FRIA Report Final

Group Report on FRIA 2010 2015

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I. HISTORY:

The Philippines is facing a rosy economic outlook. Amidst slowdowns and financial crises abroad, it has recently been dubbed as an emerging Asian tiger, a star performer in Asia, and a truly remarkable hot spot in Asia that can become one of the world's top economies by 2050.

Indeed, with the increasing investor confidence and the proliferation of small and medium-scale local enterprises, the Philippines is a viable competitor in the race to becoming a lead economy in South East Asia.

However, to win this race, it is crucial for the country to lay down its economic fundamentals properly. One of the structural frameworks that need to be put in place is a sound insolvency system.

The primary objective of an insolvency system is to reallocate resources and distribute liabilities. Its ultimate goals are to increase the competitiveness of industries, promote investor confidence, and achieve economic growth. It is imperative, therefore, that the law, rules and supporting systems put in place by the government be able to keep viable businesses operating. This means avoiding premature liquidation of sustainable businesses.

Our first insolvency law, Act No. 1956 (Insolvency Law), was enacted on 20 May 1909. The Insolvency Law traces origin to American laws. Specifically, it was derived from the Insolvency Act of California, with a few provisions taken from the American Bankruptcy Law .

Under the Insolvency Law, jurisdiction over suspension of payments and insolvency was vested in the Courts of First Instance (now the Regional Trial Courts).

This changed in 1981, when Presidential Decree No. 1758 amended Section 6 of Presidential Decree No. 902-A (PD 902-A), otherwise known as the SEC Reorganization Act which was promulgated by then President Ferdinand Marcos it gave the SEC jurisdiction over suspension of payments cases filed by corporations, partnerships or associations. For the first time in our legal history, P.D. 902-A, as amended, introduced the remedy of rehabilitation.

FRIA adopted the best practices of ADB Insolvency Reform Guide

Since the ASIAN financial crisis in 1997, the Asian Development Bank was extensively involved in helping ASEAN countries reform their insolvency systems. In 2002, it undertook a regional technical project (RETA No. 5975: Promoting Regional Cooperation in the Development of Insolvency), which involved four ASEAN countries (i.e., Indonesia, Korea, Philippines and Thailand) which suggests several principles that should be taken into account in improving insolvency systems.

On 8 August 2000, Republic Act No. 8799, otherwise known as the Securities Regulation Code, came into effect. It reverted jurisdiction over rehabilitation cases from the SEC to the courts of general jurisdiction or the appropriate Regional Trial Courts.


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On December 15 of the same year, the Supreme Courts Interim Rules of Procedure on Corporate Rehabilitation became effective.

The Interim Rules laid down the guidelines for filing a petition for rehabilitation, either by the debtor or the creditor(s), and outlined the powers and functions of the rehabilitation receiver, among others.

On 16 January 2009, or more than eight (8) years after its promulgation, the Supreme Court amended the Interim Rules. 41 The Insolvency Law, however, continued to remain in force and effect.

It was only on 18 July 2010 that this century-old law was replaced by Republic Act No. 10142, otherwise known as the Financial Rehabilitation Act (FRIA).

Prior to the enactment of the FRIA, rules and procedures on suspension of payments, corporate rehabilitation, insolvency and liquidation were scattered and embodied in different laws and Supreme Court issuances. The FRIA effectively repealed the provisions found in the Insolvency Law.


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II. The Law - Financial Rehabilitation and Insolvency Act of 2010

A. Modes of Rehabilitation

1. Court-supervised Rehabilitation

Diagram 1. Procedure in Court-supervised Rehabilitation i. Petition (Sec. 12 and 14)

BOTH INVOLUNTARY AND VOLUNTARY

Indentification of Debtor

Specific relief sought

Rehabilitation Plan

Names of atleast 3 nominees for Rehab Receiver

Other docs & info required under this act

Table 1 Contents of Petition

VOLUNTARY INVOLUNTARY

Statement of cause of debtors insolvency/inability to pay debts when due

Circumstances sufficient to support petition

Grounds/ basis of petition

Schedule of debts, Creditor claims & list of claims

Inventory of assets and receivables


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ii. Commencement Order (Sec. 16) The Commencement shall:

Identify Debtor and summarize grounds for initiating proceedings

Declare that the debtor is under rehabilitation;

Direct publication of the Order and notice to creditors;

Appoint a rehabilitation receiver;

Set the date of the initial hearing for the determination WON the debtor can be rehabilitated;

Direct all creditors to file their claims at least 5 days from initial hearing;

Direct the govt through the BIR to either file its Comment to the Petition or present its claims against the debtor.

Set case for hearing not more than 40 days from filing date

The imposition of all taxes and fees, including penalties interests and charges thereof, due to the national government or to LGUs shall be considered waived (sec 19);

Prohibit Debtors suppliers from withholding supply of goods. & services in ordinary course of business

Copies of the petition be available for examination and copying, and location of such documents;

Include a SUSPENSION or STAY ORDER iii. Suspension or Stay Order

Prohibits the sale or disposition of assets of the debtor except ordinary course of business

Actions to enforce judgment, attachments or other provisional remedies

Ordering the suspension of all actions against the debtor and/or the debtors estate.

EQUALITY IN EQUITY (Tsuneishi Inc. v Negros Navigation, GR No. 166845, 10 December 2008) but -- Section 60 (FRIA) issuance of Stay or Suspension Order shall not be deemed in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the Stay Order

Exceptions to the Suspension or Stay Order (Sec. 18)

a. to cases already pending appeal in the Supreme Court as of commencement date Provided, That any final and executory judgment arising from such appeal shall be referred to the court for appropriate action;


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b. subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;

c. to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;

d. to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;

e. to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;

f. the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and

g. any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under this Act.

iv. Avoidance Proceedings

Any transaction occurring prior to commencement date entered by the debtor, or involving funds or assets may be rescinded or declared null and void on the ground that the same was executed with intent to defraud creditor/s which constitutes undue preference of creditors.

Disputable presumption when:

Provides reasonable inadequate consideration to the debtor and executed within 90 days prior to commencement date.

Involves accelerated payment of a claim to a creditor within 90 days prior to commencement date


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Creditors involving, or has obtained or received benefit MORE than its pro rata share in the assets of debtor beyond reach of creditors or are prejudicial to interests of creditors;

Intended to defeat, hinder, and delay creditors from collecting claims.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if the following cricumstances are present:

Rehab plan complies with requirements under this act.

Rehab receiver recommends confirmation of plan

Stockholders, owners, partners, lose at least their controlling interest as a result of the plan

Likely provide objecting class of creditors compensation greater than they would receive when debtor is under liquidation (Sec. 64)

Diagram 1


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2. Pre-negotiated Rehabilitation

Diagram 2

3. Out of Court Rehabilitation (Sec.84)

Diagram 3

Debtor must agree with an out-of-court rehabilitation plan;

approved by creditors representing at least 67% of the secured obligations of the debtor;

approved by creditors representing at least 75% of the unsecured obligations of the debtor; AND


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approved by creditors representing at least 85% of TOTAL liabilities, secured and unsecured, of the debtor.

B. The Rehabilitation Receiver

i. Who may serve as a Rehabilitation Receiver?

Section 28: Any person qualified natural or juridical person may serve as a rehabilitation receiver.

Section 29: enumerates the minimum qualifications of a rehabilitation receiver, to wit:

A citizen of the Philippines or a resident in the 6 months immediately preceding his nomination;

Of good moral character and with acknowledged integrity, impartiality and independence;

Has requisite knowledge of insolvency and other relevant commercial laws, rules and procedures as well as other relevant training and education necessary to enable him to properly discharge his duties and obligations;

No conflict of interest; such conflict may be waived, expressly or impliedly by a party who may be prejudiced thereby.

Section 40 provides situations where an individual may be deemed to have conflict of interest.

(a) He is a creditor, owner, partner or stockholder of the debtor;

(b) He is engaged in a line of business which competes with that of the debtor;

(c) He is, or was, within 5 years from the filing of the petition, a director, officer, owner, partner or employee of the debtor or any of the creditors, or the auditor or the accountant of the debtor.

(d) He is, or was, within 2 years from the filing of a petition, an underwriter of the outstanding securities of the debtor.

(e) He is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sole proprietorship-debtor, partners of a partnership-debtor or to any stockholder, director, officer, employee or underwriter of a corporation-debtor; or

(f) He has any other direct or indirect material interest in the debtor or any of the creditors.

ii. Initial appointment of the Rehabilitation Receiver

The court shall initially appoint the rehabilitation receiver, who may or may not be from among the nominees.

However, at the initial hearing of the petition, the creditors and debtor who


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are not petitioners may nominate another person. The court may: 1.) retain the person initially appointed, or 2.) appoint another who may or may not be from among the nominees.

If the debtor is a securities market participant court gives priority to nominee of the appropriate secured or investor protection fund.

If a qualified natural person is nominated by MORE THAN 50% of the secured creditors and general unsecured creditors, with satisfactory evidence, the court shall appoint the person nominated by the creditors.

iii. Powers, duties and responsibilities of the rehabilitation receiver

The rehabilitation receiver shall be deemed an officer of the court with the principal duty of:

1. PRESERVING and MAXIMIZING the assets of the debtor during the

rehabilitation proceedings; 2. DETERMINING the viability of the rehabilitation of the debtor; 3. PREPARING and RECOMMENDING a rehabilitation plan; and 4. IMPLEMENTING the approved rehabilitation plan.

The duties and responsibilities of the rehabilitation receiver shall include, but shall not be limited to the following:

(a) To verify the accuracy of the factual allegations in the petition;

(b) To verify and correct, if necessary, the inventory of all the assets of the debtor and their valuation;

(c) To verify and correct, if necessary, the schedule of the debts and liabilities of the debtor;

(d) To evaluate the validity, genuineness and true amount of all the claims against the debtor;

(e) To take possession, custody and control, and to preserve the value of all the property of the debtor;

(f) To sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor;

(g) To have access to all information necessary, proper or relevant to the operations and business of the debtor and for its rehabilitation;

(h) To sue and recover, with approval of the court, all money or property of the debtor paid, transferred or disbursed in fraud of creditors, or which constitute undue preference of credit;


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Initiate and prosecute any action to rescind, or declare null and void any transaction done in fraud of creditors. (Section 59)

(i) To monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other than in the ordinary course of business;

May apply in court for authority to sell unencumbered property of the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise in jeopardy. (Section 49)

(j) With the courts approval, to engage the services of or to employ persons or entities to assist him in the discharge of his functions;

(k) To determine the manner by which the debtor may best be rehabilitated;

(l) To implement the rehabilitation plan;

(m) To assume an exercise the powers of management of the debtor pursuant to Section 36 hereof;

May be appointed and directed, upon motion of any interested party, to assume the powers of management of the debtor upon clear and convincing evidence of the following circumstances:

Actual or imminent danger of dissipation, loss, wastage or destruction of debtor's assets or other properties;

Paralyzation of the business operations of the debtor; or

Gross mismanagement of the debtor (Section 36) (n) To exercise such other powers as may, from time to time, be conferred upon him by the court; and to submit a status report every quarter as may be required by the court motu proprio, or upon motion of any creditor, or as may be provided in the Rehabilitation Plan.

iv. Removal of the rehabilitation receiver

The rehabilitation receiver may be removed by the court AT ANY TIME either motu proprio or upon motion by any creditor/s holding MORE THAN 50% of the total obligation of the debtor on such grounds as the rules of procedure may provide which shall include, but shall not be limited to the following:

1. Incompetence, gross negligence, failure to perform proper degree of diligence in the performance of his duties.

2. Lack of particular competency required by the specific case. 3. Illegal acts in the performance of his duties. 4. Lack of qualifications and presence of any disqualification.


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5. Conflict of interest arises after his appointment. 6. Manifest lack of independence that is detrimental to the general body of the

stakeholders. C. Liquidation Proceedings

This is the proceeding where claims are filed and the assets of the insolvent debtor are disposed and the proceeds are divided among the creditors. Applies to individual debtors, sole proprietorships, partnerships and corporation. Liquidation of Juridical Debtors

A. Voluntary Liquidation (Sec. 90, FRIA)

An insolvent debtor may apply for liquidation by filing a petition for liquidation with the court. The petition shall be verified, shall establish the insolvency of the debtor and shall contain, whether as an attachment or as part of the body of the petition:

a) schedule of debts & liabilities, list of creditors with their addresses, amounts of claims and collaterals, or securities if any;

b) Inventory of all its assets including receivables and claims against third parties; and

c) Names of at least three (3) nominees to the position of liquidator.

At any time during the pendency of court-supervised or pre negotiated rehabilitation proceedings, the debtor may also initiate liquidation proceedings by filing a motion in the same Court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. If the petition or the motion, as the case may be, is sufficient in form and substance, the court shall issue a Liquidation Order

B. Involuntary Liquidation (Sec. 91, FRIA) Who may file a petition:

Three (3) or more creditors the aggregate of whose claims is at least either One million pesos (1 Million Pesos) or at least twenty-five percent (25%) of the subscribed capital stock or partner's contributions of the debtor, whichever is higher. The petition must show that:

a) there is no genuine issue off act or law on the claim/s of the

petitioner/s, and that the due and demandable payments thereon have not been made for at least one hundred eighty (180) days or that the debtor has failed generally to meet its liabilities as they fall due


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b) There is no substantial likelihood that the debtor may be rehabilitated.

If the petition or the motion is sufficient in form and substance, the court shall issue an order:

1. Directing the publication of the petition or motion in a newspaper of

general circulation once ,a week for two (2) consecutive weeks 2. Directing the debtor and all creditors who are not the petitioners to file

their comment on the petition or motion within fifteen (15) days from the date of last publication

If, after considering the comments filed, the court determines that the petition or motion is meritorious, it shall issue the Liquidation Order.

Liquidation of Individual Debtors

A. Voluntary Liquidation (Sec. 103, FRIA)

An individual debtor whose properties are not sufficient to cover his liabilities, and owing debs exceeding Five hundred thousand pesos (Php500,000.00), may apply to be discharged from his debts and liabilities by filing a verified petition with the court of the province or city in which he has resided for 6 months prior to the filing of such petition.

He shall attach to his petition a schedule of debts and liabilities and an

inventory of assets. The filing of such petition shall be an act of insolvency.

B. Involuntary Liquidation (Sec. 105, FRIA) Who may file a petition:

Any creditor or group of creditors with a claim of, or with claims aggregating, at least Five hundred thousand pesos (Php500.00) may file a verified petition for liquidation with the court of the province or city in which the individual debtor resides. Note: The petition for liquidation shall set forth or allege at least one Acts of insolvency. Acts of Insolvency (Sec. 105, FRIA)

1. That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors;

2. That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent

3. That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors


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4. That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;

5. That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors

6. That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying the liquidation or of defrauding any creditor or claimant

7. That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors

8. That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud anyone of his creditors

9. That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors;

10. That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;

11. That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days;

12. That for a period of thirty (30) days, he has failed, after Demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; and

13. That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property object to execution to satisfy the judgment.

Individual Debtor to Show Cause (Sec. 106 & 107, FRIA)

Upon the filing of such creditors' petition, the court shall issue an Order requiring the individual debtor to show cause, at a time and place to be fixed by the said court, why he should not be adjudged an insolvent.

If the issues are found in favor of the petitioning creditors, the court

shall issue the Liquidation Order. Liquidation Order (Sec. 112, FRIA).

The Court has Jurisdiction over the liquidation proceedings shall, in proper case issue a Liquidation Order which includes:

a) declare the debtor insolvent; b) order the liquidation of the debtor and, in the case of a juridical

debtor, declare it as dissolved; c) order the sheriff to take possession and control of all the property of

the debtor, except those that may be exempt from execution;


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d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks;

e) direct payments of any claims and conveyance of any property due the debtor to the liquidator;

f) prohibit payments by the debtor and the transfer of any property by the debtor;

g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;

h) authorize the payment of administrative expenses as they become due;

Effects of the Liquidation Order (Sec. 113, FRIA)

a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;

b) legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment with the court;

c) all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees;

d) no separate action for the collection of an unsecured claim shall be allowed Such actions already pending will be transferred to the Liquidator;

e) No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

Liquidator (Sec 115, FRIA)

Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute, of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless: (a) he waives his security or lien; or (b) has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim. The nominee receiving the highest number of votes and qualified under this law, shall be appointed as the Liquidator.

Qualifications of the Liquidator (Sec. 118, FRIA)

The liquidator shall have the qualifications enumerated in Section 29

hereof. He may be removed at any time by the court for cause, either motu proprio or upon motion of any creditor entitled to vote for the election of the liquidator.


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Powers, Duties and Responsibilities of the Liquidator. (Sec. 119, FRIA)

The liquidator shall be deemed an officer of the court with the principal duty of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and discharging to the extent possible all the claims against the debtor.

Suspension of payment (Sec. 94, FRIA)

Postponement of payment through a court order of an individual debtor who, while possessing sufficient property to cover all his debts, foresees the impossibility of meeting them when they respectfully fall due. Requisites for filling petition:

a) Possessing sufficient property to cover all his debts b) Foreseeing the impossibility of meeting them when they fall due c) Petitioning that he be declared in a state of suspension of payments d) Petition must be filed in the Court of the Province/City in which he resides

for 6months prior to the filling. e) Petition must be verified

Attachment upon filling Petition:

a) Schedule of debts and liabilities b) Inventory of its Assets c) Proposed agreement with his creditor

Action on the Petition (Sec.95, FRIA).

a) Calling a meeting of all the creditors not less than fifteen (15) days nor more than forty (40) days from the date of such Order & designating a meeting. (creditors meeting)

b) Directing such creditors to prepare and present written evidence of their claims.

c) Directing the publication of the said order in a newspaper of general circulation.

d) Directing the clerk of court to cause the sending of a copy of the Order by registered mail, postage prepaid, to all creditors.

PROHIBITED ACTS (Sec.95, FRIA).

The Individual debtor is prohibited (in the Order to be issued by the Court after filling the Petition for Suspension of Payments) from:

1. Selling, transferring, encumbering or disposing in any manner of his

property, except those used in the ordinary operations of commerce or of industry in which the petitioning individual debtor is engaged, so long as the proceedings relative to the suspension of payments are pending.


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2. Making any payment outside of the necessary or legitimate expenses

of his business or industry, so long as the proceedings relative to the suspension of payments are pending.

Actions Suspended (Sec. 96, FRIA)

The properties held as security by secured creditors shall not be the subject of such suspension order. The suspension order shall lapse when three (3) months shall have passed without the proposed agreement being accepted by the creditors or as soon as such agreement is denied.

No creditor shall sue or institute proceedings to collect claim from the debtor from the time of the filing of the petition for suspension of payments and for as long as proceedings are pending.

Creditors' Meeting. (Sec. 97, FRIA)

The presence of CREDITORS holding claims amounting to at least three-fifths (3/5) of HIS liabilities shall be necessary for holding a meeting. The commissioner appointed by the court shall preside over the meeting and the clerk of court shall act as the secretary thereof, subject to the following rules:

a) The clerk shall record the creditors present and amount of their respective claims;

b) The commissioner shall examine the written evidence of the claims. If the creditors present hold at least three-fifths (3/5) of the liabilities of the individual debtor, the commissioner shall declare the meeting open for business;

c) The creditors and individual debtor shall discuss propositions in the proposed agreement and put them to a vote;

d) To form a majority, it is necessary:

1) that two-thirds (2/3) of the creditors voting unite upon the same proposition;

2) that the claims represented by said majority vote amount to at least three-fifths (3/5) of the total liabilities of the debtor mentioned in the petition; and

e) After the result of the voting has been announced, all protests made against the majority vote shall be drawn up, and the commissioner and the individual debtor together with all creditors taking part in the voting shall sign the affirmed propositions.

D. Proceedings Ancillary to Other Insolvency or Rehabilitation Section 137: Provides that the court shall issue orders, adjudicate claims and provide other necessary assistance in the liquidation of a financial institution under rehabilitation receivership established by a state-funded or state-mandated insurance system.


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Section 139: Provides for the adoption of the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development as part of this Act. The procedures in Cross-Border Insolvency Proceedings are as follows:

The court shall set a hearing in connection with an insolvency or rehabilitation proceeding taking place in a foreign jurisdiction, upon the submission of a petition by the representative of a foreign entity that is the subject of the foreign proceeding.

The court may issue the following order: 1. Suspension of any action to enforce claims against the entity or

otherwise seize or foreclose on property of the foreign entity located in the Philippines.

2. Requiring the surrender of property of the foreign entity to its representative.

3. Other necessary relief. These reliefs shall be granted upon the following considerations:

Protection of creditors n the Philippines and inconvenience of enforcing their claim in a foreign proceeding.

The just treatment of all creditors through a unified insolvency or rehabilitation proceeding.

Whether other jurisdictions have given recognition to the foreign proceeding.

The extent that the foreign proceeding recognizes the right of the creditors and other interested parties.

The extent that the foreign proceeding has recognized and shown deference to proceedings under this Act and previous legislations.

III. Cases

1. Dissolution:

Aguirre vs. FQB 7 Inc. G.R. No. 170770, January 9, 2013

Facts: On October 5, 2004, Aguirre filed in his individual capacity a complaint for intra corporate dispute, injunction, inspection of corporate books and records, and damages against respondent Nathaniel D. Bocobo, Priscila Bocobo and Antonio Bacobo.

The dispute springs from the GIS that Nathaniel and Priscila submitted to the SEC on September 6, 2002 and the appointment of Antonio by Nathaniel as the corporations attorney-in-fact, with the power of administration over the corporations farm.The case, docketed as SEC Case No. 04-111077, was assigned to branch 24 of the RTC of Manila.

Respondents failed, despite notice, to attend the hearing on Vitalianos application for preliminary injunction. Thus the RTC granted the application based only on Vitalianos testimonial and documentary evidence. The respondent filed a motion for an


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extension to file the pleadings warranted in response to the complaint. The RTC subsequently denied this motion for being a prohibited pleading under Section 8, Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.

Aggrieved by the adverse decision, respondent filed a petition for certiorari in the CA for the annulment of all the proceedings and issuances in the RTC of Manila on the ground that it has no jurisdiction over the subject matter, which they defined as being an agrarian dispute. They theorized that Vitalianos real goal in filing the Complaint was to maintain custody of the corporate farm in Quezon Province. Since this land is agricultural in nature, they claimed that jurisdiction belongs to the Department of Agrarian Reform (DAR), not to the Manila RTC.

The Court of Appeals ruled that, the RTC committed a grave abuse of discretion when it issued the preliminary injunction to remove the respondents from their positions in the Board of Directors based only on Vitalianos self-serving and empty assertions. The appellate court also held that the RTC does not have jurisdiction to entertain an intra-corporate dispute when a corporation is already dissolved. Hence, this instant petition. Issue: Whether the RTC has jurisdiction over an intra-corporate dispute involving dissolved corporation. Ruling: The Supreme Court ruled in affirmative. They explained that Board of directors of a dissolved corporation may continue to exercise its powers and act in behalf of the corporation for the limited purpose of winding up and liquidating its corporate affairs. For this reason, issues raised by the stockholder of the dissolved corporation against the board are still covered by the summary rules on intra-corporate disputes. The nature of the case as an intra-corporate dispute was not affected by the subsequent dissolution of the corporation.

Jurisdiction over subject matter is conferred by law. RA 8799 conferred Jurisdiction over intra-corporate controversies on courts of general jurisdiction or RTCs, to be designated by the Supreme Court. Thus, as long as the nature of the controversy is intra-corporate, the designated RTCs have the authority to exercise jurisdiction over such cases.

In the case of Speed Distribution, Inc. vs. CA, the court used the TWO- TIER Test to determine the nature of the dispute. In the said test two essential elements will determine the nature of the dispute. The first element to consider is the Status or relationship of the parties. The second element involves the nature of the question that is subject to their controversy. The first element requires that the controversy must arise out of intra-corporate or partnership relations between any or all of the parties and the corporation, partnership, or association of which they are stockholders, members or associates, between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership, or association and the State insofar as it concerns the individual franchises. The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-corporate controversy.


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The Court further held that the nature of the case as an intra-corporate dispute was not affected by the subsequent dissolution of the corporation.

Vigilla vs Philippine College of Criminology G.R. No. 200094, June 10, 2013

Facts: PCC is a non-stock educational institution, while the petitioners were janitors, janitresses and supervisor in the Maintenance Department of PCC under the supervision and control of Atty. Florante A. Seril, PCC Senior Vice President for Administration. However, the petitioners were made to understand upon application with the respondent school that they were under MBMSI, a corporation engage in providing janitorial services to clients, were Atty. Seril is also the president and General Manager of the said corporation.

Sometime in 2008, The President of PCC, Mr. Gregory Bautista, discovered that the Certificate of Incorporation of MBMSI had been revoked as of July 2, 2003. The school then revoked and terminated their relationship with MBMSI, resulting to the dismissal of the employees of MBMSI.

In September 2009, the dismissed employees filed their complaints for illegal dismissal, reinstatement and demands for other benefits against MBMSI, Atty. Seril, PCC and Bautista.

The Labor arbiter favored the petitioners contending that it is the PCC who was actually the one which exercised control over the means and methods of the work of the petitioners, thru Atty. Seril, who was acting, throughout the time in his capacity as Senior VP of PCC, not as the President or GM of MBMSI.

In February 11, 2011 the NLRC affirmed the decision of LA after finding out that MBMSI is just a labor only contractor. However, on April 28, 2011, it modified their previous decision ruling that their award has been superseded by their respective releases, waivers and quit claims. Aggrieved by the NLRC decision the petitioners appealed in the CA. However, the appellate court denied the petition and affirm the NLRC decisions in toto. Issue: Whether their claims against the respondents were amicably settled by virtue of the releases, waivers and quitclaims which they had executed in favor of MBMSI. Sub-issue:

Whether the petitioners executed the said releases, waivers and quitclaims.

Whether a dissolved corporation can enter into an agreement such as releases, waivers and quit-claims beyond the 3-year winding-up period under section 122 of the Corporation Code.

Whether there is labor only contracting agreement. Ruling: The executed releases, waivers and quitclaims are valid and binding notwithstanding the revocation of a Certificate of Incorporation. The revocation does not result in the termination of its liabilities. What is provided in Sec. 122 of the Corp. Law is that the conveyance to the trustees must be made within the three-year period but there is no time limit within which the trustees must complete a liquidation placed in their hands. Even if no trustee is appointed or designated during the three-year period of the liquidation of the corporation, the Court has held that the board of directors may


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be permitted to complete the corporate liquidation by continuing as "trustees" by legal implication.

Furthermore, Sec. 145 of the same law provides that no liabilities, remedy or right in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation.

2. Liquidation

Barrameda vs. Rural Bank of Canaman G.R. No. 176260, November 24 2010

Facts: Lucia Barrameda Vda. De Ballesteros filed a complaint for annulment of deed of extrajudicial partition, Deed of Mortgage, and Damages with prayer for preliminary injunction against her children and the Rural Bank of Canaman Inc. before the RTC of Iriga.

During the pre-trial, RBCIs counsel filed a motion to withdraw after being informed that PDIC would handle the case as RBCI had already been closed and placed under receivership of the PDIC. Subsequently, The RBCI, through PDIC, filed a motion to dismiss on the ground that the RTC of Iriga has no Jurisdiction over the subject matter of the action. They quoted RA 7653 or the New Central Bank Act, which constitutes the RTC of Makati as the liquidation court to assist PDIC in undertaking the liquidation of RBCI.

The RTC of Iriga then issued an order granting the Motion to Dismiss based on the case of Ong vs. CA wherein the SC held that the liquidation court shall have the jurisdiction to adjudicate all claims against the bank whether they be against assets of the insolvent bank, for Specific Performance, Breach of Contract, Damages or whatever.

Not in conformity, Lucia appealed the ruling of the RTC in the CA. However, the appellate court modified the RTC decision and ordered the consolidation of the Civil case and the Liquidation case pending before the RTC of Makati.

Issue: Whether a liquidation court can take cognizance of a case wherein the main cause of action is not a simple money claim against a bank ordered closed, placed under receivership of the PDIC and undergoing liquidation proceeding.

Ruling: The liquidation court shall have jurisdiction to adjudicate all claims against the bank whether they be against assets of the insolvent bank, for Specific Performance, Breach of Contract, Damages or whatever.

The petitioner contends that the RTC court of Iriga already acquired jurisdiction over the case and by applying the doctrine of the adherence of the jurisdiction the said court must continue to exercise jurisdiction over the case until it is terminated. However


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the Court posited that such doctrine is not without any exception. In Garcia vs Martinez, the court ruled that the rule on adherence of jurisdiction is not absolute and has exceptions, one exception is that when the change in jurisdiction is curative in character. RA 7650 is curative in nature since its main purpose is to prevent multiplicity of actions, establish due process and orderliness in the liquidation of the bank. ( Ong vs CA)

The Petitioner also questioned the validity of the consolidation of her civil case and the liquidation case. The court upheld the validity of such consolidation considering that Liquidation is defined as a single proceeding which consists of a number of cases properly classified as claims.

Lucias Complaint involving annulment of deed of mortgage and damages falls within the purview of a disputed claim in contemplation of section 30 of RA 7653. In the case of Miranda vs PDIC, the Court explained that regular courts do not have jurisdiction over actions filed by claimants against an insolvent bank unless there is a clear showing that the action taken by BSP in the closure of the financial institutions was in excess of jurisdiction or with grave abuse of discretion.

3. Corporate Rehabilitation

Heirs of Santiago Divinagarcia vs. Ruiz G.R. No. 172023, July 7 2010

Facts: Santiago alleged that he was then a stockholder of respondent CBS Development Corporation, Inc. (CBSDC). He opposed to the proposal to authorize respondent Rogelio Florete, in his capacity as President of CBSDC, to mortgage all or substantially all of CBSDCs real properties to secure the loan obtained by Newsounds Broadcasting Network, Inc. (NBN), Consolidated Broadcasting System (CBS), and Peoples Broadcasting Services, Inc. (PBS). However, despite Santiagos and the other stockholders protest, a majority, representing more than 2/3 of the outstanding capital stock of CBSDC, voted and approved the grant of such authority to the Board.

Subsequently, Santiago, as a dissenting stockholder, wrote a letter objecting to the mortgage and exercising his appraisal right under Section 81 of the Corporation Code. In response, the corporate secretary informed Santiago that a majority of CBSDCs Board of Directors approved the exercise of his appraisal right. Thereafter, Santiago surrendered his stock certificates to CBSDC and then demanded an appraisal of his shares. The Board indefinitely postponed action on Santiagos appraisal right, to which Santiago protested.

The corporate secretary denied Santiagos protest and informed him that his CBSDC shares, including those for which he was issued Certificates of Stock, were declared delinquent and were to be sold on auction on 12 February 2002.

On 6 February 2002, Santiago filed with the Regional Trial Court of Iloilo City a


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Petition for Mandamus and Nullification of Delinquency Call and Issuance of Unsubscribed Shares. However, on 12 February 2002, Santiagos CBSDC shares were sold on auction to respondent Diamel, Inc. With this, Santiago then modified his petition including Diamel as one of the respondents. The respondents filed an answer with Compulsory Counterclaims.

On April 14, 2004, Santiago died and His Heirs substituted him in the case.

The RTC dismissed the petition filed by Santiago and give due course to the Compulsory Counterclaims filed by the respondent. The court ordered the heirs of Santiago to pay the respondents 200,000.00 pesos for exemplary damages and attorneys fees.

Petitioners then filed a Notice of Appeal of the RTCs decision. On the other hand, private respondents then filed motion for immediate execution of the trial courts decision, which petitioners opposed. The RTC grants the respondents motion and issued an ordered for the issuance of a writ of execution.

Petitioners subsequently filed a petition for certiorari with Prayers for TRO and Writ of Injunction before the CA. However, the CA dismissed the said petition. The dismissal is based on Section 4, Rule 1 of the interim Rules of Procedure for Intra-Corporate Controversies which provides that all decision rendered in intra-corporate controversies shall immediately be executory.

Issue: Whether the awards of exemplary damages and attorneys fees can be immediately executed pending appeal of the corporate case.

Ruling: The Supreme court held in negative. The court issued an A.M. No. 01-2-04-SC entitled Re: Amendment of Section 4, Rule 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. This said memorandum clarifies that Decisions issued pursuant to said Rule are immediately executory except the awards for moral damages, exemplary damages and attorneys fees, if any.

Even before the promulgation of the said memorandum, the Court in International School, INC. vs. CA, ruled that the execution of any award for moral and exemplary damages is dependent on the outcome of the main case for their exact amounts remain uncertain and indefinite pending resolution by the CA or SC.


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Advent Capital and Finance Corporation vs. Roland Young G.R. No. 183018, August 3, 2011

Facts: The present controversy stemmed from a replevin suit instituted by petitioner Advent Capital and Finance Corporation (Advent) against respondent Roland Young to recover the possession of a 1996 Mercedes Benz E230 which is registered in Advents name.

Before institution of the replevin case which was filed on July 16, 2001 Advent filed for corporate rehabilitation with the Regional Trial Court of Makati City, Branch 142.

On 27 August 2001, the rehabilitation court issued a stay order which states that "the enforcement of all claims whether for money or otherwise, and whether such enforcement is by court action or otherwise, against Advent, its guarantors and sureties not solidarily liable with it, is to be stayed.

Young filed his Comment to the Petition for Rehabilitation that there are several employee outstanding benefits allegedly due him as Advents former president and chief executive officer.

The rehabilitation court approved the rehabilitation plan submitted by Advent. Included in the inventory of Advents assets was the subject car which remained in Youngs possession at the time.

Youngs obstinate refusal to return the subject car, after repeated demands, prompted Advent to file the replevin case on 8 July 2003. The complaint was raffled to the Regional Trial Court of Makati City, Branch 147 (trial court).

Advent filed a replevin case with the RTC and posted a P3,000,000 replevin bond, the trial court issued a Writ of Seizure directing the Sheriff to seize the subject car from Young. Upon receipt of the Writ of Seizure, Young turned over the car to Advent, which delivered the same to the rehabilitation receiver.

On 28 April 2005, the trial court issued an Order dismissing the replevin case without prejudice for Advents failure to prosecute and the possession of the vehicle remain with Advent.

It appears that as of July 28, 2003, subject motor vehicle has been turned over to the plaintiff, thru its authorized representative, and no action had been taken by the plaintiff in the further prosecution of this case. Accordingly, this case is ordered dismissed without prejudice on the ground of failure to prosecute.

Young alleged that the dismissal of the case resulted in the dissolution of the writ. Nonetheless, the Court deems it proper to suspend the resolution of the return of the subject vehicle. In this case, the subject vehicle was turned over to plaintiff by virtue of a writ of replevin validly issued, the latter having sufficiently shown that it is the absolute/registered owner thereof. This was not denied by the defendant. Plaintiffs ownership includes its right of possession. The case has been dismissed without a decision on the merits having been rendered.


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Young filed a petition for certiorari and mandamus with the Court of Appeals seeking to annul the trial courts Orders. The Court of Appeals ruled in favor of Young and annulled the assailed rulings of the trial court. The Court of Appeals held:

It is noteworthy that the case was dismissed by the court a quo for failure of Advent to prosecute the same. Upon dismissal of the case, the writ of seizure issued as an incident of the main action (for replevin) should have been recalled or lifted. Since there was no adjudication on the merits of the case, the issue of who between Advent and petitioner has the better right to possess the subject car was not determined. As such, the parties should be restored to their status immediately before the institution of the case.

Issue: Whether or not the seized car from the replevin case should remain with Advent despite the failure to prosecute the case by virtue of stay order issued by the rehabilitation court?

Ruling: No. The said vehicle should return the seized car to Young since this is the necessary consequence of the dismissal of the replevin case for failure to prosecute without prejudice. Upon the dismissal of the replevin case for failure to prosecute, the writ of seizure, which is merely ancillary in nature should have been lifted. There was no adjudication on the merits, which means that there was no determination of the issue who has the better right to possess the subject car. Advent cannot therefore retain possession of the subject car considering that it was not adjudged as the prevailing party entitled to the remedy of replevin.

The dismissal of the replevin case, for failure to prosecute, results in the restoration of the parties status prior to litigation, as if no complaint was filed at all. To let the writ of seizure stand after the dismissal of the complaint would be adjudging Advent as the prevailing party, when precisely no decision on the merits had been rendered. Accordingly, the parties must be reverted to their status quo ante. Since Young possessed the subject car before the filing of the replevin case, the same must be returned to him, as if no complaint was filed at all.

Advents contention that returning the subject car to Young would constitute a violation of the stay order issued by the rehabilitation court is untenable. As the Court of Appeals correctly concluded, returning the seized vehicle to Young is not an enforcement of a claim against Advent which must be suspended by virtue of the stay order issued by the rehabilitation court pursuant to Section 6 of the Interim Rules on Corporate Rehabilitation (Interim Rules).

The issue in the replevin case is who has better right to possession of the car, and it was Advent that claimed a better right in filing the replevin case against Young. In defense, Young claimed a better right to possession of the car arising from Advents car plan to its executives, which he asserts entitles him to offset the value of the car against the proceeds of his retirement pay and stock option plan.

Young cannot collect a money "claim" against Advent within the contemplation of the Interim Rules. The term "claim" has been construed to refer to debts or demands of


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a pecuniary nature, or the assertion to have money paid by the company under rehabilitation to its creditors. In the replevin case, Young cannot demand that Advent pay him money because such payment, even if valid, has been "stayed" by order of the rehabilitation court. However, in the replevin case, Young can raise Advents car plan, coupled with his retirement pay and stock option plan, as giving him a better right to possession of the car. To repeat, Young is entitled to recover the subject car as a necessary consequence of the dismissal of the replevin case for failure to prosecute without prejudice.

Manuel D. Yngson Jr. (in his capacity as the liquidator of ARCAM & Company, inc.) vs. PNB

G.R. No. 171132, August 15, 2012

Facts: ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in Pampanga. It applied for and was granted a loan by respondent Philippine National Bank (PNB). To secure the loan, ARCAM executed a Real Estate Mortgage over a 350,004-square meter parcel of land and a Chattel Mortgage over various personal properties consisting of machinery, generators, field transportation and heavy equipment.

ARCAM, however, defaulted on its obligations to PNB.

On November 25, 1993, pursuant to the provisions of the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure proceedings.

The public auction was scheduled on December 29, 1993 for the mortgaged real properties and December 8, 1993 for the mortgaged personal properties.

On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments, Appointment of a Management or Rehabilitation Committee, and Approval of Rehabilitation Plan, with application for issuance of a temporary restraining order (TRO) and writ of preliminary injunction. The SEC issued a TRO and subsequently a writ of preliminary injunction, enjoining PNB and the Sheriff from proceeding with the foreclosure sale of the mortgaged properties.

On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that the petition for suspension of payment was filed in December 1993 and six years had passed.

The SEC decreed that ARCAM be dissolved and placed under liquidation. The SEC Hearing Panel also granted PNBs motion to dissolve the preliminary injunction and appointed Atty. Manuel D. Yngson, Jr.& Associates as Liquidator for ARCAM.

PNB revived the foreclosure case and requested the RTC Clerk of Court to re-schedule the sale at public auction of the mortgaged properties.


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On November 16, 2000, Yngson filed with the SEC a motion to nullify the auction sale .He posited that all actions against companies which are under liquidation, like ARCAM, are suspended because liquidation is a continuation of the petition for suspension proceedings. He also asserted that the mortgaged assets should be included in the liquidation and the proceeds shared with the unsecured creditors.

PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules prohibits secured creditors from foreclosing on their mortgages to satisfy the mortgagors debt after the termination of the rehabilitation proceedings and during liquidation proceedings.

The SEC issued a Resolution denying petitioners motion to nullify the auction sale. Holding that PNB was not legally barred from foreclosing on the mortgages.

Yngson filed a petition for review in the CA questioning the January 4, 2005 Resolution of the SEC and dismissed the petition.

Issue: Whether or not PNB, as a secured creditor, can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC?

Ruling: No. PNB was not barred from foreclosing on the mortgages

If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as ordinary claims.

Moreover, Section 2248 of the Civil Code provides:

"Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers."

Under Section 2248 of the Civil Code. The creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.

Under Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien during liquidation proceedings is retained. Section 114 of said law thus provides:


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SEC. 114. Rights of Secured Creditors. The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may:

(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or

(b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.1wphi1 When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtors right of redemption upon receiving the excess from the creditor;

(2) the liquidator may sell the property and satisfy the secured creditors entire claim from the proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.

PNB elected to maintain its rights under the security or lien; hence, its right to foreclose the mortgaged properties should be respected.

Equitable PCI Bank, Inc. vs. DNG Realty and Development Corporation G.R. No. 168672, August 8, 2010

Facts: Respondent, DNG Realty and Development Corporation (DNG) obtained a loan of P20M from Equitable PCI Bank (EPCIB) secured by a real estate mortgage

Due to the Asian Economic Crisis, DNG was not able to pay the loan. For this reason, EPCIB sought the extrajudicial foreclosure of the said mortgage by filing a petition for sale on 30 June 2003. On 4 September 2003, the mortgage property was sold at public auction, which was eventually awarded to EPCIB as the highest bidder. The Sheriff executed a Certificate of Sale in favor of EPCIB.

On October 21, 2003, DNG filed a petition for rehabilitation under Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation before the Regional Trial Court, Branch 28. A Stay Order was issued by RTC on 27 October 2003. The petition for rehabilitation was then published in a newspaper of general circulation.


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EPCIB caused the recording of the Sheriff's Certificate of Sale on December 3, 2003 with the Registry of Deeds of Cabanatuan City. EPCIB executed an Affidavit of Consolidation of Ownership and had the same annotated on the title of DNG

This prompted DNG to file Civil Case No. 4631 with RTC-Br. 28 for annulment of the foreclosure proceeding before the Office of the Ex-Officio Sheriff. This case was dismissed for failure to prosecute.

In order to gain possession of the foreclosed property, EPCIB on 17 March 2004 filed an Ex-Parte Petition for Issuance of Writ of Possession which was subsequently issued.

The Office of the Ex-Officio Sheriff issued the Notice to Vacate dated 6 October 2004.On October 15, 2004, respondent filed with the CA a petition for certiorari, prohibition and mandamus with prayer for the issuance of temporary restraining order/ preliminary injunction.

On October 22, 2004, the CA issued a temporary restraining order and the Notice to Vacate are all reversed and set aside.

The CA's decision in reversing the decision of the RTC was based on its interpretation of Interim Rules of Procedure on Corporate Rehabilitation, that all petitions for rehabilitation by corporations, partnerships and associations upon the appointment of a rehabilitation receiver, all actions or claims against the corporations, partnerships or associations under management or receivership pending before any court shall be suspended accordingly.

The CA, relying in Bank of the Philippine Islands v. Court of Appeals, found no merit to petitioner EPCIB's claim that the foreclosure sale of the property was made prior to the issuance of the Stay Order with the consummation of the extrajudicial foreclosure sale, all the valid and legal consequences of such could no longer be stayed.

The CA ruled that after the issuance of the Stay Order, effective from the date of its issuance, all subsequent actions pertaining to respondent DNG's Cabanatuan property should have been held in abeyance.

Dissatisfied, petitioner EPCIB filed the instant petition before the Supreme Court.

Issue: Whether the CA correctly held that all subsequent actions pertaining to respondent DNG's Cabanatuan property should have been held in abeyance after the Stay Order was issued by the rehabilitation court?

Ruling: Respondent DNG's petition for rehabilitation filed in Branch 28 of the RTC of Cabanatuan City on October 21, 2003 was made pursuant to the 2000 Interim Rules of Procedure on Corporate Rehabilitation, which was the applicable law on rehabilitation petitions filed by corporations, partnerships or associations, including rehabilitation cases transferred from the SEC to the RTCs pursuant to RA 8799 or the Securities Regulation Code.


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Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation provides:

Sec. 6. Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) days from the filing of the petition, issue an Order:

(a) appointing a Rehabilitation Receiver and fixing his bond;

(b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor;

(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business;

(d) prohibiting the debtor from making any payment of its liabilities outstanding as at the date of filing of the petition;

(e) prohibiting the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order;

(f) directing the payment in full of all administrative expenses incurred after the issuance of the stay order;

(g) fixing the initial hearing on the petition not earlier than forty five (45) days but not later than sixty (60) days from the filing thereof;

(h) directing the petitioner to publish the Order in a newspaper of general of general circulation in the Philippines once a week for two (2) consecutive weeks;

(i) directing all creditors and all interested parties (including the Securities and Exchange Commission) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than ten (10) days before the date of the initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings; and

(j) directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition.

The suspension of the enforcement of all claims against the corporation is subject to the rule that it shall commence only from the time the Rehabilitation Receiver is appointed.


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The CA annulled the RTC Order dated September 6, 2004 directing the issuance of a writ of possession, as well as the writ of possession issued pursuant thereto on October 4, 2004, and the notice to vacate issued by the Sheriff for being premature and untimely and ordered the cancellation of the TCT in the name of petitioner EPCIB as they were all done after the Stay Order was issued on October 27, 2003 by the rehabilitation court. In so ruling, the CA relied on BPI v. CA.

In the BPI, the action for judicial foreclosure of the real estate mortgage was still pending with the RTC when the stay order was issued; thus, there was no judgment on the foreclosure for payment and the sale of the mortgaged property at a public auction. In contrast to this case, DNG's mortgaged property had already been extrajudicially foreclosed and sold to petitioner as the highest bidder and a Certificate of Sale was issued on September 4, 2003, which was prior to the issuance of the Stay Order on October 27, 2003.

EPCIB's argument heavily relied on the decision in RCBC v. IAC, an en banc case decided in 1999. The SC, in that case ruled that RCBC can rightfully move for the extrajudicial foreclosure of the mortgage on the BF Home properties on October 16, 1984, because a management committee was not appointed by the SEC until March 18, 1985. Such ruling was a reversal to the court's earlier decision in the same case where we found that the prohibition against foreclosure attaches as soon as a petition for rehabilitation was filed.

In RCBC, it was upheld the extrajudicial foreclosure sale of the mortgage properties of BF Homes wherein RCBC emerged as the highest bidder as it was done before the appointment of the management committee.

Thus, applying RCBC v. IAC in the case, since the foreclosure of respondent DNG's mortgage and the issuance of the certificate of sale in petitioner EPCIB's favor were done prior to the appointment of a Rehabilitation Receiver and the Stay Order, all the actions taken with respect to the foreclosed mortgage property which were subsequent to the issuance of the Stay Order were not affected by the Stay Order. Thus, after the redemption period expired without respondent redeeming the foreclosed property, petitioner becomes the absolute owner of the property and it was within its right to ask for the consolidation of title and the issuance of new title in its name as a consequence of ownership; thus, it is entitled to the possession and enjoyment of the property.

Town and Country Enterprises Inc. vs. Hon. Quisumbing G.R No. 173610, October 1, 2012

Facts: TCEI obtained a loan from Metrobank and secured the same through a real estate mortgage over 20 parcels of land. These lands were registered in the name of its corporate officers, Sps. Campos. TCEI failed to pay its obligations and so Metrobank caused the extrajudicial foreclosure of the properties. Subsequently, the certificate of sale was issued to Metrobank being the highest bidder in the auction sale. TCEI and


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Sps. Campos refused to turn over the possession of the properties to Metrobank, thus the bank petitioned before the RTC for the issuance of a writ of possession. In the meantime, TCEI, claiming difficulty due to the Asian financial crisis, petitioned for the declaration of a state of suspension of payments with approval of the rehabilitation plan before the same court. A stay order was issued in the rehabilitation case. Upon motion of TCEI, the proceeding for the issuance of the writ of possession was suspended. Aggrieved by the denial of its motion for reconsideration, Metrobank appealed to the CA where it obtained favorable judgment. The CA directed respondent judge to continue with the proceedings and eventually issue the writ of possession. On the other hand, the rehabilitation court approved the rehabilitation plan filed by TCEI and gave to it a grace period of 5 years after which it has to pay its obligations within 3 years. Meanwhile, the RTC issued the writ of possession as ordered by the CA. With such issuance, TCEI and Sps. Campos appealed to the CA. The CA affirmed the decision of the RTC in issuing the said writ. Hence, this petition.

Issue: WON the issuance of the writ of possession is proper despite the fact that the companys rehabilitation plan was approved.

Ruling: Yes.

The applicable law in the herein case is RA 8791 and not Act No. 3135. The former provides the redemption period of 3 months or the period before the registration of the certificate of sale, whichever is earlier. The properties were acquired on 7 November 2001 and the redemption period expired on 6 February 2002. TCEI failed to redeem the properties within the threemonth period, thus Metrobank acquired ownership over the properties. The mortgagor loses all interest over the foreclosed property after the expiration of the redemption period and the purchaser becomes the absolute owner thereof if no redemption is made.

Furthermore, although there was already a Stay Order dated 8 October 2002 and approval of the rehabilitation court on 29 March 2004, these cannot be relied upon. An essential function of a corporate rehabilitation is admittedly the stay order which is a mechanism of suspension of all actions and claims against the distressed corporation upon the due appointment of a management committee or rehabilitation receiver. It should be noted that Metrobank has acquired ownership of the properties even before the issuance of the stay order and approval of the rehabilitation plan.

While it is true that the issuance of a writ of possession ceases to be a ministerial function if third parties claimed rights adverse to the judgment debtor, rehabilitation receivers power to take possession, control and custody of TCEIs assets is not adverse. A rehabilitation receiver is an officer of the court who is appointed for the protection of interests of corporate investors and creditors. There is nothing in the concept of corporate rehabilitation that would ipso facto deprive the officers of a debtor corporation of control over its business or properties.

Metrobank would still own the property even if Act No. 3135 will be followed. The properties, as mentioned, were purchased on 7 November 2001, the certificate of sale was issued on 13 December 2001 and was registered on 10 April 2002, and the


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affidavit of consolidation of ownership was executed on 25 April 2003. It can be seen, that the bank consolidated its ownership over the properties only after the lapse of one-year period.

Finally, the argument of petitioners that the CA erroneously gave more premium to the ex-parte proceedings for the issuance of the writ of possession over those in the rehabilitation case which is being in rem, is untenable. Rehabilitation cases are summary and non-adversarial and do not impair the debtors contracts or diminish the status of preferred creditors. The issuance of a Stay Order suspends the enforcement of all claims against the debtor, whether for money or otherwise and whether such enforcement is by court action or otherwise, effective from the date of its issuance until the dismissal of the petition or the termination of the rehabilitation proceedings. However, this does not apply to Metrobank which has acquired ownership over the properties before TCEI filed its petition for rehabilitation a quo.

Pryce Corporation vs. China Banking Corporation G.R. No. 172302, February 18, 2014

Facts: The case originated from a petition for corporate rehabilitation filed by Pryce on 9 July 2004 with the RTC of Makati.

Gener T. Mendoza was appointed as rehabilitation receiver upon finding that the petition was sufficient in form and substance. In not approving the rehabilitation plan, he instead submitted an amendment thereof which was approved by the court on 17 January 2005. The order, provides among others that:

1. The indebtedness to China Bank and BPI as well as the long term commercial paper will be paid through a dacion en pago of developed real estate assets of petitioner.

4. All accrued penalties are waived

5. Interests shall accrue only up to July 13, 2004, the date of the issuance of the stay order.

6. No interest will accrue during the pendency of the petitioners corporate rehabilitation.

7. Dollar denominated loans will be converted to Philippine pesos on the date of the issuance of this order using the reference rate of the Philippine Dealing System as of this date.

China Bank questioned the order before the CA and argued that the plan amounts to impairment of obligations of contracts which is not allowed in PD No. 902-A nor the Interim Rules of Procedure on Corporate Rehabilitation. Moreover, it contended that the payment through dacion en pago not only violated the mutuality of contracts


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and due process but also the policy of the state to maintain a competitive financial system.

Another creditor, BPI, filed a separate petition and challenged the same order based on a similar argument of the China Bank.

Meanwhile, the 7th Division of the CA granted China Banks petition and reversed the courts order. The 1st Division of the CA, on the other hand, initially granted BPIs petition but on a motion for reconsideration, the court set aside its original decision and upheld the courts order. On appeal by the BPI, the petition was denied with finality. With the final judgment of the SC, Pryce appealed to the Court assailing the 7th Divisions decision granting China Banks petition. However, on February 4, 2008 the SC denied the appeal of Pryce and remanded the case to the RTC to determine the merits of the petition for rehabilitation.

In a second motion for reconsideration of Pryce, SC gave due course to the petition. While pending the resolution of the motion, Pryce and China Bank filed a joint manifestation to suspend the proceedings to enable a possible mutual agreement between them. The two-month period prayed and granted having elapsed, and still no agreement was reached, the SC proceeded to resolve the second motion for reconsideration.

Issues:

1. WON the decision in BPI vs. Pryce Corporation operates as res judicata in the herein case.

2. WON the rehabilitation court is required to hold a hearing before issuing a stay order.

Ruling:

1. Yes, the elements of res judicata being present in the case. The elements of res judicata are: a. former judgment was final; b. the court that rendered it had jurisdiction over the subject matter and the

parties; c. the judgment was based on the merits; d. between the actions, there was identity of parties, subject matter and cause of

action.

The Court further explained that there are two concepts of res judicata:

1. barred by prior judgment when there is identity of parties, subject matter and cause of action

2. conclusiveness of judgment where a fact or question has been squarely put in issue, judicially passed upon and adjudged in a former suit by a court of competent jurisdiction; identity of parties as well applies


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In the case at bar, the elements of res judicata barred by prior judgment is present. Although the parties are not the very same parties in BPI vs. Pryce Corporation, the substantial identity of the parties suffices to apply the principle of res judicata. Substantial identity of parties refers to a community of interest between a party in the first case and a party in the second case even if the latter is not impleaded in the first case. In the herein case, both China Bank and BPI questioned the rehabilitation courts approval of the amended rehabilitation plan, and both cases deal with the same subject matter petitioners rehabilitation.

In addition to the Courts explanation, the Interim Rules allows the rehabilitation court to approve a rehabilitation plan even over the opposition of the creditors holding majority of the total liabilities of debtor if, in its judgment, the rehabilitation of debtor is feasible and opposition of creditors are manifestly unreasonable. The same rules provide that upon approval by the court of the rehabilitation plan, the same shall be binding upon the debtor and all persons who may be affected by it, including creditors, regardless of the absence or presence and participation of such persons in the proceedings, and regardless if such persons claims were scheduled.

The principle of immutability and finality of judgment was likewise applied in this case. Note that the decision in BPI vs. Pryce has become final and executory. The decision can no longer be changed except for correction of clerical errors (nunc pro tunc entries) which cause no prejudice to any party, void judgments, or whenever circumstances transpire after the finality of decision. As a general rule, the later case is abated applying the maxim qui prior est tempore (priority in time gives preference in law). In our jurisdiction, however, the law does not specifically require that the pending action which would hold in abatement the other must be a pending prior action. It is not just a prior action but also an appropriate action taken in good faith. Consideration must be taken as to the nature of controversy, comparative accessibility of the court to parties and other similar factors. None of these situations is present in the case.

2. No.

Under the Interim Rules, if the court finds the petition to be sufficient in form and substance, it shall, not later than 5 days from filing the petition, issue an order appointing the rehabilitation receiver and staying enforcement of all claims. The petition is said to be sufficient in form and substance if it alleges all material facts and includes all documents required.

The rule does not require the holding of a hearing in issuing the order, but it does not preclude in conducting one. The court, in its discretion may hold a hearing which must be within the five-day period from filing the petition.

The intent of the Interim Rules is to promote a speedy disposition of corporate rehabilitation cases. As said by the SC Committee on Interim Rules of Procedure on Corporate Rehabilitation, the interim receiver was replaced with rehabilitation receiver to justify immediate issuance of the stay order.


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The argument of China Bank that the non-holding of a hearing amounts to the violation of the non-impairment clause must fail. The non-impairment clause must yield to the States police power.

Admittedly, the cram down principle of the Interim Rules does dilute contracts. But the Court said that rather than let struggling corporation slip and vanish, the better option is to allow commercial courts to come in and apply the process of corporate rehabilitation. Furthermore, the suspension of payment is based on the general theory of second best one market imperfection will not necessarily be efficiency enhancing unless theres simultaneous correction for all other market imperfection.

Veterans vs. FDPHI G.R. No. 190907, August 23, 2012

Facts: Veterans Philippine Scout Security Agency, Inc (Veterans) is a corporation engaged in providing security services. On the other hand, FDPHI (First Dominion Prime Hodings, Inc) is a holding and management company which owns subsidiaries and affiliates, among which is Clearwater Tuna Corporation (Clearwater). FDPHI and some of its subsidiaries jointly filed before the RTC of Pasig a petition for rehabilitation. Attached in the petition was a Schedule of Debts and liabilities showing that Clearwater had an outstanding indebtedness to Veterans. This debt represents the security services rendered by Veterans to Inglenook Food Corporation, Clearwaters former name, pursuant to a contract of guard services. Upon finding that the petition was sufficient in form and substance, the rehabilitation court issued a stay order with a direction that the same be published to let interested and affected third parties give its opposition or comment. At the same time, the rehabilitation court approved the amended rehabilitation plan of FDPHI.

Following the pending rehabilitation proceeding, Veterans filed a collection case against Clearwater and the appointed rehabilitation receiver before the MeTC of Quezon City. The case was dismissed for failure of Veterans to prosecute but was later reinstated upon a motion for reconsideration. Veterans filed an amended complaint against FDPHI averring that Clearwater changed its name to FDPHI. FDPHI, on the other hand, moved for the dismissal of the case invoking res judicata by virtue of the approval of the rehabilitation plan. It further contended that the complaint constituted forum shopping because petitioner was fully aware of the pending rehabilitation proceeding. Moreover, it argued that the complaint failed to state a cause of action since the contract was not executed by FDPHI but by Clearwater.

MeTC granted the motion to dismiss upholding the arguments of FPDHI. It emphasized that Veterans should have had filed its comment or opposition in the rehabilitation proceeding.

In its second motion for reconsideration with prayer that the dismissal be declared without prejudice of filing a separate action, the same was still denied. In the RTC, the court partially granted Veterans petition. It upheld the other reasoning of the


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lower court yet the dismissal was declared as without prejudice to petitioners reinstitution of a separate action or enforcement of its claim. The stay order and the approved amended rehabilitation plan, according to the RTC, cannot operate to deprive petitioners right to present its own case.

On appeal, the CA reversed the RTCs decision and agreed with the MeTC. The motion for reconsideration of Veterans was likewise denied.

Issue: WON Veterans action to enforce payment of the unpaid debt is covered by the rehabilitation plan such that it can no longer institute a separate action to collect the same.

Ruling: Yes.

The SC initially explained that Clearwater and FDPHI are two separate corporate entities. The obligation sought to be enforced was not contracted by FDPHI but by Clearwater under its old name. On this ground alone, the complaint was properly dismissed.

Additionally, while respondent FDPHI is the parent company of Clearwater and both jointly filed for a corporate rehabilitation, this must not be taken as an assumption by FDPHI of any liability of Clearwater.

It should be remembered that the essential function of corporate rehabilitation is its mechanism of suspension of allocations and claims against the distressed corporation upon the appointment of management committee or rehabilitation receiver.

Sec. 6 of PD 902-A provides that all actions for claims against a corporation, association, or partnerships under management or receivership pending before any court, tribunal or board shall be suspended. It is likewise settled in jurisprudence that suspension of proceedings refers to all actions or claims except only those expenses incurred in the ordinary course of business. The stay order is effective to all creditors, whether secured or unsecured.

In the case at bar, Veterans cannot be exempted from the order of suspension of enforcement of claims. The suspension is without distinction (as to if it is secured or unsecured) to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might hinder or prevent the rescue of the debtor company. Note that under Sec. 20-A of the 2008 Rules of Procedure on Corporate Rehabilitation provides that the rehabilitation plan and its provisions shall be binding upon the debtor and all persons who may be affected

Documents

FRIA Report Final