Dean’s Circle 2016

University of Santo Tomas

Digested by: DC 2016 Members
Editors:
Tricia Lacuesta
Lorenzo Gayya
Cristopher Reyes
Macky Siazon
Janine Arenas
Ninna Bonsol
Lloyd Javier

MERCANTILE
LAW
Supreme Court decisions penned by Associate
Justice Presbitero J. Velasco, Jr.

Table of Contents
 2

Negotiable
Instruments ......................................................................................... 1
Rights of a
Holder ....................................................................................................1
Holder in Due
Course ............................................................................................ 1
Consideration .............................................................................................
........... 3
Accommodation
Party ........................................................................................ 3
Corporation
Law.................................................................................................... 5
Grandfather
Rule .................................................................................................. 5
Doctrine of Piercing the
Veil ................................................................................ 6
Board of Directors and
Trustees .......................................................................... 7
Shares of
Stock ...................................................................................................... 8
Insolvency ..................................................................................................
........... 9
 3

NEGOTIABLE INSTRUMENTS LAW

Rights of the Holder

Holder in Due Course
SPOUSES PEDRO AND FLORENCIA VIOLAGO v. BA FINANCE
CORPORATION AND AVELINO VIOLAGO
G.R. No. 158262, July 21, 2008, Velasco, Jr., J.
A holder in due course holds the instrument free from any defect of title
of prior parties and from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full
amount thereof

Facts:
To increase the sales quota of Violago Motor Sales Corporation (VMSC),
its president Avelino Violago (Avelino) offered to sell his car to his cousin
Pedro Violago and his wife Florencia (Spouses). Avelino said that the
spouses need only pay the amount of p60,500 while the balance will be
financed by BA Finance Corporation (BA Finance). Under these terms, the
spouses agreed to purchase a car. The spouses signed a promissory note
under which they bound to pay p209,601 in 36 monthly installments. In
turn, the spouses a chattel mortgage over the car in favor of VMSC as
security for the amount of the promissory note. VMSC then indorsed the
promissory note to BA Finance. After VMSC received the amount of
p209,601, it assigned its rights and interests under the promissory note
and chattel mortgage in favor of BA Finance. Meanwhile, the spouses
remitted to VMSC the amount of p60,500. The spouses were unaware
that the car had already been sold to Esmeraldo Violago (Esmeraldo),
another cousin of Avelino. So, the spouses demanded for the delivery of
the car, but to no avail. Since there was no delivery, the spouses did not
pay any amortization to BA Finance. BA Finance then filed a complaint
against the spouses for the delivery of the car, or if not possible, the
payment of the amount of the promissory note. As this happening,
Esmeraldo conveyed the vehicle to Jose Olvido who executed a Chattel
Mortgage over the vehicle in favor of Generoso Lopez as security for a
loan covered by a promissory note in the amount of p260,664. This
promissory note was later endorsed to BA Finance, Cebu City branch.
 4

In their defense, the spouses contended that BA Finance is not a holder

in due course under the Negotiable Instruments Law (NIL) since it knew
through its Cebu Branch that the car was never delivered to the spouses.

Issue:
Whether BA Finance is a holder in due course under the NIL
Ruling:
Yes. BA Finance meets all the requisites to be a holder in due course,
namely: a) Promissory note is complete and regular on its face; b)
Promissory note was endorsed by VMSC to BA Finance; c) BA Finance
when it accepted the Note, acted in good faith and for value; d) BA
Finance was never informed, before and at the time the Promissory Note
was endorsed to the it, that the vehicle sold to the spouses was not
delivered to them and that VMSC had already previously sold the vehicle
to Esmeraldo. Although Jose Olvido mortgaged the vehicle to Generoso
Lopez, who assigned his rights to the BA Finance Corporation Cebu
Branch, the same occurred only on May 8, 1987, much later than August
4, 1983, when VMSC assigned its rights over the Chattel Mortgage by the
spouses to BA Finance. A holder in due course holds the instrument free
from any defect of title of prior parties and from defenses available to
prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. Since BA Finance is a holder in
due course, petitioners cannot raise the defense of non-delivery of the
object and nullity of the sale against the corporation. The NIL considers
every negotiable instrument prima facie to have been issued for a
valuable consideration.

Consideration
TING TING PUA v. SPOUSES BENITO LO BUN TIONG and CAROLINE
SIOK CHING TENG
G.R. No. 198660 October 23, 2013, Velasco, Jr., J.
Section 24. Presumption of consideration. – Every negotiable instrument
is deemed prima facie to have been issued for a valuable consideration;
and every person whose signature appears thereon to have become a
party for value.

Facts:
Respondents owed petitioner a sum of money for which the former gave
the latter several checks. All of the checks, however, were dishonored
and petitioner has not been paid the amount of the loan plus the agreed
interest. Eventually, respondents approached her to get the computation
of their liability including the 2% compounded interest. After bargaining
to lower their liability, respondents gave her another postdated check
 5

but like the other checks, it was dishonored by the drawee bank.
Respondents deny the existence of the debt. They hypothesize that
petitioner Pua is simply acting at the instance of her sister, Lilian, to file a
false charge against them using a check left to fund a gambling business
previously operated by Lilian and respondent Caroline. While not saying
so in express terms, the appellate court considered respondents’ denial
as worthy of belief. Petitioner filed a case in the RTC which ruled in her
favor. On appeal by the respondent, the CA overturned the decision
ruling that petitioner "failed to establish the alleged indebtedness in
writing." Consequently, so the CA held, respondents were under no
obligation to prove their defense.

Issue:
Whether respondent is indebted to petitioner and thus should be liable

Ruling:
Yes. The 17 original checks, completed and delivered to petitioner, are
sufficient by themselves to prove the existence of the loan obligation of
the respondents to petitioner. Note that respondent Caroline had not
denied the genuineness of these checks. Instead, respondents argue that
they were given to various other persons and petitioner had simply
collected all these 17 checks from them in order to damage respondents’
reputation. This account is not only incredible; it runs counter to human
experience, as enshrined in Sec. 16 of the NIL which provides that when
an instrument is no longer in the possession of the person who signed it
and it is complete in its terms "a valid and intentional delivery by him is
presumed until the contrary is proved."

Accommodation Party
EUSEBIO GONZALES v. PHILIPPINE COMMERCIAL AND
INTERNATIONAL BANK, EDNA OCAMPO, and ROBERTO NOCEDA
G.R. No. 180257 February 23, 2011, Velasco, Jr., J.
An accommodation party is a person who has signs the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor,
and for the purpose of lending his name to some other person. The
relation between an accommodation party and the accommodated party
is one of principal and surety, the accommodation party being the surety.

Facts:
Gonzales was a client of respondent bank (PCIB). He was granted a
Credit-On-Hand Loan Agreement (COHLA) with his accounts as collateral
on the limit of the credit line. Gonzales and his spouse obtained 3 loans
from the bank which was covered by 3 promissory notes and a real
estate mortgage over a parcel of land executed by Gonzales and spouses
 6

Panlilio who likewise obtained one of the loans together with Gonzales.
Thereafter, the spouses Panlilio, who received the total amount of the
loan, failed to pay the interests due from their PCIB account. When
Gonzales issued a check in favor of Unson, it was dishonored by the bank
due to the termination by the PCIB of the credit line under COHLA and
likewise froze Gonzales’ foreign account.

Gonzales was forced to pay Unson in cash. Gonzales demanded the bank
to unfreeze his account since it was not him who benefitted from the
loans but the spouses Panlilio. PCIB refused, compelling Gonzales to file a
case for damages against the bank for dishonor of the check issued in
favor of Unson.

The RTC ruled in favor of PCIB which decision was affirmed by the CA.
The lower courts found Gonzales solidarily liable with spouses Panlilio
and the dishonor of the check as well as the freezing of the foreign
account justified. Hence, this petition.

Issue:
(1) Whether Gonzales is solidarily liable with the spouses Panlilio
(2) Whether PCIB properly dishonored Gonzales’ check

Ruling:
(1) Yes. Gonzales merely accommodated the spouses Panlilio in order to
facilitate the fast release of the loan. By signing as borrower and co-
borrower on the promissory notes with the proceeds of the loans going to
the spouses Panlilio, Gonzales has extended an accommodation to said
spouses. As an accommodation party, Gonzales is solidarily liable with
the spouses Panlilio for the loans.

The accommodation party, as surety, is deemed an original promisor and

debtor from the beginning; he is considered in law as the same party as
the debtor in relation to whatever is adjudged touching the obligation of
the latter since their liabilities are interwoven as to be inseparable.
Although a contract of suretyship is in essence accessory or collateral to
a valid principal obligation, the surety’s liability to the creditor is
immediate, primary and absolute; he is directly and equally bound with
the principal. As an equivalent of a regular party to the undertaking, a
surety becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations nor
does he receive any benefit therefrom.

(2) No. There was no proper notice to Gonzales of the default of the PhP
1,800,000 loan. It must be borne in mind that while solidarily liable with
 7

the spouses Panlilio, Gonzales is only an accommodation party and as

such only lent his name and credit to the spouses Panlilio. While not
exonerating his solidary liability, Gonzales has a right to be properly
apprised of the delinquency of the loan precisely because he is a co-
signatory of the promissory notes and of his solidary liability.

A written notice on the default and deficiency of the PhP1,800,000 loan

covered by the three promissory notes was required to apprise Gonzales,
an accommodation party. PCIB is obliged to formally inform and apprise
Gonzales of the defaults and the outstanding obligations, more so when
PCIB was invoking the solidary liability of Gonzales.

There is no dispute on the right of PCIB to suspend, terminate, or revoke

the COHLA under the "cross default provisions" of both the promissory
notes and the COHLA. However, these cross default provisions do not
confer absolute unilateral right to PCIB, as they are qualified by the other
stipulations in the contracts or specific circumstances, like in the instant
case of an accommodation party.

CORPORATION LAW

Nationality of Corporations
Grandfather Rule
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, INC.
v. REDMONT CONSOLIDATED MINES CORP.
G.R. No. 195580 April 21, 2014, Velasco Jr., J.
There are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. The grandfather
rule applies only when the 60-40 Filipino-foreign equity ownership is in
doubt.

Facts:
Redmont, a domestic corporation, learned that the areas where it wanted
to undertake exploration and mining activities were already covered by
Mineral Production Sharing Agreement (MPSA) applications of Narra,
Tesoro and McArthur. Redmont filed before the Panel of Arbitrators (POA)
of the DENR three separate petitions for the denial of petitioners’
applications for MPSA. It alleged that at least 60% of the capital stock of
McArthur, Tesoro and Narra are owned and controlled by MBMI
Resources, Inc. (MBMI), a 100% Canadian corporation. It also argued that
given that petitioners’ capital stocks were mostly owned by MBMI, they
were likewise disqualified from engaging in mining activities through
MPSAs, which are reserved only for Filipino citizens. In a resolution issued
 8

by POA, petitioners were disqualified from gaining MPSAs for being

considered as foreign corporations. On appeal to the Mines Adjudication
Board, the latter reversed and set aside the resolution of the POA
denying also the motion for reconsideration filed by Redmont. However,
the CA upheld the findings of the POA.

Issue:
Whether petitioners are foreign corporations

Ruling:
Yes. The first part of paragraph 7, DOJ Opinion No. 020, stating "shares
belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine
nationality,” pertains to the control test or the liberal rule. On the other
hand, the second part of the DOJ Opinion which provides, "if the
percentage of the Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the
stricter, more stringent grandfather rule. The grandfather rule or the
second part applies only when the 60-40 Filipino-foreign equity
ownership is in doubt (i.e., in cases where the joint venture corporation
with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is
either 60-40% Filipino-alien or the 59% less Filipino).

McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion
is derived from grandfathering petitioners’ corporate owners, namely:
MMI, SMMI and PLMDC. Going further, MBMI’s Summary of Significant
Accounting Policies statement regarding the "joint venture" agreements
that it entered into with the "Olympic" and "Alpha" groups involves SMMI,
Tesoro, PLMDC and Narra. The ownership of the "layered" corporations
boils down to MBMI, Olympic or corporations under the "Alpha" group
wherein MBMI has joint venture agreements with, practically exercising
majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between
and among the corporations, petitioners are NOT Filipino nationals and
must be considered foreign since 60% or more of their capital stocks or
equity interests are owned by MBMI.

Doctrine of Piercing the Corporate Veil (Test in Determining

Applicability)
KUKAN INTERNATIONAL CORPORATION v. HON. AMOR REYES, in
her capacity as Presiding Judge of the Regional Trial Court of
 9

Manila, Branch 21, and ROMEO M. MORALES, doing business

under the name and style RM Morales Trophies and Plaques
G.R. No. 182729 September 29, 2010, Velasco, Jr., J.
The principle of piercing the veil of corporate fiction, and the resulting
treatment of two related corporations as one and the same juridical
person with respect to a given transaction, is basically applied only to
determine established liability; it is not available to confer on the court
jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case.

Facts:
Romeo M. Morales, doing business under the name RM Morales Trophies
and Plaques, was awarded a P5 million contract for the supply and
installation of signages in a building constructed in Makati. The contract
price was later reduced to P3,388,502. Morales complied with his
contractual obligations but he was paid only the amount of
P1,976,371.07 leaving a balance of P1,412,130.93. He filed a case
against Kukan, Inc., for a sum of money with the RTC of Manila. The RTC
rendered a decision in favor of Morales and ordered Kunkan, Inc. to pay
for the balance, damages and cost of the suit which became final and
executory. During the execution, the sheriff levied the personal
properties found at the office of Kukan, Inc. Claiming it owned the
properties levied, Kukan International Corporation (KIC) field an Affidavit
of Third Party Claim. Morales filed an Omnibus Motion praying to apply
the principle of piercing the veil of corporate entity. He alleged that
Kukan, Inc. and Kukan International Inc. (KIC) are one and the same
corporation. His motion was granted. KIC filed a Motion for
Reconsideration which was denied. Upon appellate review, the CA
likewise denied KIC’s petition and Motion for Reconsideration. Hence, this
petition.

Issue:
Whether the principle of piercing the veil of corporate entity was
correctly applied

Ruling:
No. A corporation not impleaded in a suit cannot be subject to the court’s
process of piercing the veil of its corporate fiction. In that situation, the
court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property would
infringe on its right to due process. The doctrine of piercing the veil of
corporate fiction comes to play only during the trial of the case after the
court has already acquired jurisdiction over the corporation. Before this
 10

doctrine can be applied, the court must first have jurisdiction over the
corporation.

The implication of the above comment is two-fold: (1) the court must first
acquire jurisdiction over the corporation or corporations involved before
its or their separate personalities are disregarded; and (2) the doctrine of
piercing the veil of corporate entity can only be raised during a full-blown
trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons
or what passes as such service.

No full-blown trial involving KIC was had when the RTC disregarded the
corporate veil of KIC. KIC was not impleaded in the collection case filed
by Morales against Kukan Inc. It was dragged to the case after it reacted
to the improper execution of its properties and veritably hauled to court,
not through the usual process of service of summons, but by mere
motion of a party with whom it has no privity of contract and after the
decision in the main case had already become final and executory.

Board of Directors and Trustees (Responsibility for Crimes)

ARNEL U. TY, MARIE ANTONETTE TY, JASON ONG, WILLY DY, and
ALVIN TY v. NBI SUPERVISING AGENT MARVIN E. DE JEMIL,
PETRON GASUL DEALERS ASSOCIATION, and TOTALGAZ DEALERS
ASSOCIATION
G.R. No. 182147 December 15, 2010, Velasco, Jr. J.
Even if the corporate powers of a corporation are reposed in it under the
first paragraph of Sec. 23 of the Corporation Code, the board of directors
is not directly charged with the running of the recurring business affairs
of the corporation and may not be held liable under BP 33.

Facts:
Arnel Ty, Marie Antonette Ty, Jason Ong, Willy Dy, Alvin Ty, are the
Directors of Omni Gas Corporation (Omni) while Arnel was the president
of Omni, engaged in the refilling of LPG cylinders in Pasig City. Omni was
investigated by the NBI for allegedly violating pertinent provision of BP
No. 33 which in essence penalizes the unauthorized use of LPG cylinders
owned by Petron, Shell and Totalgaz, as well as the under filling of the
LPG cylinders by Omni.

After finding probable cause, the NBI caused the filing of the complaint
with the Office of the Chief State Prosecutor against Omni and its
directors for violation of BP No. 33. To this Omni and its directors
opposed. However, the Office of the Chief State Prosecutor, DOJ
 11

Secretary, as well as the CA found merit in the filing of the information

against Omni and its directors.

Omni and its directors come to the Supreme Court assailing the decision
of the CA in directing the issuance of the Information for the prosecution
of Omni and its directors insofar as to the liability of its directors. Arnel,
et al. avers that they cannot be held personally liable since Omni is a
separate and distinct juridical entity. Hence this petition.
Issue:
Whether Arnel, Marie, Ong, Dy and Ty can be held criminally liable for
violation of BP No. 33

Ruling:
Yes, as regards Arnel who is the President and Director of Omni. On the
other hand, Marie, Ong, Dy, and Ty cannot be held liable as directors for
the criminal acts committed by Omni.

The law applicable in this case is Sec. 4 of BP 33 which provides:

Sec. 4. Penalties.
When the offender is a corporation, partnership, or other juridical
person, the president, the general manager, managing partner, or
such other officer charged with the management of the business
affairs thereof, or employee responsible for the violation shall be
criminally liable; in case the offender is an alien, he shall be subject
to deportation after serving the sentence.

Arnel, as President, who manages the business affairs of Omni, can be

held liable for probable violations by Omni of BP 33. The fact that Arnel is
ostensibly the operations manager of Multi-Gas Corporation, a family-
owned business, does not deter him from managing Omni as well. Where
the language of the law is clear and unequivocal, it must be taken to
mean exactly what it says. As to the other petitioners, unless otherwise
shown that they are situated under the catch-all such other officer
charged with the management of the business affairs, they may not be
held liable under BP 33, as amended, for probable violations. With the
exception of Arnel, the charges against other petitioners must be
dismissed.

Shares of Stock (Nature of Stock)

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY v. NATIONAL
TELECOMMUNICATIONS COMMISSION, JOSEPH A. SANTIAGO, in
his capacity as NTC Commissioner, and EDGARDO CABARRIOS, in
his capacity as Chief, CCAD
G.R. No. 152685, December 4, 2007, Velasco, Jr., J.
 12

When stock dividends are distributed, the amount declared ceases to

belong to the corporation but is distributed among the shareholders.
Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the
stockholders’ equity is increased. Therefore, stock dividends acquired by
shareholders for the monetary value they forego are under the coverage
of the SRF and the basis for the latter is such monetary value as
declared by the board of directors.

Facts:
Under Section 40 (e) of the Public Service Act (PSA) the National
Telecommunications Commission (NTC) is authorized to collect from
public telecommunications companies Supervision and Regulation Fees
(SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock
subscribed or paid for of a stock corporation, partnership or single
proprietorship of the capital invested, or of the property and equipment,
whichever is higher. Consequently, the NTC sent SRF assessments to
petitioner PLDT. The SRF assessments were based on the market value of
the outstanding capital stock, including stock dividends, of PLDT. PLDT
protested the assessments contending that the SRF should be based on
the par value of its outstanding capital stock. Its protest was denied by
the NTC as well as its motion for reconsideration. The case reached the
Supreme Court, and the Court, in G.R. No. 127937, ruled that the SRF
should be based neither on the par value nor the market value of the
outstanding capital stock but on the value of the stocks subscribed or
paid including the premiums paid therefor. Furthermore, the Court ruled
that in the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account, that is, the
amount the stock dividends represent is equivalent to the value paid for
its original issuance. Thereafter, the NTC, in compliance with the decision
of the Supreme Court in G.R. No. 127937, reassessed PLDT but now
based its assessment on the value of the stocks subscribed or paid,
including the premiums paid for the stocks, if any. Hence, this petition.

PLDT argues that the reassessment issued by NTC is in violation of the

decision of the Court in G.R. No. 127937 because according to PLDT, the
Court in that case excluded stock dividends from the SRF coverage.

Issue:
Whether stock dividends are included in computing Supervision and
Regulation Fees

Ruling:
 13

Yes. Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared dividend
taken from the unrestricted retained earnings of a corporation. Thus, the
value of the declaration in the case of a stock dividend is the actual
value of the original issuance of said stocks. In G.R. No. 127937 we said
that "in the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account" or "it is the
amount that the corporation receives in consideration of the original
issuance of the shares." It is "the distribution of current or accumulated
earnings to the shareholders of a corporation pro rata based on the
number of shares owned." Such distribution in whatever form is valued
at the declared amount or monetary equivalent.

Thus, it cannot be said that no consideration is involved in the issuance

of stock dividends. In fact, the declaration of stock dividends is akin to a
forced purchase of stocks. By declaring stock dividends, a corporation
ploughs back a portion of its entire unrestricted retained earnings either
to its working capital or for capital asset acquisition or investments. It is
simplistic to say that the corporation did not receive any actual payment
for these. When the dividend is distributed, it ceases to be a property of
the corporation as the entire or portion of its unrestricted retained
earnings is distributed pro rata to corporate shareholders.

In essence, therefore, the stockholders by receiving stock dividends are

forced to exchange the monetary value of their dividend for capital
stock, and the monetary value they forego is considered the actual
payment for the original issuance of the stocks given as dividends.
Therefore, stock dividends acquired by shareholders for the monetary
value they forego are under the coverage of the SRF and the basis for
the latter is such monetary value as declared by the board of directors.

Insolvency
PHILIPPINE NATIONAL BANK and EQUITABLE PCI BANK v.
HONORABLE COURT OF APPEALS
G.R. No. 165571, January 20, 2009, Velasco, Jr., J.
There are two kinds of insolvency contemplated in it: actual insolvency,
i.e., the corporation’s assets are not enough to cover its liabilities; and
technical insolvency defined under Sec. 3-12, i.e., the corporation has
enough assets but it foresees its inability to pay its obligations for more
than one year.

Facts:
Philippine National Bank (PNB) and Equitable PCI Bank are members of
the consortium of creditor banks constituted pursuant to the Mortgage
 14

Trust Indenture (MTI) by and between Rizal Commercial Banking

Corporation-Trust and Investments Division, acting as trustee for the
consortium, and ASB Development Corporation (ASBDC, formerly Tiffany
Tower Realty Corporation). Under the MTI, petitioners granted a loan of
PhP1,081,000,000 to ASBDC secured by a mortgage of five parcels of
land with improvements. Private respondents filed with the SEC a verified
petition for rehabilitation. Private respondents stated that they possess
sufficient properties to cover their obligations but foresee inability to pay
them within a period of one year. Finding the petition sufficient in form
and substance, the SEC Hearing Panel issued an order suspending for 60
days all actions for claims against the ASB Group and appointing Atty.
Monico V. Jacob as interim receiver of the ASB Group. Atty. Jacob was
later replaced by Atty. Fortunato Cruz. The consortium of creditor banks,
which included petitioners, filed their opposition praying for the dismissal
of the petition. The ASB Group submitted a rehabilitation plan but the
consortium of creditor banks moved for its disapproval. However, the
Hearing Panel denied the opposition of the banks and held that the ASB
Group complied with the requirements of Sec. 4-1 of the Rules of
Procedure on Corporate Recovery, which allows debtors who are
technically insolvent to file a petition for rehabilitation. The creditors filed
a Supplemental Petition for Review on Certiorari with the SEC en banc to
question the foregoing order but it was dismissed. The CA affirmed the
ruling of the SEC en banc. Hence, the case.

Issues:
Whether ASB Group is considered technically insolvent

Ruling:
Yes. The ASB Group filed with the SEC a petition for rehabilitation with
prayer for suspension of actions and proceedings pending rehabilitation.
Contrary to petitioners’ arguments, the mere fact that the ASB Group
averred that it has sufficient assets to cover its obligations does not
make it "solvent" enough to prevent it from filing a petition for
rehabilitation. A corporation may have considerable assets but if it
foresees the impossibility of meeting its obligations for more than one
year, it is considered as technically insolvent. Thus, at the first instance,
a corporation may file a petition for rehabilitation—a remedy provided
under Sec. 4-1. When Sec. 4-1 mentioned technical insolvency under
Sec. 3-12, it was referring to the definition of technical insolvency in the
said section; it was not requiring a previous filing of a petition for
suspension of payments which petitioners would have us believe.

Petitioners harp on the SEC’s failure to examine whether the ASB Group
is technically insolvent. They contend that the SEC should wait for a year
 15

after the filing of the petition for suspension of payments when technical
insolvency may or may not arise. This is erroneous. The period
mentioned under Sec. 3-12, "longer than one year from the filing of the
petition," does not refer to a year-long waiting period when the SEC can
finally say that the ailing corporation is technically insolvent to qualify for
rehabilitation. The period referred to the corporation’s inability to pay its
obligations; when such inability extends beyond one year, the
corporation is considered technically insolvent. Said inability may be
established from the start by way of a petition for rehabilitation, or it
may be proved during the proceedings for suspension of payments, if the
latter was the first remedy chosen by the ailing corporation. If the
corporation opts for a direct petition for rehabilitation on the ground of
technical insolvency, it should show in its petition and later prove during
the proceedings that it will not be able to meet its obligations for longer
than one year from the filing of the petition.