or persons such as lawyers, accountants, appraisers, and staff as are necessary in performing his functions and duties as rehabilitation receiver; (10) monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor’s business; (11) evaluate the existing assets and liabilities, earnings and operations of the debtor; (12) determine and recommend to the court the best way to salvage and protect the interests of the creditors, stockholders, and the general public; (13) study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together with any comments made thereon; (14) prohibit and report to the court any encumbrance, transfer, or disposition of the debtor’s property outside of the ordinary course of business or what is allowed by the court; (15) prohibit and report to the court any payments outside of the ordinary course of business; (16) have unlimited access to the debtor’s employees, premises, books, records, and financial documents during business hours; (17) inspect, copy, photocopy, or photograph any document, paper, book, account, or letter, whether in the possession of the debtor or other persons; (18) gain entry into any property for the purpose of inspecting, measuring, surveying, or photographing it or any designated relevant object or operation thereon; (19) take possession, control, and custody of the debtor’s assets; (20) notify the parties and the court as to contracts that the debtor has decided to continue to perform or breach; (21) be notified of, and to attend all meetings of the board of directors and stockholders of the debtor; (22) recommend any modification of an approved rehabilitation plan as he may deem appropriate; (23) bring to the attention of the court any material change affecting the debtor’s ability to meet the obligations under the rehabilitation plan; (24) recommend the appointment of a management committee in the cases provided for under Presidential Decree No. 902-A, as amended; (25) recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general public; and (26) apply to the court for any order or directive that he may deem necessary or desirable to aid him in the exercise of his powers.

The rehabilitation plan is an indispensable requirement in corporate rehabilitation proceedings. Section 5 of the Rules enumerates the essential requisites of a rehabilitation plan:

The rehabilitation plan shall include (a) the desired business targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include the manner of its implementation, giving due regard to the interests of secured creditors; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which may include conversion of the debts or any portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the controlling interest; (e) a liquidation analysis that estimates the proportion of the claims that the creditors and shareholders would receive if the debtor’s properties were liquidated; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan.

The Court notes that petitioners failed to include a liquidation analysis in their rehabilitation plan.

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Advent Capital and Finance Corporation vs. Nicasio I. Alcantara and Editha I. Alcantara G.R. No. 1803050, January 25, 2012FACTS:The corporation petitioner, Advent Capital, was subject to rehabilitation. Its court appointed rehabilitation receiver, Atty. Danilo L. Concepcion, subsequently found out that the respondent Alcantara couple had owned the Advent Capital P27,398,026.59, representing trust fees that it supposedly earned for managing their several trust accounts. Prompted by this finding, Atty. Concepcion requested Belson Securities, Inc. (Belson) to deliver to him, as Advent Capital’s rehabilitation receiver, the P7,635,597.50 in cash dividends that Belson held under the Alcantaras’ Trust Account 95-013. Atty. Concepcion claimed that the dividends, as trust fees, formed part of Advent Capital’s assets. Belson refused, however, citing the Alcantaras’ objections as well as the absence of an appropriate order from the rehabilitation court. Thus, Atty. Concepcion filed a motion before the rehabilitation court to direct Belson to release the money to him. The Alcantaras made a special appearance before the rehabilitation court to oppose Atty. Concepcion’s motion. They claimed that the money in the trust account belonged to them under their Trust Agreement with Advent Capital. The rehabilitation court granted the motion despite the Alcantara couple’s opposition. Complying with the rehabilitation court’s order and Atty. Concepcion’s demand letter, Belson turned over the subject dividends to him. Meanwhile, the Alcantaras filed a special civil action of certiorari before the Court of Appeals (CA), seeking to annul the rehabilitation court’s order. The CA rendered a decision, granting the petition and directing Atty. Concepcion to account for the dividends and deliver them to the Alcantaras. The CA ruled that the Alcantaras owned those dividends. They did not form part of Advent Capital’s assets as contemplated under the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). Hence, the present petition. ISSUE:Whether or not the cash dividends held by Belson and claimed by both the Alcantaras and Advent Capital constitute corporate assets of the latter that the rehabilitation court may, upon motion, require to be conveyed to the rehabilitation receiver for his disposition?HELD:No. The Court of Appeals’ decision is affirmed.RATIO:Cash dividends held by Belson and claimed by both the Alcantaras and Advent Capital does not constitute corporate assets of the latter that the rehabilitation court may, upon motion, require to be conveyed to the rehabilitation receiver for his disposition.Advent Capital asserts that the cash dividends in Belson’s possession formed part of its assets based on paragraph 9 of its Trust Agreement with the Alcantaras,According to Advent Capital, it could automatically deduct its management fees from the Alcantaras’ portfolio that they entrusted to it. Paragraph 9 of the Trust Agreement provides that Advent Capital could automatically deduct its trust fees from the Alcantaras’ portfolio, “at the end of each calendar quarter,” with the corresponding duty to submit to the Alcantaras a quarterly accounting report within 20 days after.But the problem is that the trust fees that Advent Capital’s receiver was claiming were for past quarters. Based on the stipulation, these should have been deducted as they became due. As it happened, at the time Advent Capital made its move to collect its supposed management fees, it neither had possession nor control of the money it wanted to apply to its claim. Belson, a third party, held the money in the Alcantaras’ names. Whether it should deliver the same to Advent Capital or to the Alcantaras is not clear. What is clear is that the issue as to who should get the same has been seriously contested.The real owner of the trust property is the trustor-beneficiary. In this case, the trustors-beneficiaries are the Alcantaras. Thus, Advent Capital could not dispose of the Alcantaras’ portfolio on its own. The income and principal of the portfolio could only be withdrawn upon the Alcantaras’ written instruction or order to Advent Capital. The latter could not also assign or encumber the portfolio or its income without the written consent of the Alcantara. All these are stipulated in the Trust Agreement. Advent Capital and Finance Corporation vs. Nicasio I. Alcantara and Editha I. Alcantara,Ultimately, the issue is what court has jurisdiction to hear and adjudicate the conflicting claims of the parties over the dividends that Belson held in trust for their owners. Certainly, not the rehabilitation court which has not been given the power to resolve ownership disputes between Advent Capital and third parties. Neither Belson nor the Alcantaras are its debtors or creditors with interest in the rehabilitation.Advent Capital must file a separate action for collection to recover the trust fees that it allegedly earned and, with the trial court’s authorization if warranted, put the money in escrow for payment to whoever it rightly belongs. Having failed to collect the trust fees at the end of each calendar quarter as stated in the contract, all it had against the Alcantaras was a claim for payment which is a proper subject for an ordinary action for collection. It cannot enforce its money claim by simply filing a motion in the rehabilitation case for delivery of money belonging to the Alcantaras but in the possession of a third party.Rehabilitation proceedings are summary and non-adversarial in nature, and do not contemplate adjudication of claims that must be threshed out in ordinary court proceedings. Adversarial proceedings similar to that in ordinary courts are inconsistent with the commercial nature of a rehabilitation case. The latter must be resolved quickly and expeditiously for the sake of the corporate debtor, its creditors and other interested parties. Thus, the Interim Rules “incorporate the concept of prohibited pleadings, affidavit evidence in lieu of oral testimony, clarificatory hearings

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instead of the traditional approach of receiving evidence, and the grant of authority to the court to decide the case, or any incident, on the basis of affidavits and documentary evidence.”

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Wonder Book Corporation vs. Philippine Bank of Communications G.R. No. 187316 January 16, 2012FACTS:Petitioner Wonder Book Corporation (Wonder Book) is a corporation duly organized and existing under Philippine laws engaged in the business of retailing books, school and office supplies, greeting cards and other related items. It operates the chain of stores known as the Diplomat Book Center. The petitioner filed a petition for rehabilitation before the RTC. The petitioner in the course of its business acquired a loan from the respondent Bank. The respondent, Philippine Bank of Communications, opposed the petition for rehabilitation on the ground that the corporation is insolvent and can no longer be rehabilitated. The RTC granted the petition despite the respondent bank’s opposition. However, on appeal, the Court of Appeals reversed the lower court’s decision on the ground that Wonder Book as a corporation is not merely illiquid but in a state of insolvency. This can be proven in Wonder Book’s financial statement. Hence, the present petition.ISSUE:Whether Wonder Book’s petition for rehabilitation is impressed with merit?HELD: No. The Court of Appeals’ decision is affirmed. RATIO: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 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. The rehabilitation of a financially distressed corporation benefits its employees, creditors, stockholders and, in a larger sense, the general public.Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of the United States, have equitable and rehabilitative purposes. On 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 rationale of Presidential Decree No. 902-A, as amended, is to “effect a feasible and viable rehabilitation,” by preserving a floundering business as going concern, because the assets of a business are often more valuable when so maintained than they would be when liquidated.Under Section 23, Rule 4 of the Interim Rules, a rehabilitation plan may be approved if there is a showing that rehabilitation is feasible and the opposition entered by the creditors holding a majority of the total liabilities is unreasonable. In determining whether the objections to the approval of a rehabilitation plan are reasonable or otherwise, the court has the following to consider: (a) that the opposing creditors would receive greater comp.ensation under the plan than if the corporate assets would be sold; (b) that the shareholders would lose their controlling interest as a result of the plan; and (c) that the receiver has recommended approval.Rehabilitation is therefore available to a corporation who, while illiquid, has assets that can generate more cash if used in its daily operations than sold. Its liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and anchored on realistic assumptions and goals. This remedy should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by the following: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily operations; and (e) negative net worth and the assets are near full depreciation or fully depreciated. The figures appearing on Wonder Book’s financial documents and the nature and value of its assets are indeed discouraging. Rehabilitation is not the proper remedy for Wonder Book’s dire financial condition. Given that it is actually insolvent and not just suffering from temporary liquidity problems, rehabilitation is not a viable option.Another reason for this Court’s denial of Wonder Book’s petition is its failure to comply with Section 5 of the Interim Rules, which enumerates the minimum requirements of an acceptable rehabilitation plan. It is imperative for a distressed corporation seeking rehabilitation to present “material financial commitments” as this is critical in determining its resolve, determination, earnestness and good faith in financing its proposed rehabilitation plan. Wonder Book’s “material financial commitments” are limited to converting all deposits for future subscriptions to common stock and treating all its payables to its officers and stockholders as trade payables. These, unfortunately, do not qualify as sincere commitment and even betray Wonder Book’s intent to fund the implementation of its rehabilitation plan using whatever cash it will generate during the reprieve provided by the stay order and the moratorium on the principal and interest payments. This scheme is certainly unfair as PBCOM or any of Wonder Book’s creditors cannot be compelled to finance Wonder Book’s rehabilitation by a delay in the payment of their claims or a considerable reduction in the amounts thereof.

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Pryce Corporation vs. Court of Appeals, G.R. No. 172302, February 4, 2008FACTS:Pryce Corporation, petitioner, was incorporated under the Philippine laws. Its primary purpose was to develop real estate in Mindanao. It engaged in the development of memorial parks, operated a major hotel in Cagayan de Oro City, and produced industrial gases. The 1997 Asian financial crisis, however, badly affected petitioner’s operations, resulting in heavy losses. It could not meet its obligations as they became due. It incurred losses of P943.09 million in 2001, P479.05 million in 2002, and P125.86 million in 2003. Thus, on July 12, 2004, petitioner filed with the Regional Trial Court of Makati acting as Commercial Court, a petition for rehabilitation. Petitioner prayer for the appointment of a Rehabilitation Receiver from among the nominees named therein and the staying of the enforcement of all claims, monetary or otherwise against it. Petitioner also prayed that after due hearing, its proposed Rehabilitation Plan be approved. The said rehabilitation plan, among others include the payment to bank creditors through dacion en pago of assets already mortgaged to them and that any other debt not covered by mortgaged assets or not falling under the aforementioned categories shall be paid through dacion of memorial park lots. On July 13, 2004, the RTC issued a Stay Order directing that; all claims against petitioner be deferred; the initial hearing of the petition for rehabilitation be set on September 1, 20044; and all creditors and interested parties should file their respective comments/oppositions to the petition. In the same Order, the RTC then appointed Gener T. Mendoza as Rehabilitation Receiver. The petition was opposed by petitioner’s bank-creditors. The Bank of the Philippine Islands claimed that the petition and the proposed Rehabilitation Plan are coercive and violative of the contract. The Land Bank of the Philippines contended, among others, that the petition is unacceptable because of the unrealistic valuation of the properties subject of the dacion en pago. The China Banking Corporation, respondent herein, alleged in its opposition that the petitioner is solvent and that it filed the petition to force its creditors to accept dacion payments. In effect, petitioner passed on to the creditors the burden of marketing and financing unwanted memorial lots, while exempting it (petitioner) from paying interests and penalties. On September 13, 2004, the RTC issued an Order giving due course to the Rehabilitation Plan. The receiver made proposals to amend the rehabilitation plan and the same was approved by the RTC. Consequently, on February 23, 2005, respondent filed with the Court of Appeals a petition for review alleging that in approving the Amended Rehabilitation Plan, the RTC impaired the obligation of contracts, voided the contract stipulation and contravened the “avowed policy of the State” to maintain a competitive financial system. On July 25, 2005, the CA granted respondent’s petition and reversed the assailed Order of the RTC. Hence, this present petition.ISSUE:Was the serious test necessary in determining the appointment of a receiver for Pryce Properties?HELD: Yes. The Court denies the petition and remanded the case to RTC, sitting as a Commercial Court for further proceedings with dispatch to determine the merits of the petition for rehabilitation.RATIO:Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation requires the petition must be sufficient in form and substance. Moreover, the Court held in the case of Rizal Commercial Banking Corporation vs. Intermediate Appellate Court, that under Section 6(c) of P.D. 902-A, receivers may be appointed whenever: 1)necessary in order to preserve the rights of the parties-litigants; and/or 2)protect the interest of the investing public and creditors. The situations contemplated in these instances are serious in nature. There must exist a clear and imminent danger of losing the corporate assets if a receiver is not appointed. Absent such danger, such as where there are sufficient assets to sustain the rehabilitation plan and both investors and creditors are amply protected, the need for appointing a receiver does not exist. Simply put, the purpose of the law in directing the appointment of receiver is to protect the interests of the corporate investors and creditors.It is clear that in the petition for rehabilitation does not allege that there is a clear and imminent danger that petitioner will lose its corporate assets if a receiver is not appointed. In other words, the “serious situation test” laid down by Rizal Commercial Banking Corporation has not been met or at least substantially complied with. We observe that in appointing Mr. Gener T. Mendoza as Rehabilitation Receiver, the only basis of the lower court was its finding that “the petition is sufficient in form and substance”. However, it did not specify any reason or ground to sustain such finding. Clearly, the petition failed to comply with the “serious situation test”

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Bank of the Philippine Islands v. Shemberg Biotech Corporation and Benson Dakay, G.R. No. 162291, August 11, 2010FACTS:Respondent Shemberg Biotech Corporation (SBC), a domestic corporation which manufactures carrageenan from seaweeds, filed a petition for the approval of its rehabilitation plan and appointment of a rehabilitation receiver before the RTC. The RTC issued a stay order, and petitioner Bank of the Philippine Islands (BPI) filed its opposition to SBC’s petition. After initial hearings, the RTC issued the assailed October 12, 2001 Order which gave due course to the SBC’s petition; referred the rehabilitation plan to the Rehabilitation Receiver for evaluation; ordered the Rehabilitation receiver to submit its recommendation; recalled the appointment of the first Rehabilitation Receiver; and appointed Atty. Pio Y. Go as new Rehabilitation Receiver. The RTC found that SBC complied with the conditions necessary to give due course to its petition for rehabilitation. The RTC was also satisfied of the merit of SBC’s petition and noted that SBC’s business appears viable since it has a market for its product. A sufficient breathing spell, according to the RTC, may help SBC settle its debts. The RTC further said that it will reflect on the issue raised by SBC’s creditors that the rehabilitation plan is not feasible, upon submission by the Rehabilitation Receiver of his recommendation. Consequently, BPI filed a petition for certiorari, prohibition and mandamus before the CA. In its assailed decision, the CA dismissed the petition. The CA ruled that the RTC’s decision dated April 22, 2002 in Civil Case No. CEB-26481-SRC, which approved its modification SBC’s rehabilitation plan, rendered the petition moot. The CA also ruled that the issues against the rehabilitation plan should be raised in BPI’s appeal from the said RTC’s decision. The CA found that the RTC did not commit an error or grave abuse of discretion in issuing the October 12,2001 and December 26, 2001 Orders. BPI laments that CA focused its discussion on the procedural matters, i.e., on the propriety of the petition for certiorari, rather than on the substantial and jurisdictional issues raised. BPI contends that the rehabilitation plan does not require “infusion of new capital from its guarantors and sureties” and that forcing creditors to transform their debt to equity amounts to taking private property without just compensation and due process of law. BPI further contends that the RTC exercised its rehabilitation power “whimsically, arbitrarily and despotically by eliminating penalties and reducing interests amounting to millions.” Such exercise of power, BPI contends, also amounts to taking of property without just compensation and due process of law that could not be justified under the police power. BPI adds that the Interim Rules of Corporate Recovery is unconstitutional insofar as it alters or modifies and expands the existing law on rehabilitation contrary to the principle that rules of procedure cannot modify or affect substantive rights.ISSUE:Is the Interim Rules of Procedure on Corporate Rehabilitation unconstitutional?HELD:The Interim Rules of Procedure on Corporate Rehabilitation is constitutional. On the question of the constitutionality of the Interim Rules of Procedure on Corporate Rehabilitation, BPI failed in its burden of clearly and unequivocally proving its assertion. Its failure to so prove defeats the challenge. We even note that BPI itself opposes its own stand by invoking Section 27, Rule 44 of the Interim Rules to support its prayer that the rehabilitation proceedings be declared terminated. BPI also impliedly invoked the Interim Rules before the CA in seeking a modified rehabilitation plan considering that SBC’s petition for approval of its rehabilitation plan had been filed under the Interim Rules.In addition, the challenge on the constitutionality of the Interim Rules is a new and belated theory that we should not even entertain. It was not raised before the CA. Well settled is the rule that issues not previously ventilated cannot be raised for the first time on appeal. Relatedly, the constitutional question was not raised at the earliest opportunity. The rule is that when issues of constitutionality are raised, the Court can exercise its power of judicial review only if the following requisites are present: 1)the existence of an actual and appropriate case; 2)a personal and substantial interest; 3)the exercise of judicial review is pleaded at the earliest possible opportunity; and 4)the constitutional question is the lis mota of the case.The Court cannot grant BPI’s prayer that the petition for rehabilitation be ordered dismissed and terminated. To dismiss the petition for rehabilitation would be to reverse improperly the final course of that petition: the petition was granted by the RTC; the RTC decision was affirmed with finality; and the rehabilitation plan is now being implemented. And while Interim Rules and new Rules of Procedure on Corporate Rehabilitation contain provisions on termination of the corporate rehabilitation proceedings, neither the RTC nor the CA rule on this point. In fact, BPI did not ask the CA to terminate the rehabilitation proceedings. Aside from being another new issue, its resolution involve factual matters such as: 1) Whether there was failure to achieve the desired targets or goals as set forth in the rehabilitation plan; 2)whether there was failure of the debtor (SBC) to perform its obligations under the plan; 3)whether the rehabilitation plan may no longer be implemented in accordance with its terms, conditions, restrictions or assumptions; or 4)whether there was successful implementation of the rehabilitation plan. The Court is not at liberty to consider these factual matters for the first time.

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North Bulacan Corporation vs. Philippine Bank of Communications, G.R. No. 183140, August 2, 2010FACTS:Petitioner North Bulacan Corporation (NBC) is engaged in the business of developing low medium-cost housing projects. Respondent Philippine Bank of Communication (PBCom) offered to finance the whole project of NBC and immediately provide it a loan facility. Relying on PBCom’s commitment, NBC accepted the bank’s offer. NBC executed a deed of assignment, assigning to PBCom its rights and interests over all payments that may be due from the Pag-IBIG. After a time, however, PBCom discontinued its financial support to NBC reportedly because Bangko Sentral ng Pilipinas (BSP) had issued a cease and desist order against the bank. When it became apparent that PBCom had no intention of complying with its commitment, NBC sought life from Cocolife and Land Bank which express their intention to finance the project by taking out NBC’s loan from PBCom. But the latter refused the offer, insisting on the supposed BSP cease and desist order. NBC’s construction eventually stopped for lack of funds. NBC filed a petition for corporate rehabilitation with the Mandaluyong Regional Trial Court (RTC). It filed with the court a manifestation and urgent motions a) to order PBCom to release 12 Transfer Certificates of Title of finished housing units, b)to order Pag-IBIG to issue Letters of Guaranty to PBCom representing the take-out value of the finished units, and c) to allow NBC to use the proceeds to make emergency repairs and restoration works. The RTC issued an order giving due course to NBC’s petition for rehabilitation. PBCom challenges the RTC’s order alleging that NBC violated the several rules on corporate rehabilitation and that it had not met the requirements for the grant of the petition involved. Among the rules alleged to have been violated is a rule on prohibited pleadings on motion for extension in filing the required rehabilitation plan, which NBC did in this case. Petitioner counters however, that it did not violated the rules on petition for rehabilitation because such rules allows extension under certain circumstances.ISSUE:Whether or not the RTC correctly gave due course on NBC’s action for corporate rehabilitation?HELD:No. The Court held that the RTC erred in giving due course to the petitioner’s action. The RTC utterly disregarded the Rules on Corporate Rehabilitation in the guise of liberal construction and granted the petition for rehabilitation based on insufficient evidence. The NBC inventory did not mention the condition of its listed assets. It merely enumerated certain real properties and their respective sizes and market values. The RTC should have dismissed the petition as it had not approved any rehabilitation plan within the period specified by law. Further under, the circumstances, NBC’s total debts would balloon to P560,81,213.5, exclusive of interests, penalties, and other charges. Obviously, its continued operation would no longer be viable. The Court holds that the RTC should have ruled on the creditors’ objections instead of merely treating them as premature. The RTC of course claims that the rehabilitation plan would still have to be referred to the receiver for study and evaluation. But there would be no need to go that far when the petitioning corporation declined to comply with the simpler rules of rehabilitation, when the documentation of its assets were inadequate, and the when the creditors’ opposition offered insurmountable basis for shelving the entire effort.

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Banco De Oro-EPCI, Inc. vs. JAPRL Development Corporation, et.al. G.R. No. 179901, April 14, 2008FACTS:After evaluating the financial statements of respondent JAPRL Development Corporation (JAPRL) for fiscal years 1998, 1999, and 2000, petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it amounting to P 230,000,000. Respondents Rapid Forming Corporation (RFC) and Jose U. Arollado acted as JAPRL’s sureties. Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust receipts soon after the approval of its loan. Petitioner later learned from MRM management, JAPRL’s financial adviser, that JAPRL had altered and falsified its financial statements. It allegedly bloated its sales revenues to post a big income from operations for the concerned fiscal years to project itself as a viable investment. The information alarmed petitioner. Citing relevant provisions of the Trust Receipt Agreement, it demanded immediate payment of JAPRL’s outstanding obligations amounting to P194,493,388.98. On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC) of Quezon City. It disclosed that it had been experiencing a decline in sales for the three preceding years and a staggering loss in 2002. Because the petition was sufficient in form and substance, a stay order was issued. However, the proposed rehabilitation plan for JAPRL and RFC was eventually rejected by the Quezon City RTC. Because JAPRL ignored its demand for payment, petitioner filed a complaint for sum of money with an application for the issuance of a writ of preliminary attachment against respondents in the RTC of Makati docketed as Civil Case No. 03-991. Petitioner essentially asserted that JAPRL was guilty of fraud because it (JAPRL) altered and falsified its financial statements. The Makati RTC subsequently denied the application (for the issuance of a writ of preliminary attachment) for lack of merit as petitioner was unable to substantiate its allegations. Nevertheless, it ordered the service of summons on respondents. On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the RTC of Calamba. Finding JAPRL’s petition sufficient in form and substance, the Calamba RTC issued a stay order. In view of the said order, respondents hastily moved to suspend the proceeding in Civil Case No. 03-991 pending in the Makati RTC. The Makati RTC granted the motion with regard to JAPRL and RFC but ordered Arollado to file an answer. It ruled that, because he was jointly and solidarily liable with JAPRL and RFC, the proceedings against him should continue. Respondents moved for the reconsideration but it was denied. On appeal before the Court of Appeals, the latter denied petitioner’s appeal and subsequent motion for reconsideration. Hence, this petition.ISSUE:Whether the granting of the petition for corporate rehabilitation of JAPRL Dev’t. Corp. is proper which would necessarily cause the suspension of the proceedings due to a valid stay order?HELD:The petition is granted.RATIO:The Court withheld the judgment for the moment on the order of the Makati RTC suspending the proceedings in Civil Case 03-991 insofar as JAPRL and RFC are concerned. Under the Interim Rules of Procedure on Corporate Rehabilitation, a stay order defers all actions or claims against the corporation seeking rehabilitation from the date of its issuance until the dismissal of the petition or termination of the rehabilitation proceeding.The Makati RTC may proceed to hear Civil Case No. 03-991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation.It is noteworthy to stress the role of bank in financial business. Banks are entities engaged in the lending of funds obtained through deposits from the public. They borrow the public’s excess money (i.e., deposits) and lend out the same. Banks therefore redistribute wealth in the economy by channelling idle savings to profitable investments. Since banks deal with the public’s money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniable imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance. In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioners exposure in JAPRL, justice and fairness dictate that the Makati RTC, hear whether or not respondents indeed committed fraud in securing the credit accommodation. A finding of fraud will change the whole picture. In this event, petitioner can use the finding of fraud to move for the dismissal of the rehabilitation case in the Calamba RTC. The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud.Meanwhile, the Makati RTC should proceed to hear the Civil Case No. 03-991 against the three respondents guided by Section 40 of the General Banking Law which gives banks the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud. Petitioner would then be entitled to the immediate payment of P194, 493,388.98 and other appropriate damages.Finally, considering that respondents failed to pay the four trust receipts, the Makati City Prosecutor should investigate whether or not there is probable cause to indict respondents for violation of Section 13 of the Trust Receipt Law.

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Philippine National Bank and Equitable PCI Bank vs. Court of Appeals, Securities and Exchange Corporation, ASB Holding, et.al. G.R. No. 165571, January 20, 2009FACTS:Petitioners Philippine National Bank (PNB) and Equitable PCI Bank are members of the consortium of creditor banks constituted pursuant to the Mortgage Trust Indenture (MTI) dated May 29, 1989, as amended, by and between Rizal Commercial Banking Corporation-Trust and Investments Division, acting as trustee for the consortium, and ASB Development Corporation (ASBDC, formerly Tiffany Tower Realty Corporation). Other members of the consortium include Metropolitan Bank and Trust Company (Metrobank), Prudential Bank, Union Bank of the Philippines, and United Coconut Planters Bank. Private respondents ASB Holdings, Inc., ASBDC, ASB Land, Inc., ASB Finance, Inc., Makati Hope Christian School, Inc., Bel-Air Holdings Corporation, Winchester Trading, Inc., VYL Holdings Corporation, and Neighborhood Holdings, Inc. (ASB Group) are corporations engaged in real estate development. The ASB Group is owned by Luke C. Roxas. Under the MTI, petitioners granted a loan of PhP 1,081,000,000 to ASBDC secured by a mortgage of five parcels of land with improvements. On May 2, 2000, private respondents filed with the SEC a verified petition for rehabilitation with prayer for suspension of actions and proceedings pending rehabilitation pursuant to Presidential Decree No. (PD) 902-A, as amended. The case was docketed as SEC Case No. 05-00-6609. Private respondents stated that they possess sufficient properties to cover their obligations but foresee inability to pay them within a period of one year. They cited the sudden non-renewal and/or massive withdrawal by creditors of their loans to ASB Holdings, the glut in the real estate market, severe drop in the sale of real properties, peso devaluation, and decreased investor confidence in the economy which resulted in the non-completion of and failure to sell their projects and default in the servicing of their credits as they fell due. The ASB Group had assets worth PhP 19,410,000,000 and liabilities worth PhP 12,700,000,000. Faced with at least 712 creditors, 317 contractors/suppliers, and 492 condominium unit buyers, and the prospect of having secured and non-secured creditors press for payments and threaten to initiate foreclosure proceedings, the ASB Group pleaded for suspension of payments while working for rehabilitation with the help of the SEC. Private respondents’ petition to the SEC was accompanied by documentary requirements in accordance with the Rules of Procedure on Corporate Recovery. Finding the petition sufficient in form and substance, the SEC Hearing Panel issued on May 4, 2000 an order suspending for 60 days all actions for claims against the ASB Group, enjoining the latter from disposing its properties in any manner except in the ordinary course of business and from paying outstanding liabilities, and appointing Atty. Monico V. Jacob as interim receiver of the ASB Group. Atty. Jacob was later replaced by Atty. Fortunato Cruz as interim receiver. On the onset, the consortium of creditor banks prayed for the dismissal of the petition. the ASB Group submitted a rehabilitation plan to enable it to meet all of its obligations. The consortium of creditor banks moved for its disapproval on the ground that it is not viable; the proposals are unrealistic; and it collides with the freedom of contract and the constitutional right against non-impairment of contracts, particularly the release of portions of mortgaged properties and waiver of interest, penalties, and other charges. The banks further asserted that the Rehabilitation Plan does not explain the basis of the selling values and the net realizable values of the properties; it irregularly nets out inter-corporation transactions and offsets the receivables amounting to PhP 5.23 billion from Roxas; and it shows that the ASB Group is insolvent and should be subjected to liquidation proceedings. The banks opposed the extension of the suspension order sought by the ASB Group. The consortium also prayed for the early resolution of their opposition to the petition. The SEC Hearing Panel denied the opposition of the banks and allowed the filing of the petition for rehabilitation. Since he ASB Group foresees its inability to meet its obligations within one year, it was considered technically insolvent and, thus, qualified for rehabilitation under Sec. 4-1 of the Rules of Procedure on Corporate Recovery. The panel also held that suspension of payment is necessarily an effect of the filing of the petition. Upon motion by the ASB Group, the suspension period was extended through an order dated October 27, 2000. The creditor banks appealed the October 10 and 27, 2000 orders by filing before the SEC en banc a Petition for Review on Certiorari with application for a temporary restraining order .Subsequently, the Hearing Panel approved the Rehabilitation Plan. The creditors filed a Supplemental Petition for Review on Certiorari with the SEC en banc to question the foregoing order but the SEC en banc dismissed the petition. Petitioners went to the CA via a petition for certiorari under Rule 65, alleging grave abuse of discretion on the part of the SEC in dismissing the creditors’ petition for review on the ground that 54% of the total obligations of the ASB Group with creditor banks have been settled. Petitioners also questioned the remedy availed of by the ASB Group since a solvent corporation cannot file a petition for rehabilitation nor be placed under receivership. They maintained that the SEC should not have

approved the Rehabilitation Plan over the objection of the consortium of creditor banks. The CA upheld the ruling of the SEC en banc and explained that the Rules does not preclude a solvent corporation, like the ASB Group, to file a petition for rehabilitation instead of just a petition for suspension of payments because such temporary inability to pay obligations may extend beyond one year or the corporation may become insolvent in the interim. It stated that the determination of the sufficiency of the petition and the question of propriety of the petition filed by the ASB Group are matters within the technical competence and administrative discretion of the SEC. Hence, this present petition.ISSUE:Is the filing of a petition for suspension of payments necessary before a corporation which is technically insolvent may file a petition for rehabilitation?

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HELD: The petition is denied.RATIO:The Court affirms the ruling of the appellate court. In cases of technical insolvency, a petition for rehabilitation and suspension of payments can be filed without previously filing a petition for suspension of payments since these refer to different reliefs under the Rules. The correct interpretation of these rules are the following:(1) A corporation which has sufficient assets to cover its liabilities but foresees its inability to pay its obligations as they fall due may file a petition for suspension of payments under Rule III of the Rules (Sec. 3-1); (2) If the SEC finds that the corporation’s inability to pay will last more than one year from the filing of the petition for suspension of payments, that is, the corporation becomes technically insolvent, the petition shall be dismissed (Sec. 3-12);(3) If the corporation is shown or actually becomes technically insolvent anytime during the pendency of the proceedings (supervening technical insolvency), the SEC may either terminate the proceedings or it may, upon motion, treat the petition as one for rehabilitation (Sec. 3-13); and (4) If from the start, a corporation which has enough assets foresees its inability to meet its obligations for more than one year, i.e., existing technical insolvency, it may file a petition for rehabilitation under Rule IV, Sec. 4-1.A reading of Sec. 4-1 shows that there are two kinds of insolvency contemplated in it: (1) actual insolvency, i.e., the corporation’s assets are not enough to cover its liabilities; and (2) technical insolvency defined under Sec. 3-12, i.e., the corporation has enough assets but it foresees its inability to pay its obligations for more than one year. In the case at bar, the ASB Group filed with the SEC a petition for rehabilitation with prayer for suspension of actions and proceedings pending rehabilitation. Contrary to petitioners’ arguments, the mere fact that the ASB Group averred that it has sufficient assets to cover its obligations does not make it “solvent” enough to prevent it from filing a petition for rehabilitation. A corporation may have considerable assets but if it foresees the impossibility of meeting its obligations for more than one year, it is considered as technically insolvent. Thus, at the first instance, a corporation may file a petition for rehabilitation—a remedy provided under Sec. 4-1. When Sec. 4-1 mentioned technical insolvency under Sec. 3-12, it was referring to the definition of technical insolvency in the said section; it was not requiring a previous filing of a petition for suspension of payments which petitioners would have us believe. Petitioners harp on the SEC’s failure to examine whether the ASB Group is technically insolvent. They contend that the SEC should wait for a year after the filing of the petition for suspension of payments when technical insolvency may or may not arise. This is erroneous. The period mentioned under Sec. 3-12, “longer than one year from the filing of the petition,” does not refer to a year-long waiting period when the SEC can finally say that the ailing corporation is technically insolvent to qualify for rehabilitation. The period referred to the corporation’s inability to pay its obligations; when such inability extends beyond one year, the corporation is considered technically insolvent. Said inability may be established from the start by way of a petition for rehabilitation, or it may be proved during the proceedings for suspension of payments, if the latter was the first remedy chosen by the ailing corporation. If the corporation opts for a direct petition for rehabilitation on the ground of technical insolvency, it should show in its petition and later prove during the proceedings that it will not be able to meet its obligations for longer than one year from the filing of the petition.

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De Barreto vs. Villanueva G.R. L-14938Facts:

Cruzado sold land (which was foreclosed by RFC but later resold to Cruzado) to Villanueva with a stipulation that Villanueva will continue payment to RFC (for the reselling price). Villanueva mortgaged the land to De Barreto when it obtained a loan from the latter. Villanueva failed to pay both Cruzado and De Barreto. On the one hand, De Barreto sued for foreclosure and won. On the other hand, Cruzado filed a motion in that foreclosure proceeding for the recognition of his “vendor’s lien.”

RTC: granted Cruzado’s motion that his lien be satisfied by the foreclosure proceeds.SC: affirmed RTC. But on MFR, reversed RTC ruling.

Held:The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by Article 2243, Civil

Code. The preferences named in Articles 2241 and 2242 are to be enforced in accordance with the Involvency Law.Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale

(as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect and must be reversed.

In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate), the conflict between the parties now before us must be decided pursuant to the well established principle concerning register lands; that a purchaser in good faith and for value (as the appellant concededly is) takes registered property free from liens and encumbrances other than statutory liens and those recorded in the certificate of title. There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not acquire the character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter.

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DBP vs. Secretary of Labor G.R. 79351Facts:

Difontorum and other co-employees obtained a favorable judgment against RMC for illegal dismissal, ULP, etc. A writ of execution was not satisfied (in 1984). In 1983, DBP foreclosed RMC’s premises. Thus, Difontorum et al. filed with the Minister of Labor and Employment a “motion for delivery of properties of RMC in possession of DBP to MOLE for proper disposition” pursuant to Art. 110 of the Labor Code which gives employees 1st preference over properties of the employer.

Held:SC: It is clear from the wording of the law that the preferential right accorded to employees and workers

under Article 110 may be invoked only during bankruptcy or judicial liquidation proceedings against the employer. The law is unequivocal and admits of no other construction.

There is no “first automatic lien.” What Article 110 of the Labor Code establishes is not a lien, but a preference of credit in favor of employees. This simply means that during bankruptcy, insolvency or liquidation proceedings involving the existing properties of the employer, the employees have the advantage of having their unpaid wages satisfied ahead of certain claims which may be proved therein.

J.L. Bernardo Construction, et al. vs. CA G.R. 105827Facts:

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The Municipality of San Antonio failed to pay petitioners for the latter’s construction of the public market of San Antonio. Petitioners then sued the municipality for breach of contract, specific performance, etc. with a prayer for the enforcement of contractor’s lien (based on Art. 2242 of the Civil Code).

RTC granted petitioners’ motion and awarded possession and use of the building to them. CA reversed RTC.

SC: affirmed CA

Held:Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific

property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.

This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241 and 2242 shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.

The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages. Thus, even if it is finally adjudicated that petitioners herein actually stand in the position of unpaid contractors and are entitled to invoke the contractor's lien granted under Article 2242, such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved.

Union Bank of the Philippines vs. Spouses Ong G.R. 152347Facts:

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BMC (a corporation 70% of which is owned by Spouses Ong) obtained a Php 40M credit line facility from Union Bank wherein the Ongs assumed a solidary liability undertaking. On Oct. 22, 1991, Spouses Ong sold to Lee their house and lot in Greenhills. On Nov. 22, 1991, BMC filed a petition for rehabilitation with the SEC.

Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is null and void in contemplation of the aforequoted provision, the sale having occurred on October 22, 1991 or within thirty (30) days before BMC filed a petition for suspension of payments on November 22, 1991.

Held:Petitioner's reliance on the afore-quoted provision is misplaced for the following reasons: First, SEC 70 of the Insolvency Law specifically makes reference to conveyance of properties made by a

“debtor” or by an “insolvent” who filed a petition, or against whom a petition for insolvency has been filed. Respondent spouses Ong have doubtlessly not filed a petition for a declaration of their own insolvency. Neither has one been filed against them. It was never proven that respondent spouses are likewise insolvent.

It may be that BMC had filed a petition for rehabilitation and suspension of payments with the SEC. The nagging fact, however is that BMC is a different juridical person from the respondent spouses. Accordingly, the alleged insolvency of BMC cannot, as petitioner postulates, extend to the respondent spouses such that transaction of the latter comes within the purview of SEC 70 of the Insolvency Law.

Second, the real debtor of petitioner bank in this case is BMC. The fact that the respondent spouses bound themselves to answer for BMC’s indebtedness under the surety agreement referred to at the outset is not reason enough to conclude that the spouses are themselves debtors of petitioner bank. Third, SEC 70 of the Insolvency Law considers transfers made within a month after the date of cleavage void, except those made in good faith and for valuable pecuniary consideration. The twin elements of good faith and valuable and sufficient consideration have been duly established. Given the validity and the basic legitimacy of the sale in question, there is simply no occasion to apply SEC 70 of the Insolvency Law to nullify the transaction subject of the instant case.

Republic of the Philippines v. Hon. Peralta G.R. No. L-56568        May 20, 1987Facts:

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The Republic of the Philippines seeks the review on certiorari on the order of the Court of First Instance of Manila in the voluntary insolvency case of Quality Tobacco Corporation (the Insolvent). The trial court held that the claims of the labor unions (i.e. USTC Association of Employees and Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas) for separation pay of their respective members embodied in final awards of the National Labor Relations Commission were to be preferred over the claims of the Bureau of Customs and Bureau of Internal Revenue for customs duties and inspection fees relying on Article 110 of the Labor Code. Said Article 110 reads, “Worker preference in case of bankruptcy—In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.” Issue:Whether or not separation pays are preferred liabilities over taxes in insolvency cases Held: The Supreme Court ruled on the negative. Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits, which provisions find particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding manner. Articles 2241 and 2242 jointly with Articles 2246 to 2249, all of the Civil Code, establish a two-tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable property. All other special preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.Under Section 1204 of the Tariff and Customs Code, the liability of an importer for duties, taxes and fees and other charges attaching on importation constitute a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced while such articles are in the custody or subject to the control of the government. Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of a specially preferred credit under Article 2241, No. 1, of the Civil Code only in respect of the articles importation of which by the Insolvent resulted in the assessment of the unpaid taxes and duties, and which are still in the custody or subject to the control of the Bureau of Customs. The goods imported on one occasion are not subject to a lien for customs duties and taxes assessed upon other importations though also effected by the Insolvent. Customs duties and taxes which remain unsatisfied after levy upon the imported articles on which such duties and taxes are due, would have to be paid out of the Insolvent's "free property" in accordance with the order of preference embodied in Article 2244 of the Civil Code. Such unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of the Civil Code and hence would be ninth in priority.With respect the claims for tobacco inspection fees, under Section 315 of the National Internal Revenue Code ("old Tax Code"), later reenacted in Identical terms as Section 301 of the Tax Code of 1977, an unpaid "internal revenue tax," together with related interest, penalties and costs, constitutes a lien in favor of the Government from the time an assessment therefor is made and until paid, "upon all property and rights to property belonging to the taxpayer." The claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a claim for unpaid internal revenue taxes which gives rise to a tax lien upon all the properties and assets, movable and immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given preference over any other claim of any other creditor, in respect of any and all properties of the Insolvent.Article 110 of the Labor Code did not sweep away the overriding preference accorded under the scheme of the Civil Code to tax claims of the government or any subdivision thereof which constitute a lien upon properties of the Insolvent. It is frequently said that taxes are the very lifeblood of government. The effective collection of taxes is a task of highest importance for the sovereign. It is critical indeed for its own survival. It follows that language of a much higher degree of specificity than that exhibited in Article 110 of the Labor Code is necessary to set aside the intent and purpose of the legislator that shines through the precisely crafted provisions of the Civil Code. It cannot be assumedsimpliciter that the legislative authority, by using in Article 110 the words "first preference" and "any provision of law to the contrary notwithstanding" intended to disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to subsume the sovereign itself within the term "other creditors" in stating that "unpaid wages shall be paid in full before other creditors may establish any claim to a share in the assets of employer." Insistent considerations of public policy prevent us from giving to "other creditors" a linguistically unlimited scope that would embrace the universe of creditors save only unpaid employees.Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code and the fact that the Labor Code does not impress any lien on the property of an employer, the use of the phrase "first preference" in Article 110 indicates that what Article 110 intended to modify is the order of preference found in Article 2244, which order relates, as we have seen, to property of the Insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242. Article 110 of the Labor Code establishes "first preference" for services rendered "during the period prior to the bankruptcy or liquidation," a period not limited to

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the year immediately prior to the bankruptcy or liquidation. Thus, very substantial effect may be given to the provisions of Article 110 without grievously distorting the framework established in the Civil Code by holding, that Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly, by removing the one year limitation found in Article 2244, number 2; and (b) secondly, by moving up claims for unpaid wages of laborers or workers of the Insolvent from second priority to first priority in the order of preference established I by Article 2244.