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SECURITIES AND EXCHANGE COMMISSION LAW

PD 902-A, as amended by RA 8799 or the SRC

The SEC is formerly a function of the Bureau of Commerce. It is


tasked to implement the Corporation Code.

I. STRUCTURE OF THE SECURITIES AND EXCHANGE


COMMISSION (Secs 4 and 7, RA 8799)

Section 4. Administrative Agency:


4.1. Security and Exchange Commission acts as a Collegial body
COMPOSITION: Composed of a chairperson and (4)
Commissioners
appointed by the President for a term of (7) seven years each
and who shall serves as such until their successor shall have
been appointed and qualified.
A Chairperson appointed to fill a vacancy occurring prior to
the expiration of the term for which his/her predecessor was
appointed, shall serve only for the unexpired portion of their
terms under Presidential Decree No. 902-A.

4.2. QUALIFICATIONS:
The Commissioners must be natural-born citizens of the
Philippines
at least forty (40) years of age for the Chairperson and
at least thirty-five (35) years of age for the Commissioners,
of good moral character, or unquestionable integrity, of
known probity and patriotism, and
with recognized competence in social and economic
disciplines
Majority of Commissioners, including the Chairperson, shall be
members of the Philippine Bar.

II. ENTITIES UNDER ABSOLUTE JURISDICTION, SUPERVISION


AND CONTROL OF THE SEC (Sec 3 PD 902-A)

Originally, SEC was a quasi-judicial body created to implement and


enforce the Corporation Code and all the disputes between duly
registered corporations.

Now, its promissory power increased but denied or deprived their


quasi-judicial authority. Thus, the SEC exercises original and
exclusive supervision over the following entities:
a. Corporations, partnerships or associations which are grantees of
primary franchises (Sec 5a, RA 8799)

b. Investment Houses under PD 129, otherwise known as the


Investment House Act

Investment House a corporation engaged in the business of


guaranteeing the sale of any class of securities in the Philippines.

Underwriter an entity engaged in underwriting securities

c. Financing Companies (co-jurisdiction with the BSP)

Financing Companies lending institution principally engaged


in consumer loans including financing leasing.

Financial leasing refers to an activity of a financial lending


institution wherein it gives the borrower one of the following
options:

Advance the purchase price of a certain goods or materials


payable by installment on a stipulated period. At the end of
the installment period, the borrower becomes the owner of
the said goods, material or equipment (Traditional
Financing)
For the lending institution to advance the purchase price
upon which the borrower shall pay periodic rent. The
rentals shall be payable on the stipulated period. At the
end of the period, the borrower does not become the
owner. (Financial Leasing)
It merely enables the borrower to use the equipment.
Lender retains the ownership of the goods, material
or equipment.

Q: Which is the better option? Weigh the purpose and benefits of


the arrangement and determine which is more suitable to your
needs.

d. Over all entities engaged in securities market transaction such as


a security dealer, security broker including stock exchanges and
self-regulating organization.

Stock dealer a person engaged in the business of buying and


selling securities on its own account. Under Investment House
Act, an investment house has also powers which are similar to
the powers of securities dealers.
Securities broker one who buys or sells securities including
stocks on account of other.

Stock exchange an entity engaged in providing facilities for


the sale and purchase of shares of stocks.
Public market for shares of stocks.

NOTE: Philippine Stock Exchange, Inc. a self-regulating


organization operating the stock exchange in the Philippines. It is
a merger between Makati Stock Exchange and Manila Stock
Exchange.

III. POWERS AND FUNCTIONS OF THE SEC (Sec 5, RA 8799 in rel to


Sec 6, PD 902-A)
Specific Powers of SEC
1. To issue Certificate of Incorporation and Registration including
license of a foreign corporations.
2. To suspend or revoke the Certificate of Incorporation and
Registration.

A & A Continental v SEC, 225 S 314: Section 6(L) of


Presidential Decree No. 902-A clearly provides that the SEC shall
possess the power to suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration of
corporations, partnership or associations.
Grounds for revocation and suspension may be used by
SEC including Judicial Dissolution of Corporation.

3. Promulgate rules and regulations not just pertaining to


corporation, in general, but also market development.
4. Hear and decide disputes involving capital market.
5. Issue subpoena.
6. Deputization powers - Enlist the aid and support of and/or
deputize any and all enforcement agencies of the Government,
civil or military as well as any private institution, corporation,
firm, association or person in the implementation of its powers
and functions under this Code
Employees and officials of SEC are immune whenever
they are sued for acts and official discharge of their
given function. They enjoy immunity from personal
liabilities.

The quasi-judicial functions of SEC had been terminated and later


on transferred to the RTC.
RTCs generally designated as Special Commercial Courts (SCCs)
SCCs are branches of the RTC designated by the Supreme Court
to exercise special jurisdiction under RA 8799

IV. ORIGINAL AND EXCLUSIVE JURISDICTION OF THE REGIONAL


TRIAL COURTS (formerly of the SEC, Sec 5.2, RA 8799)

INTRA-CORPORATE CONTROVERSIES
How to determine? Two-tiered test
FIRST TEST: Relationship Test
SECOND TEST: Nature of the Controversy Test

Relationship Test
Case involving:
a. Relationship between Corporation and State;
b. Relationship between Corporation and public in general;
c. Relationship between shareholders, members and officers of the
Corporation;
d. Relationship between and among shareholders and members.

a. Between corporation and the State


With respect to the franchise granted by the State
Example: Quo warranto petitions, revocation of Certificate
of Incorporation and Revocation of secondary
license/franchise of the Corporation.
Quo warranto initiated by Solicitor General in behalf of
the Republic on such grounds for involuntary dissolution,
fraud in procuring Certificate of Registration or
misrepresentation as to what it can do to the great damage
or prejudice of the public.

b. Between corporation and the public at large


Cases filed when there is an allegation of corporate fraud
committed either by the corporation directly or through its
directors, trustees, officers, shareholders or members or
their known agents and associates. (Devices and
schemes amounting to fraud and misrepresentation)

c. Between shareholders, members against the corporation or vice


versa or between officers against their own shareholders/members.
To grant jurisdiction to SCC, it is required to establish
whether or not the intra-corporate relationship between
the parties still subsists at the time the acts complained of
were committed.
It is important to know when will intra-corporate
relationship begins and ends.

Q: When does the intra-corporate relationship begin?


A: Intra-corporate relationship begins from the moment of the
perfection of subscription contract; or from admission as member;
or from the moment the transfer is registered.

Q: In a conditional sale of shares of stocks where prior to the full


payment of the price, the seller agreed to indorse but not yet
deliver the stocks certificate to the buyer. The buyer has already
paid in full the purchase price and has already met the condition for
the sale to become an absolute one. However, the seller refuses to
physically transfer the stocks certificate. The buyer complained to
the Corporate Secretary and asked for the registration of the
transfer of the stocks under his name. Corporate Secretary refused.
Thus, an action for Mandamus was file in the RTC to compel the
corporate secretary to cause the registration. Will the action
prosper?

A: No. The case must be dismissed. The buyer is not yet a


stockholder because there is yet no delivery of the stocks
certificate. Mere indorsement without delivery does not make the
transferee a shareholder of the corporation. Therefore, he is not
entitled to demand registration from the corporation.

Q: Stock certificate was indorsed in blank and was physically


delivered to the transferee subject to the full payment of the
purchase price. However, without paying in full, the transferee-
buyer goes to the corporate secretary demanding that the share be
registered under his name and that new stocks certificate be given
in lieu of the old one. Transferor-seller opposed on the ground that
they has been no full payment yet. Buyer filed an action to compel
the registration of the transfer under his name. Is there an intra-
corporate controversy?

A: The action against the corporate secretary is an intra-corporate


controversy because at that point, there is already a complete
transfer, that is, indorsement coupled with delivery. The fact that
the indorsement was made in blank does not change the fact that
there is already a complete transfer.

As such, the mandamus case compelling the corporate secretary


to register the transfer is one which is considered as an intra-
corporate controversy. Whatever is the issue between the transferor
and the transferee against one another is purely private where the
corporation is not involved.

Nature of controversy test


The cause of action must arise from enforcement of rights and
obligations under:
i. Corporation Code;
ii. Articles of Incorporation;
iii. By-laws.
If the intra-corporate relationship is merely incidental, it is not an intra-
corporate controversy.
REAL TEST: Would the case survive without the intra-corporate
relationship between the parties? If the answer is yes, the case is
not an intra-corporate controversy.
For as long as it relates to this, regardless of the amount involved, it is
the RTC designated by the Supreme Court can exercise jurisdiction.
Examples:
1. A derivative suit is exclusive to RTC.
2. Actions based on illegal dismissal of corporate officers
Dismissal of a corporate officer is considered as a
corporate act.
As long as the dismissed officer questions the
manner by which he was dismissed or terminated
from service, it is not a labor dispute.
It does not relate to an ordinary employer-employee
relationship between the parties.
Corporate officers those whose position is provided
for by the Articles of Incorporation and/or by-laws
and the Corporation Code, to wit:
1. President;
2. Corporate Secretary;
3. Treasurer; and
4. Directors/Trustees.

If not stated in or created by Articles and/or by-laws,


then it is not a corporate office. Whoever occupies
the said office is not a corporate officer. Therefore, he
must seek recourse to NLRC and not to SCC. Thus,
the position of comptroller and vice-president were
held to be not corporate officers because nowhere in
the by-laws of the said corporation provides for those
positions. The by-laws merely allows the creations of
such other offices when the Board finds it necessary.
The enabling provision does not create corporate
office. (Matling v. Coros)
Examples of cases between parties that would require
jurisdiction of SCC:
i. Action to collect balance of subscriptions (Judicial)
ii. Action for Annulment of a contract of a Self-dealing
Director
iii. Action to enforce personal liability of directors (Sec. 65,
Corp. Code)
iv. Actions arising from appraisal right
v. Others which are controversies relating to rights and
obligations extrinsic from the intra-corporate relationship
between the parties.
NOTE: In criminal cases, even if the case arose from an intra-corporate
relationship, regular jurisdiction shall apply.

SPECIFIC CASES WHICH ARE UNDER THE ORIGINAL AND EXCLUSIVE


JURISDICTION OF THE RTC (designated as Special Commercial Court)

Section 5 of Presidential Decree (P.D.) No. 902-A vested the original


and exclusive jurisdiction over cases involving the following in the SEC.
However, with the advent of Republic Act No. 8799 (The Securities
Regulation Code), effective on August 8, 2000, the jurisdiction of the SEC
over intra-corporate controversies and the other cases enumerated in
Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court
pursuant to Section 5.2 of the law. These cases are as follows:

A. Devises or schemes amounting to fraud or misrepresentation


o Devices or schemes employed by, or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the
public and/or of the stockholder, partners, members of associations or
organization registered with the Commission

i. Alleje v CA 240 S 495


The complaint filed by SHAPE before the Pasig trial court imputes
unmistakable acts of fraud to Alleje as an officer of SHAPE which
have supposedly resulted in its heavy financial losses. The fraud
committed is detrimental to the interest not only of the corporation
itself but also of its members who have unselfishly agreed among
themselves that no part of the net income of the corporation shall
inure to any of them. As held in Magalad v. Premier Corporation 7, this
(fraud) encompasses a category of relationship within the SEC
jurisdiction, despite the fact that the complaint ultimately involves
collection of money, the recovery of which would ordinarily fall within
the legal competence of the regular courts.
ii. Baez v Dimensional Construction 140 S 249
In the promissory notes issued by private respondent corporation, it is
clearly indicated therein that the sums by money received by private
respondent were in the nature of investments of the petitioners,
agreed upon by the parties to be returned by the corporation upon the
maturity of said promissory notes. As the money received by private
respondent do (sic) not constitute payment of subscription of shares,
the petitioners herein did not become members of respondent
Dimensional Trade and Development Corporation. In the case of Sunset
View Condominium Corporation vs. Hon. Jose C. Campos, Jr. et al., 104
SCRA 295, it was ruled that where the stated party-litigants "are not
shareholders of the condominium corporation, the instant cases for
collection cannot be "a controversy arising out of intra-corporate or
partnership relations between and among stockholders, members of
associates.

There is no allegation nor any mention whatsoever in plaintiff's


complaint that a device or scheme was resorted to by private
respondent corporation amounting to fraud and misrepresentation. It
is, therefore, difficult to consider that petitioner's case falls within the
jurisdiction of the Securities and Exchange Commission pursuant to PD
902-A

B. Controversies arising out of intra-corporate or partnership


relations
o Controversies arising out of intra-corporate or partnership relations,
between and among 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 their individual franchise or right as such entity

i. Aguirre v. FQB+7, Inc.


G.R. no. 170770, January 9, 2013

Facts: On October 5, 2004, Vitaliano filed, in his individual capacity and


on behalf of FQB+7, Inc., a Complaint for intra-corporate dispute, injunction,
inspection of corporate books and records, and damages, against
respondents Nathaniel D. Bocobo, Priscila D. Bocobo and Antonio De Villa.
The Complaint alleged that FQB+7 was established in 1985 with the
following directors and subscribers, as reflected in its Articles of
Incorporation.

The substantive changes found in the GIS, respecting the composition of


directors and subscribers of FQB+7, prompted Vitaliano to write to the "real"
Board of Directors (the directors reflected in the Articles of Incorporation),
represented by Fidel N. Aguirre. In this letter dated April 29, 2004, Vitaliano
questioned the validity and truthfulness of the alleged stockholders meeting
held on September 3, 2002. He asked the "real" Board to rectify what he
perceived as erroneous entries in the GIS, and to allow him to inspect the
corporate books and records.

Issue: Whether the RTC has jurisdiction over an intra-corporate dispute


involving a dissolved corporation.

Held: Yes. Intra-corporate disputes remain even when the corporation is


dissolved. Jurisdiction over the subject matter is conferred by law. R.A. No.
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.

Thus, to be considered as an intra-corporate dispute, the case: (a) must arise


out of intra-corporate or partnership relations, and (b) the nature of the
question subject of the controversy must be such that it is intrinsically
connected with the regulation of the corporation or the enforcement of the
parties rights and obligations under the Corporation Code and the internal
regulatory rules of the corporation.

Examining the case before us in relation to these two criteria, the Court finds
and so holds that the case is essentially an intra-corporate dispute. It
obviously arose from the intra-corporate relations between the parties, and
the questions involved pertain to their rights and obligations under the
Corporation Code and matters relating to the regulation of the corporation.
We further hold that the nature of the case as an intra-corporate dispute was
not affected by the subsequent dissolution of the corporation.

ii. Philip Go v. Distinction Properties Development


G.R. No. 194024, April 25, 2012

Facts: Petitioners, as condominium unit-owners, filed a complaint


before the HLURB against DPDCI for unsound business practices and
violation of the MDDR, alleging that DPDCI committed
misrepresentation in their circulated flyers and brochures as to the
facilities or amenities that would be available in the condominium and
failed to perform its obligation to comply with the MDDR.

Issue: Whether the HLURB has jurisdiction over the complaint


filed by the petitioners.

Held:The HLURB is given a wide latitude in characterizing or


categorizing acts which may constitute unsound business practice or
breach of contractual obligations in the real estate trade. This grant of
expansive jurisdiction to the HLURB does not mean, however, that all
cases involving subdivision lots or condominium units automatically
fall under its jurisdiction. The mere relationship between the parties,
i.e., that of being subdivision owner/developer and subdivision lot
buyer, does not automatically vest jurisdiction in the HLURB. For an
action to fall within the exclusive jurisdiction of the HLURB, the
decisive element is the nature of the action.

In this case, the complaint filed by petitioners alleged causes of action


that apparently are not cognizable by the HLURB considering the
nature of the action and the reliefs sought. A perusal of the complaint
discloses that petitioners are actually seeking to nullify and invalidate
the duly constituted acts of PHCC. This action, therefore, partakes the
nature of an "intra-corporate controversy," the jurisdiction over which
used to belong to the Securities and Exchange Commission (SEC), but
transferred to the courts of general jurisdiction or the appropriate
Regional Trial Court (RTC), pursuant to Section 5b of P.D. No. 902-A,38
as amended by Section 5.2 of Republic Act (R.A.) No. 8799.

iii. Strategic Alliance v. Star Infrastructure


G.R. No. 187872, November 17, 2010

Held:Pursuant to Section 5.2 of Republic Act No. 8799, otherwise


known as the Securities Regulation Code, the jurisdiction of the SEC
over all cases enumerated under Section 5 of Presidential Decree No.
902-A has been transferred to RTCs designated by this Court as SCCs
pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

It should be noted that the SCCs are still considered courts of general
jurisdiction. Section 5.2 of R.A. No. 8799 directs merely the Supreme
Court's designation of RTC branches that shall exercise jurisdiction
over intra-corporate disputes. Nothing in the language of the law
suggests the diminution of jurisdiction of those RTCs to be designated
as SCCs. The assignment of intra-corporate disputes to SCCs is only
for the purpose of streamlining the workload of the RTCs so that
certain branches thereof like the SCCs can focus only on a particular
subject matter.

The RTC exercising jurisdiction over an intra-corporate dispute can be


likened to an RTC exercising its probate jurisdiction or sitting as a
special agrarian court. The designation of the SCCs as such has not in
any way limited their jurisdiction to hear and decide cases of all
nature, whether civil, criminal or special proceedings.

iv. GD Express v. CA
G.R. No. 136978, May 8, 2009
Held:The RTC exercising jurisdiction over an intra-corporate dispute
can be likened to an RTC exercising its probate jurisdiction or sitting as
a special agrarian court. The designation of the SCCs as such has not
in any way limited their jurisdiction to hear and decide cases of all
nature, whether civil, criminal or special proceedings.

Incidentally, not all the prayers and reliefs sought by respondent


Filchart in SEC Case No. 08-97-5746 can be characterized as intra-
corporate in nature. For instance, respondent Filcharts petition does
not allege that the cause of action for the nullification of the
management contract between PEAC and petitioner Amihan is being
instituted as a derivative suit. It is an ordinary action for the
nullification of a contract, which is cognizable by courts of general
jurisdiction.

C. Controversies in the election or appointment/dismissal of


corporate officers
o Controversies in the election or appointment of directors, trustees,
officers or managers of such corporations, partnership or associations

i. Cosare v. Broadcom Asia


G.R. No. 201298, February 5, 2014

Issue: Whether the RTC has jurisdiction over the illegal dismissal
case filed against Broadcom Asia, Inc. (Broadcom) and Dante
Arevalo (Arevalo), the President of Broadcom.

Held: It is the LA, and not the regular courts, which has the
original jurisdiction over the subject controversy. An intra-corporate
controversy, which falls within the jurisdiction of regular courts, has
been regarded in its broad sense to pertain to disputes that involve
any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the
corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; (3) between
the corporation, partnership or association and its stockholders,
partners, members or officers; and (4) among the stockholders,
partners or associates, themselves. Settled jurisprudence, however,
qualifies that when the dispute involves a charge of illegal
dismissal, the action may fall under the jurisdiction of the LAs upon
whose jurisdiction, as a rule, falls termination disputes and claims
for damages arising from employer-employee relations as provided
in Article 217 of the Labor Code. Consistent with this jurisprudence,
the mere fact that Cosare was a stockholder and an officer of
Broadcom at the time the subject controversy developed failed to
necessarily make the case an intra-corporate dispute.
There are two circumstances which must concur in order for an
individual to be considered a corporate officer, as against an
ordinary employee or officer, namely: (1) the creation of the position
is under the corporations charter or by-laws; and (2) the election of
the officer is by the directors or stockholders. It is only when the
officer claiming to have been illegally dismissed is classified as such
corporate officer that the issue is deemed an intra-corporate dispute
which falls within the jurisdiction of the trial courts. Cosare,
although an officer of Broadcom for being its AVP for Sales, was not
a "corporate officer" under the contemplation of the law.

ii. Renato Real vs. Sangu Philippines, Inc. et al.,


G.R. No. 168757, January 19, 2011.

Issue: Who can be considered as corporate officers?

Held: Corporate officers in the context of Presidential Decree


No. 902-A are those officers of the corporation who are given that
character by the Corporation Code or by the corporations by-laws.
There are three specific officers whom a corporation must have
under Section 25 of the Corporation Code. These are the president,
secretary and the treasurer. The number of officers is not limited to
these three. A corporation may have such other officers as may be
provided for by its by-laws like, but not limited to, the vice-
president, cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the corporations by-
laws.

It has been consistently held that [a]n office is created by the


charter of the corporation and the officer is elected (or appointed)
by the directors or stockholders. Clearly here, respondents failed
to prove that petitioner was appointed by the board of directors.
Thus, we cannot subscribe to their claim that petitioner is a
corporate officer. Having said this, we find that there is no intra-
corporate relationship between the parties insofar as petitioners
complaint for illegal dismissal is concerned and that same does not
satisfy the relationship test.

iii. March II Marketing, Inc. and Lucila V. Joson vs. Alfredo M.


Joson
G.R. No. 171993, December 12, 2011

Issue: Is a general manager a corporate officer?


Held: In the context of Presidential Decree No. 902-A, corporate
officers are those officers of a corporation who are given that
character either by the Corporation Code or by the corporations by-
laws. Section 25 of the Corporation Code specifically enumerated
who are these corporate officers, to wit: (1) president; (2) secretary;
(3) treasurer; and (4) such other officers as may be provided for in
the by-laws.

With the given circumstances and in conformity with Matling


Industrial and Commercial Corporation v. Coros, this Court
rules that respondent was not a corporate officer of petitioner
corporation because his position as General Manager was not
specifically mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in petitioner corporations
by-laws empowering its Board of Directors to create additional
officers, i.e., General Manager, and the alleged subsequent passage
of a board resolution to that effect cannot make such position a
corporate office. Matling clearly enunciated that the board of
directors has no power to create other corporate offices without first
amending the corporate by-laws so as to include therein the newly
created corporate office. Though the board of directors may create
appointive positions other than the positions of corporate officers,
the persons occupying such positions cannot be viewed as
corporate officers under Section 25 of the Corporation Code. In
view thereof, this Court holds that unless and until petitioner
corporations by-laws is amended for the inclusion of General
Manager in the list of its corporate officers, such position cannot be
considered as a corporate office within the realm of Section 25 of
the Corporation Code.

iv. Atty. Virgilio R. Garcia vs. Eastern Telecommunications


Philippines, Inc. et al./Eastern Telecommunications
Philippines Inc. vs. Atty. Virgilio R. Garcia
G.R. No. 173115/G.R. No. 173163-64, April 16, 2009.

Issue: Whether the dismissal of a vice-president be considered as an


intra-corporate controversy.

Held: Before a dismissal or removal could properly fall within the


jurisdiction of the SEC, it has to be first established that the person
removed or dismissed was a corporate officer. Corporate officers
in the context of Presidential Decree no. 902-A are those officers of
the corporation who are given that character by the Corporation
Code or by the corporations by-laws. There are three specific
officers whom a corporation must have under Section 25 of the
Corporation Code. These are the president, secretary and the
treasurer. The number of officers is not limited to these three. A
corporation may have such other officers as may be provided for by
its by-laws like, but not limited to, the vice-president, cashier,
auditor or general manager. The number of corporate officers is
thus limited by law and by the corporations by-laws. A corporate
officers dismissal or removal is always a corporate act and/or an
intra-corporate controversy, over which the Securities and Exchange
Commission [SEC] (now the Regional Trial Court) has original and
exclusive jurisdiction.

D. Petitions for Declaration in the state of suspension of


payments
o Petitions of corporations, partnerships or associations to be declared in
the state of suspension of payment in cases where the corporation,
partnership or association possesses sufficient property to cover all its
debts but foresees the impossibility of meeting them when they
respective fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities but is under
the management of a Rehabilitation Receiver or Management
Committee created pursuant to this Decree.

Financial Rehabilitation and Insolvency Act of 2010 (R.A. 10142)

When individuals and corporations are financially distressed, the law


gives them debt relief methods by virtue of the FRIA.

Policy of FRIA
It expresses the policy of the State to encourage debtors, both juridical
and natural persons, and their creditors to collectively and realistically
resolve and adjust competing claims and property rights. (Section 2, FRIA)

Purposes: (Factors to consider when there is Rehabilitation or


Liquidation)
1. Ensure or maintain certainty and predictability in commercial affairs;
2. Preserve and maximize the value of the assets of the debtors;
3. Recognize creditors rights;
4. Respect priority of claims;
5. Ensure equitable treatment of creditors who are similarly situated.
(Section 2, FRIA)

Debtor
It shall refer to a sole proprietorship duly registered with the DTI, a
partnership duly registered with the SEC, a corporation duly organized and
existing under Philippine Laws, or an individual debtor who has become
insolvent.

Insolvency
It refers to the financial condition of a debtor that is generally unable to pay
its or his liabilities as they due in the ordinary course of business or has
liabilities that are greater than its or his assets.

Technical Insolvency
There are adequate assets but the Debtor has no sufficient cash to pay its
maturing liabilities.

Excluded Debtors (Excluded from the operation of FRIA, hence,


governed by their own special laws.)
1. Banks
2. Pre-need companies
3. Insurance companies
4. National and local government agencies or units.

Creditor
It refers to a natural or juridical person which or who has a claim against the
debtor that arose on or before the commencement date.

General Unsecured Creditor


It refers to a creditor whose claim or portion thereof is neither secured,
preferred nor subordinated under the FRIA.

Debt Relief Methods

1.Out-of-Court-Rehabilitation or Restructuring (OCRA) (Section


84, Chapter IV, FRIA)

Rehabilitation is not necessarily court supervised. It may be informal or


extrajudicial restructuring agreement or rehabilitation plan provided that it
meets the minimum requirements recognized under the FRIA. The ultimate
objective is to come up with rehabilitation or restructuring agreement. The
assumption is that debtor can no longer meet its maturing obligations.

It allows parties to make agreements with various creditors regarding on:


1. Deferment of payment;
2. Infusion of capital;
3. Condonation of some or all of the debts;
4. Restructuring of the debts; or
5. Similar arrangement that will provide assistance to the debtor.

The Court may however issue orders in a Petition for Assistance filed
either by the debtor or creditor who are parties to on-going negotiation.

For an OCRA to be recognized by the Court, the following requirements


must be complied with: (C-67%-75%-85%)
1. Consent of the debtor to the OCRA and Rehabilitation Plan;
2. Approval of creditors representing at least 67% of the secured
obligations of the debtors (preferred creditors);
3. Approval of the creditors representing at least 75% of the unsecured
obligations of the debtor (ordinary creditors);
4. Approval of the creditors holding at least 85% of the total liabilities
secured and unsecured.

When is a creditor considered to be vested a secured status?


Consider provisions of the Civil Code under Articles 2241 and 2242: Re:
Preference as to Specific Movable and Immovable Properties, and Article
2244 as modified by Article 110 of the Labor Code: Re: Order of Preference
with respect to Other Properties.

What kind of assistance may the Court may provide?


The Court may require Publication of the Notice of the on-going negotiation.
FRIA expressly provides that the notice must invite creditors to participate in
the negotiation for out-of-court rehabilitation or restructuring agreement and
notify them that said agreement will be binding on all creditors if the
required majority votes prescribed above are met.

Cram-Down Effect
The Court may bind those unwilling creditors to the restructuring plan that
may be perfected. The notice of the Rehabilitation Plan or restructuring
agreement shall be published once a week for at least three (3) consecutive
weeks in a newspaper of general circulation in the Philippines.

A. Pre-Negotiated Rehabilitation Plan (Section 76, Chapter III, FRIA)

When the OCRA is successful but the creditors do not voluntarily


implement the Rehabilitation Plan, the necessary next step to be taken is to
file a Petition for Approval of the Pre-negotiated Rehabilitation Plan. The
insolvent debtor may seek court assistance for the implementation and
execution of the Rehabilitation Plan. In which case, the implementation and
execution will be supervised by the Regional Trial Court. (SCC)

For a Petition for Approval of a Pre-Negotiated Plan, there must be proof


of the following:

Consent of the Debtor must be alleged and proved;


Consent of the creditors representing at least 2/3 of the total
liabilities of the debtor including more than 50% of secured
creditors and 50% of the unsecured creditors.
The Rehabilitation Plan is implemented through a Receiver. The Court
issues an order appointing a Receiver. He is an officer of the Court whose
main task is to ensure timely and faithful compliance of the Rehabilitation
Plan. The Implementation and Execution does not require hearing unless
there is an allegation of bad faith on the part of the receiver.

2.Court Supervised Rehabilitation (Section 12,Chapter II, FRIA)


These are proceedings in rem. Therefore, notice shall be made by
Publication in a newspaper of general circulation in the Philippines. The
petition must contain a proposed rehabilitation plan. The plan may include
debt condonation, debt restructuring, dacion en pago or debt for equity
swap, infusion of new capital, increase of capital stock, sale of assets, sale of
all or some of the business, retirement of some of the businesses, or new
loans.

a.Voluntary (Debtor-initiated)
It must be alleged that there is approval by the Majority of the Board of
Directors and stockholders representing 2/3 of the OCS.

b.Involuntary (Creditor-initiated)
1. The Petition for Rehabilitation is filed by any creditor or group of
creditors whose claims is a least either P1,000,000.00 or debts
equivalent to at least 25% of the subscribed capital stock or
partners contributions of the debtor, whichever is higher.
2. A creditor may initiate an Involuntary proceedings against a debtor
if:
There is no genuine issue of fact on law on the claims and that
the due and demandable payments thereon have not been
made at least 60 days prior to the filing of the petition.
A creditor, other than the petitioner, has initiated foreclosure
proceedings against the debtor that will prevent the debtor
from paying its debts as they become due or will render it
insolvent. (Section 13, FRIA.)

For as long as the RP is based on feasible assumptions, the Court


appoints a Rehabilitation Receiver. The receiver may come from those
nominated by the parties, if none is qualified; the court chooses the receiver
with the following minimum qualifications: (Section 29, FRIA)

1. A FC, or a resident of the Philippines in the 6 months immediately


preceding his nomination;
2. Of good moral character and with acknowledged integrity, impartiality
and independence;
3. Expertise in the business, insolvency and other relevant commercial
laws;
4. No conflict of interests.
There is conflict of interest if:
If he is a SH or a former SH of the debtor or any of the creditor;
If he is related by consanguinity or affinity to the 4 th civil degree
to any of the individual creditor or debtor, owners of a sale of
proprietorship-debtor, partners of a partnership-debtor or to ay
stockholder, director, officer, employee or underwriter of a
corporation-debtor. (Section 40, FRIA).

Objections to the Rehabilitation Plan


In a CSR, the plan itself is negotiated and approved while the case is
already pending in court. The RP requires the approval of creditors
representing at least 3/5 of the outstanding liabilities. The Receiver shall
conduct series of meetings with the creditors both secured and unsecured in
order to generate the approval of the plan. Once approved by the creditors, it
will be confirmed by the Court. If there are oppositions, the court will
determine:
1. If there is legal basis;
2. Or that the opposition is dilatory in character.

As to the valid basis of opposition, it may involve lack of adequate


protection to the creditors. However, such basis may be overridden by the
Court if it finds that the objection is lacking merit or the RP is a better option
or more feasible way of solving the financial distress. Hence, the Court may
confirm the RP as originally submitted by the receiver.

Even if the RP involves removal of the securities of the certain class of


creditors, the law will not prevent the enforcement of the RP. The RP may
involve condonation or extinguishment of all liens or encumbrances that
grants preferences to certain class of creditors. A RP may still be enforced on
the basis of Pari Passu.

Doctrine of Pari Passu of Equality in Equity


The assets are held in trust for the equal benefit of all creditors to
preclude one from obtaining an advantage or preference over another by the
expediency of attachment, execution of otherwise. The court held in the
following cases:

i. Alemars Sibal and Sons, Inc. vs. Elbinias, 1990.


For what would prevent an alert creditor, upon learning of the
receivership, from rushing posthaste to the courts to secure judgments
for the satisfaction of its claims to the prejudice of the less alert
creditors. When a corporation threatened by bankcruptcy is taken over
by a receiver, all the creditors should stand on an equal footing. Instead
of creditor vexing the courts with suits against the distressed firm, they
are directed to file their claims with the receiver who is duly appointed
officer of the SEC.
ii.BPI vs. CA, 1994
Even foreclosure of mortgage shall be disallowed so as not to prejudice
other creditors or cause discrimination among them. If foreclosure is
undertaken despite the fact that a petition for rehabilitation has been
filed, the certificate of sale shall not be delivered pending rehabilitation.
If that has already been done, no transfer certificate of title shall
likewise be effected within the period of rehabilitation.

iii. Express Investment vs. BayanTel, 2012


Whether secured creditors may enforce preference in payment during
rehabilitation by virtue of a contractual agreement?

Pari Passu- Equality in Equity. All creditors will be treated alike and in
equal footing as far as the revenues and assets of the creditor If the
Court finds that it is fair to treat all as equals, the pari passu is applied.
It is not only equality in suspension of claims but also suspension in
payment. There is pro-rata distribution of assets among all creditors.
This is to alleviate the strict application of the Preference and
Concurrences of Credits in the Civil Code.

The power of the Court to implement a Rehabilitation Plan is part of the


States police power notwithstanding the rights of the other class of
creditors. The Court may also enforce its Cram Down power.

iv. Pacific Wide vs. Puerto Azul, November 2009.


Can a rehabilitation court compel a lender to accept a 50% reduction in
the borrowers principal obligation? Would that violate the non-
impairment of contracts clause of the Constitution?
The Court found no merit in PWRDCs contention that there is a
violation of the impairment clause. Section 10, Article III of the
Constitution mandates that no law impairing the obligations of contract
shall be passed. This case does not involve a law or an executive
issuance declaring the modification of the contract among debtor PALI,
its creditors and its accommodation mortgagors. Thus, the non-
impairment clause may not be invoked. Furthermore, as held in Oposa
v. Factoran, Jr. even assuming that the same may be invoked, the non-
impairment clause must yield to the police power of the State. Property
rights and contractual rights are not absolute. The constitutional
guaranty of non-impairment of obligations is limited by the exercise of
the police power of the State for the common good of the general
public.
Successful rehabilitation of a distressed corporation will benefit its
debtors, creditors, employees, and the economy in general. The court
may approve a rehabilitation plan even over the opposition of creditors
holding a majority of the total liabilities of the debtor if, in its judgment,
the rehabilitation of the debtor is feasible and the opposition of the
creditors is manifestly unreasonable.

v. Robinsons Bank vs. Gaerlan, September 2014


World Granary Corporation filed a Petition for Rehabilitation with Prayer
for Suspension of Payments, Actions and Proceedings. It incurred loans
from RBC and TIDCORP. It appears that RBC is both a secured and
unsecured creditor, while TIDCORP is a secured creditor. Both RBC and
TIDCORP filed their respective claims. Later, the Receiver proposed,
among others, a pari passu or equal sharing between the secured
and unsecured creditors of the proceeds from WGCs cash flow made
available for debt servicing. TIDCORP among others took exception to
the proposed pari passu sharing, insisting that as a secured creditor, it
should enjoy preference over unsecured creditors. RBC filed an
Opposition arguing pertinently that TIDCORPs objection to a pari passu
sharing of WGCs cash flow proceeds and insistence on preferential
treatment goes against the legal principle that during rehabilitation,
both secured and unsecured creditors stand on equal footing, and that
it is only when rehabilitation is no longer feasible and liquidation is the
remaining option that secured creditors shall enjoy preference over
unsecured creditors; that giving preference to TIDCORP would violate
the Stay Order and impair the powers of the receiver; and that any
change in the contractual relations between TIDCORP and WGC relative
to their Indemnity Agreement comes as a necessary consequence of
rehabilitation, which TIDCORP may not be heard to complain.

The RTC issued a decision directing WGC to settle its obligations on a


pari passu basis. TIDCORP filed a Petition for Review assailing such
decision. RBC on the other hand filed Urgent Motion for Intervention
which is anchored on its original claim and objection to TIDCORPs
position that the latter may not enjoy preferential treatment over the
other WGC creditors. In its opposition, TIDCORP maintained that
intervention is not allowed in rehabilitation proceedings, citing Rule 3,
Section 1 of the Interim Rules of Procedure on Corporate Rehabilitation.
The CA held that RBC may not resort to intervention as a substitute for
a lost appeal, occasioned by its failure to file a Petition for Review.

SC: There is no visible objection to RBCs participation as it stands to be


injured or benefited by the outcome o fTIDCORPs Petition for Review
being both a secured and unsecured creditor of WGC. To recall,
TIDCORPs Petition for Review in CA-G.R. SP No. 104141 sought to 1)
nullify the pari passu sharing scheme directed by the trial court; 2)
declare RBC and the other creditor banks which granted additional
loans to WGC after the latter executed its Indemnity Agreement with
TIDCORP guilty of violating TIDCORPs rights; and 3) grant preferential
and special treatment to TIDCORP over other WGC creditors. These
remedies would undoubtedly affect not merely the rights of RBC, but of
all the other WGC creditors as well, as their standing or status as
creditors would be somewhat downgraded, and the manner of recovery
of their respective credits will be altered if TIDCORPs prayer is
granted. While TIDCORP is correct in arguing that intervention is not the
proper mode for RBC coming to the CA since it is already a party to the
rehabilitation proceedings, this merely highlights the formers error in
not allowing the latter to participate in the proceedings. And while RBC
chose the wrong mode for interposing its comments and objections, this
does not necessarily warrant the outright denial of its chosen remedy;
the Court is not so rigid as to be precluded from adopting measures to
insure that justice would be administered fairly to all parties concerned.
If TIDCORP must pursue its Petition for Review, then RBC should be
allowed to comment and participate in the proceedings. There is no
other solution to the impasse.

vi. Advent Capital vs. Alcantara, January 2012


The Alcantaras owe Advent Capital trust fees that it supposedly earned
for managing their several trust accounts. The Rehabilitation receiver
filed a motion before the rehabilitation court to direct Belson Securities,
Inc. to release the money to him.
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.

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. Advent Capital must file a
separate action for collection to recover the trust fees that it allegedly
earned. 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.

Commencement Order
Immediately and within 5 days for filing of the petition, the Rehab Court is
required to issue a Commencement Order which contains therein a
Suspension or Stay Order. The rehabilitation proceedings commences after
the issuance of such order. The same is effective for the entire duration of
the rehabilitation proceedings.

Stay or Suspension Order (like a TRO): (Section 16, FRIA)


The purpose is to preserve the assets of the corporation.

a. Suspension of all actions or proceedings, in court or otherwise, for the


enforcement of claims against the debtor;
- All actions either pending in quasi-judicial or judicial bodies are
suspended.
- Claim shall refer to all claims or demands of whatever nature or
character against the debtor or its property; whether for money or
otherwise, actual or contingent, liquidated or unliquidated, matured or
unmatured, the claim is suspended.

b. Suspension of all actions to enforce any judgment, attachment or other


provisional remedies against the debtor;
- Includes any enforcement of judgment against any creditor even if there
is a writ of execution issued. No foreclosure of mortgages is allowed.

The court held that the rationale behind the law (P.D. 902-A) is to effect
a feasible and viable rehabilitation, which cannot be achieved if one
creditor is preferred over the others.

c. Prohibit the debtor from selling, encumbering, transferring or disposing in


any manner of its properties except in the ordinary course of business;
and

d. Prohibit the debtor from making any payment of its liabilities outstanding
as of the commencement date except as may be provided.

Exceptions to the Suspension or Stay Order: (Section 18, FRIA)


a. To cases pending appeal in the SC as of the commencement date.
No two actions may be filed except if the case is already pending in the
Supreme Court. CA decisions must be suspended and wait for the
judgment of the rehabilitation proceedings under the RTC.

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 clam more
quickly, fairly, and efficiently than the court.
Upon waiver of the Special Commercial Court, cases involving the
corporate debtor but which are pending in highly specialized bodies
may be retained by the latter if the retention of jurisdiction by these
specialized bodies such as the NLRC or SEC would exercise better
expertise regarding the issues involved. (e.g. manipulation of security
prices or insider trading)

c. Payment of administrative expenses


These are reasonable and necessary expenses incurred in relation to
the:

a. on-going rehabilitation proceedings;


b. expenses incurred in the ordinary course of business of the debtor;

Under the new language of the FRIA, it is clear that all expenses
incurred prior to the issuance of the stay order are deemed to be
covered by the suspensive effect of the order, and that term
Administrative expenses can only cover those types of expenses
incurred in the ordinary course of business incurred after the issuance
of the stay order.

Q: The Commencement Order issued by the SCC took effect on


December 15, 2016. After such date, can a new case of collection by
Creditor vs. Corporate Debtor be filed before another RTC?

A: No. The case is suspended. Creditor should instead take part in the
rehabilitation proceedings.

Q: After December 15, 2016, can the RTC continue to hear a case of Pogi,
Inc. vs. Debtor filed before such date pending in a separate branch?

A: Yes. This is not within the coverage of the Suspension Order. What are
suspended are claims against the corporate debtor. Except if there is a
counterclaim for a claim against the Corporate Debtor, which may either
be a permissive or compulsory CC.

Q: A writ of execution issued by NLRC in a Labor case that has attained


finality before December 15, 2016?

A: This claim is suspended. However, payroll covering the period of


suspension should be paid because it is an administrative expense.

i. Rubberworld vs. NLRC


Upon the appointment of a management committee, rehabilitation
receiver, board or body pursuant to PD 902-A, all actions for claims
against corporations, partnerships, or associations under management or
receivership pending before any court, tribunal, board or body shall be
suspended accordingly, and among the actions suspended are those for
money claims before the labor arbiters. The language of Section 56,
FRIA supports the ruling in this case.

*Rentals accrued from December 2014 to December 15, 2016. This is


suspended. This was incurred prior to the issuance of the
Commencement Order.
*Rentals from December 15, 2016 up to present are considered
administrative expenses, hence, suspended.

d. to 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,
uncles 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.

e. To any criminal action against individual debtor or owner, partner,


director of a debtor shall not be affected by any proceeding
commend under this Act.

i. Panlileo vs. RTC, 2011


Panlileo did not pay SSS contributions of its employees. According to
them, the Rehabilitation Proceeding should suspend the pending criminal
cases arguing that the latter is a prejudicial question. The argument fails.
The motion of the officers to suspend the criminal proceedings cannot
prosper simply because under the new law on corporate rehabilitation,
which is the Financial Rehabilitation and Insolvency Act of 2010, Section
18 (g) 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. Further, 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. The liability for the crimes charged is personal
to the offender.

Until when should the Rehabilitation pend before the Court?


As a rule, only up to a maximum of 1 year from the filing of the case. Before
the lapse of the 1-year period, any of the following must be ordered by the
Court: (Section 74, FRIA)
Dismissal of the petition upon showing that there is no reasonable
ground to continue the corporation as an on-going concern, that is,
the rehabilitation proceeding is no longer feasible. In which case,
the Court may convert the proceeding into a Liquidation
Proceedings;
Order the implementation or enforcement of the RP. The proceeding
is deemed terminated. The implementation process shall now be
considered extra-judicial. The RP is considered as novated.
Order dismissal of the petition if it is shown to be for fraudulent
purposes;

3. Liquidation (Section 90, Chapter V, FRIA)


This is the most drastic method.

a.Voluntary Liquidation
It must be approved by the majority of the Board of Directors and
stockholders representing 2/3 of the OCS.

b.Involuntary Liquidation
This is filed by any creditor or group of creditors whose claims is a least
either P1,000,000.00 or debts equivalent to at least 25% of the subscribed
capital stock or partners contributions of the debtor, whichever is higher.

Court Supervised Rehabilitation Liquidation


The due and demandable payments The due and demandable payments
have not been paid for at least 60 have not been paid for at least 180
days days.
Appointment of Rehabilitation Liquidator
Receiver
Commencement Order which Liquidation Order which does not only
includes suspension of payments include suspension of payments but
also an order of dissolution and
extinction of the civil and legal
personality of the corporate debtor.
Doctrine of Pari Passu is common. Doctrine of Pari Passu in most cases
is like mandatory or more prevalent
because the corporation is suffering
from heavy insolvency.

Under the Corporation Code, Liquidation may be made in the following


methods: by 1) the corporation itself through its BOD/T; 2) the trustees to
whom the corporate assets have been conveyed; 3) by a management
committee or rehabilitation receiver appointed by SEC. Under the FRIA, it
includes Liquidation by a Liquidator.