ANY ORDER ISSUED BY THE COURT UNDER THE INTERIM RULES IS IMMEDIATELY EXECUTORY; A PETITION

FOR REVIEW OR AN APPEAL THEREFROM SHALL NOT STAY THE EXECUTION OF THE ORDER UNLESS
RESTRAINED OR ENJOINED BY THE APPELLATE COURT.

Home Guaranty Corporation v. La Savoie Development Corporation

G.R. No. 168616, January 28, 2015
Leonen, J.

FACTS:
La Savoie Development Corporation (La Savoie) is a domestic corporation engaged in the business of "real estate
development, subdivision and brokering." Because of the Asian financial crisis in 1997, La Savoie found itself unable to
pay its obligations to its creditors. Thus, on April 25, 2003, La Savoie filed before the RTC of Makati City "petition for the
declaration of state of suspension of payments with approval of proposed rehabilitation plan" under the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules).

Finding its "petition to be sufficient in form and substance," then RTC Judge Estela Perlas-Bernabe issued the Stay Order
dated June 4, 2003 staying the enforcement of all claims against La Savoie. As a consequence of the stay order, petitioner
is prohibited from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary
course of business. It is further prohibited from making any payment of its liabilities outstanding.

Home Guaranty Corporation (HGC) filed an Opposition as it had a "material and beneficial interest in the Petition because
it had redeemed the “asset participation certificates” (“APCs”) which were secured by La Savoie properties placed in an
“Asset Pool” by way of a trust agreement. Through the agreement, Planters Development Bank (PDB) pooled money
from those who took APC, which was then loaned to La Savoie. HGC then guaranteed the APC’s.

On October 1, 2003, the RTC issued an Order denying due course to La Savoie's Petition for Rehabilitation and lifting the
June 4, 2003 Stay Order because it found La Savoie’s rehabilitation not feasible. Aggrieved, La Savoie appealed the case
to the CA. In the meantime, the holders of the APC’s were paid by HGC, thereby redeeming said certificates. Thereafter,
HGC called on the APCs so PDB executed a "Deed of Assignment and Conveyance" in favor of HGC which “absolutely
conveyed and assigned” the ownership and possession of the entire Asset Pool.

However, the CA reversed the RTC and reinstated the Stay Order. The case was remanded to the trial court for further
proceedings. Pursuant thereto, the “Deed of Assignment and Conveyance” was declared invalid by the RTC and HGC’s
claims were stayed, hence this appeal.

ISSUE:
Was the redemption of APCs and call on the Asset Pool made by HGC validly done?

HELD
NO. While the redemption of the APCs was valid, the call on the Asset Pool was not.

Under the rules on rehabilitation, La Savoie and HGC were barred from paying certificate holders for as long as the Stay
Order was in effect. By order of the RTC, the Stay Order was lifted on October 1, 2003. Said order was immediately
executory and so the Stay Order was not in effect. As it was not restrained or enjoined by any order from a higher court,
HGC’s payment to the holders of the APCs was valid as they were not stayed by any effective Order.

Through such payment and redemption, HGC was subrogated into the rights of the APC holders.

However, HGC’s call on the properties in the Asset Pool partakes in the character of pactum commissorum as the
properties given as securities by La Savoie and placed in the Asset Pool were taken by HGC without due foreclosure
proceedings. As such, HGC now holds those properties in a constructive trust, ownership of which remains with HGC. As
HGC’s claims under the APC had not been properly satisfied, HGC’s remains to be a creditor in subrogation with respect
to La Savoie at the time the CA reversed and set aside the RTC’s October 1, 2003 Order.

Because Stay Order had been reinstated, HGC’s claims as a creditor in subrogation was again barred by the Stay Order.
BEING QUALIFIED TO FILE A PETITION FOR REHABILITATION DOES NOT IMMEDIATELY MEAN THAT IT WILL
BE REHABILITATED

Land Bank of the Philippines v. Fastech Synergy Philippines, Inc.

G.R. No. 190800, August 9, 2017
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari under Rule 45 concerning the rehabilitation of respondent corporations (Fastech
corporations) which filed a joint petition since they have common managers, assets, and creditors.

Due to financial losses, their assets would not be enough to pay their peso and dollar debts from the its creditors. In due
proceedings a commencement order with stay order was issued and Atty. Rosario Bernaldo (Atty. Bernaldo) was
appointed as Rehabilitation Receiver. Atty. Bernaldo reported that the rehabilitation of the Fastech Corporations' was
viable. The Rehabilitation court however dismissed the petition finding that their Rehabilitation Plan was not feasible given
that: (a) they lost access to investment capital when they were delisted from the Singapore Stock Exchange, (b) their plan
does not lay out the basic assumptions of its proposed business plans; (c) their proposed business plan is based on
experimental niche technology which does not insure a large customer based or more sound financials. There being a
great deal of competition in the petitioners' field of business, such new business venture becomes unreliable and
uncertain. Thus, the possibility of success is quite uncertain, hence it is not feasible.

Landbank filed an Ex Parte Petition for Issuance of a Writ of Possession which was enjoined by a TRO issued by the
Court of Appeals. Thereafter, the CA reversed the RTC finding the rehabilitation of the Fastech Corporations feasible.
Hence this appeal.

ISSUE:
Is a rehabilitation plan based on the development and sale of a niche and experimental product feasible?

RULING:
No. The plan does not comply with Section 18, Rule 3 of the 2008 Rules of Procedure on Corporate Rehabilitation (in
force at the time respondents' rehabilitation petition was filed on April 8, 2011)

Section 18. Rehabilitation Plan. — The rehabilitation plan shall include (a) the desired business targets or goals and the
duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include the
manner of its implementation, giving due regard to the interests of secured creditors such as, but not limited, to the non-
impairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d)
the means for the execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the
debts, dacion en pago or sale or exchange or any disposition of assets or of the interest of shareholders, partners or
members; (e) a liquidation analysis setting out for each creditor that the present value of payments it would receive under
the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a six-month
period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the rehabilitation plan.

In the present case, the Rehabilitation Plan failed to state two of the mandatory statements in a Rehabilitation Plan:
(a) A statement of the material financial commitments to support the rehabilitation plan; and
(b) A proper liquidation analysis

A material financial commitment gauges the resolve, determination, earnestness, and good faith of the distressed
corporation in financing the proposed rehabilitation plan. This commitment may include the voluntary undertakings of the
stockholders or the would-be investors of the debtor-corporation indicating their readiness, willingness, and ability to
contribute funds or property to guarantee the continued successful operation of the debtor-corporation during the period
of rehabilitation.

In this case, respondents' Chief Operating Officer, Primo D. Mateo, Jr., in his executed Affidavit of General Financial
Condition dated April 8, 2011, averred that respondents will not require the infusion of additional capital as he, instead,
proposed to have all accrued penalties, charges, and interests waived, and a reduced interest rate prospectively applied
to all respondents' obligations, in addition to the implementation of a two (2)-year grace period. Thus, there appears to be
no concrete plan to build on respondents' beleaguered financial position through substantial investments as the plan for
rehabilitation appears to be pegged merely on financial reprieves.

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Anathema to the true purpose of rehabilitation, a distressed corporation cannot be restored to its former position of
successful operation and regain solvency by the sole strategy of delaying payments/waiving accrued interests and
penalties at the expense of the creditors.

On the other hand, respondents failed to include any liquidation analysis in their Rehabilitation Plan. The total liquidation
assets and the estimated liquidation return to the creditors, as well as the fair market value vis-a-vis the forced liquidation
value of the fixed assets was therefore not shown. As such, the Court could not ascertain if the creditors can recover
more by liquidation than by rehabilitating the going concern.

Without these crucial items, the feasibility of the rehabilitation is in doubt.

The remedy of rehabilitation should be denied to corporations whose insolvency appears to be irreversible and whose
sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by: (a) the absence
of a sound and workable business plan; (b) baseless and unexplained assumptions, targets, and goals; and (c)
speculative capital infusion or complete lack thereof for the execution of the business plan, as in this case.

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TO DETERMINE THE VENUE OF AN INSOLVENCY PROCEEDING, THE RESIDENCE OF A CORPORATION
SHOULD BE THE ACTUAL PLACE WHERE ITS PRINCIPAL OFFICE HAS BEEN LOCATED FOR SIX (6) MONTHS
BEFORE THE FILING OF THE PETITION

Pilipinas Shell Petroleum Corp. v. Royal Ferry Services, Inc.

G.R. No. 188146, February 1, 2017
Leonen, J.

FACTS:
This is a Petition for Certiorari against the CA’s decision which found that the venue of the action was properly laid.

In Royal Ferry’s Articles of Incorporation, its principal place of business is located at 2521 A. Bonifacio Street, Bangkal,
Makati City. However, it currently holds office at Room 203, BF Condominium Building, Andres Soriano comer Solano
Streets, Intramuros, Manila.

It filed a verified Petition for Voluntary Insolvency before the RTC of Manila, alleging that in 2000, it suffered serious
business losses that led to heavy debts. Efforts to revive the company's finances failed, and almost all assets were either
foreclosed or sold to satisfy the liabilities incurred. Royal Ferry ceased its operations, with the board of directors approving
and authorizing the filing of the petition. The RTC declared Royal Ferry insolvent.

Thereafter, Pilipinas Shell filed a Formal Notice of Claim and a Motion to Dismiss. Among other allegations, Pilipinas Shell
argued that the petition was filed at the wrong venue because it should be filed before the court with territorial jurisdiction
over the corporation's residence—in this case with the RTC of Makati.

RTC denied the motion because Royal Ferry had abandoned its Makati office and moved to Manila. When the Branch
Sheriff confiscated Royal Ferry's books and personal assets, the properties were taken from a Manila address. However,
upon the motion for reconsideration, RTC reversed its decision and held that a corporation cannot change its place of
business without amending its Articles of Incorporation. Without the amendment, Royal Ferry's physical transfer did not
produce any legal effect on its residence.

On appeal, the CA reinstated the insolvency proceedings and held, among others, that the Manila court has jurisdiction
over the case, and therefore, has the authority to render a decision on it. Manila was the proper venue for the case
because the cities of Makati and Manila are part of one region, or even a province, city or municipality, if Section 51 of
the Corporation Code of the Philippines is taken by analogy

ISSUE:
Is a petition for insolvency properly filed with the RTC of Manila when the business’s address is declared as Makati in its
Articles of Incorporation?

HELD:
Yes, the Petition for Insolvency was properly filed before the RTC of Manila.

Wrong venue is merely a procedural infirmity, not a jurisdictional impediment. Jurisdiction is a matter of substantive law,
while venue is a matter of procedural law. Jurisdiction is conferred by law, and the Insolvency Law vests jurisdiction in
the Court of First Instance-now the RTC.

Section 14 of the (Old) Insolvency Law (prevailing at the time the petition was filed) specifies that the proper venue for a
petition for voluntary insolvency is the RTC of the province or city where the insolvent debtor has resided in for six (6)
months before the filing of the petition. In other words, the proper venue is the court having jurisdiction of the place where
the corporation’s actual place of business is located six (6) months before the filing of the petition.

If there is a conflict between the place stated in the articles of incorporation and the physical location of the corporation's
main office, the actual place of business should control.

This Rule shall not apply: (a) In those cases where a specific rule or law provides otherwise; or (b) Where the parties
have validly agreed in writing before the filing of the action on the exclusive venue thereof.

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PRIOR LEAVE OF THE INSOLVENCY COURT IS NECESSARY BEFORE A SECURED CREDITOR CAN
EXTRAJUDICIALLY FORECLOSE THE MORTGAGED PROPERTY

Metrobank vs Naguiat Enterprises Inc.

G.R. No. 178407, March 18, 2015
Leonen, J.

FACTS:
Spouses Naguiat and S.F. Naguiat Enterprises executed a real estate mortgage in favor of Metrobank to secure certain
credit accommodations from the latter. The respondent subsequently obtained a loan from Metrobank secured by the
said mortgage.

In 2005, respondent enterprise filed a Petition for Voluntary Insolvency. Respondent was subsequently declared insolvent
and the court directed the Deputy Sheriff to take possession of all the properties of the enterprise until the appointment
of a receiver/assignee. Metrobank filed a Manifestation and Motion of its decision to withdraw from the insolvency
proceedings because it intended to extrajudicially foreclose the mortgaged property to satisfy its claim.

Metrobank then extrajudicially foreclosed the mortgaged property and submitted the Certificate of Sale to the rehabilitation
court for approval. The court however denied the approval in view of the prior order of insolvency of the S.F. Naguiat.

Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must first obtain leave or permission
from the insolvency court before said creditor can foreclose on the mortgaged property. It adds that this procedural
requirement applies only to civil suits, and not when the secured creditor opts to exercise the right to foreclose
extrajudicially the mortgaged property under Act No. 3135, as amended, because extrajudicial foreclosure is not a civil
suit.

ISSUE:
May secured creditors foreclose on securities made in their favor despite a Stay Order?

HELD:
No. Prior leave of the insolvency court is necessary before a secured creditor can extrajudicially foreclose the mortgaged
property.

The relevant proceedings in this case took place prior to Republic Act No. 10142, hence, the issue will be resolved
according to the provisions of Act No. 1956. Act No. 1956 impliedly requires a secured creditor to ask the permission of
the insolvent court before said creditor can foreclose the mortgaged property.

When read together, Sections 14, 16, 18, and 32 reveal the necessity for leave of the insolvency court. With the declaration
of insolvency of the debtor, insolvency courts "obtain full and complete jurisdiction over all property of the insolvent and
of all claims by and against [it.]" It follows that the insolvency court has exclusive jurisdiction to deal with the property of
the insolvent.

Consequently, after the mortgagor-debtor has been declared insolvent and the insolvency court has acquired control of
his estate, a mortgagee may not, without the permission of the insolvency court, institute proceedings to enforce its lien.
In so doing, it would interfere with the insolvency court's possession and orderly administration of the insolvent's
properties. Explicitly under Section 59 and as a necessary consequence flowing from the exclusive jurisdiction of the
insolvency court over the estate of the insolvent, the mortgaged property must first be formally delivered by the court or
the assignee (if one has already been elected) before a mortgagee-creditor can initiate proceedings for foreclosure.

Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of court, contravene the provisions
of Act No. 1956 and violate the Order dated July 12, 2005 of the insolvency court which declared S.F. Naguiat insolvent
and forbidden from making any transfer of any of its properties to any person.

(Note: the rule is the same under the FRIA)

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INTERLOCUTORY ORDERS ISSUED BY THE REHABILITATION COURT CANNOT BE THE SUBJECT OF A
PETITION FOR REVIEW UNDER RULE 45; NON-OBSERVANCE OF THE MANDATORY PERIOD TO APPROVE
REHABILITATION PLAN DOES NOT RESULT TO AUTOMATIC DISMISSAL OF THE CASE

Metropolitan Bank & Trust Company v. G&P Builders Inc.

G.R. No. 189509, November 23, 2015
Leonen, J.

FACTS:
G & P Builders, Incorporated (G & P) filed a Petition for Rehabilitation before Branch 40 of the Misamis Oriental Regional
Trial Court. Among the allegations in the Petition is that G & P "obtained a loan from Metrobank and mortgaged twelve
(12) parcels of land as collateral." While the rehabilitation proceedings were pending, Metrobank and G & P executed a
Memorandum of Agreement (first MOA) on August 11, 2003, where the parties agreed that four (4) out of the 12 parcels
of land mortgaged would be released and sold. The sale of the parcels of land amounted to P15,000,000.00. Pursuant to
the first MOA, the amount was deposited with Metrobank "for subsequent disposition and application [in conformity with]
the Court approved Rehabilitation Plan." Metrobank then entered into a Loan Sale and Purchase Agreement with Elite
Union Investments Limited (Elite Union). Metrobank sold G & P's loan account for P10,419,000.00. Elite Union moved to
be substituted for Metrobank. G & P, Elite Union, and Spouses Victor and Lani Paras executed a Memorandum of
Agreement (second MOA). Elite Union sold all its rights, titles, and interests over G & P's account to Spouses Victor and
Lani Paras. G & P then filed a Motion for the Release of Unapplied Deposit with Metrobank on November 27, 2006.
Metrobank opposed the Motion and claimed that the deposit was not covered by the contract transferring G & P's loan
obligation to Elite Union. In the Order dated April 2, 2007, the rehabilitation court granted G & P's Motion and ordered the
release of unapplied deposit with Metrobank.

Metrobank then filed before the Court of Appeals a Petition for Review under Rule 43 of the Rules of Court assailing the
April 2, 2007 and October 10, 2007 Orders of the rehabilitation court. the Court of Appeals reversed and set aside the
April 2, 2007 Order of the rehabilitation court. The Court of Appeals observed that the Petition should have been dismissed
outright since the assailed April 2, 2007 Order was a mere interlocutory order and could not be assailed through a Petition
for Review under Rule 43 of the Rules of Court.

ISSUE:
1. Whether or not the Orders of the trial court are interlocutory orders and, thus, not appealable to the Court of Appeals
via Rule 43 of the Rules of Court; and
2. Whether or not the trial court's assailed Orders were issued in excess of its jurisdiction

HELD:
1. Corporate rehabilitation is a special proceeding. The proceeding seeks to establish the "inability of the corporate
debtor to pay its debts when they fall due so that a rehabilitation plan, containing the formula for the successful
recovery of the corporation, may be approved in the end." There is no relief sought for "an injury caused by another
party." Corporate rehabilitation is one of the remedies that a financially stressed company can opt for to raise itself
from insolvency: It is one of many statutorily provided remedies for businesses that experience a downturn. Rather
than leave the various creditors unprotected, legislation now provides for an orderly procedure of equitably and fairly
addressing their concerns. Corporate rehabilitation allows a court-supervised process to rejuvenate a corporation.
Rehabilitation proceedings allow the financially stressed company "to gain a new lease on life and . . . allow creditors
to be paid their claims from its earnings." Under A.M. No. 04-9-07-SC, which provides for the mode of appeal in cases
involving corporate rehabilitation, all decisions and final orders rendered by the trial court shall be appealed to the
Court of Appeals through a petition for review under Rule 43 of the Rules of Court. What is challenged before Us is
the court a quo's April 2, 2007 Order granting petitioner's "Motion for Release of Unapplied Deposit with Metropolitan
Bank and Trust Company". Considering that the assailed Order merely ordered the release of funds from a depository
bank and did not completely dispose of the case but left something else to be done by the court a quo, the order
assailed before Us is merely interlocutory. As such, it is unappealable and consequently, cannot be assailed before
Us via the instant petition for review under Rule 43. The instant petition should thus, have been dismissed outright.

2. The lapse of the periods provided for under Rule 4, Section 11 of the Interim Rules does not automatically result in
the dismissal of the petition for corporate rehabilitation. This is in line with the liberal construction given to the rules
governing corporate rehabilitation. Petitioner is estopped in assailing the trial court Orders when it availed itself of
several extensions of time, whether directly or indirectly, during the rehabilitation proceedings.

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REHABILITATION COURT NOT REQUIRED TO HOLD A HEARING PRIOR TO THE ISSUANCE OF A STAY ORDER
IN CORPORATE REHABILITATION PROCEEDINGS

Pryce Corporation vs. China Banking Corporation

G.R. No. 172302, February 18, 2014
Leonen, J.

FACTS:
Pryce Corporation (petitioner) filed a Petition for Corporate Rehabilitation with the RTC of Makati. Finding the petition
sufficient in form and substance, it issued a stay order appointing Gener Mendoza (Mendoza) as rehabilitation receiver.

After the first plan was denied, Mendoza submitted an amended rehabilitation plan. Two creditors of petitioner - China
Banking Corporation (Chinabank) and Bank of the Philippine Islands (BPI) – opposed the approval of the rehabilitation
plan. Among others grounds, they claim that the rehabilitation court must first hold a hearing before it can issue a stay
order. However, the rehabilitation plan was still approved by the court. Chinabank and BPI filed separate appeals.

In Chinabank’s appeal (Chinabank case), the CA reversed and set aside the order of the rehabilitation court. BPI’s appeal
(BPI case) however was dismissed. The SC likewise dismissed the BPI’s appeal and this decision attained finality.

Petitioner is now appealing the Chinabank case. It argues that the issue on the validity of the rehabilitation court orders
is now res judicata because of the CA’s and SC’s rulings in the BPI case. Second, petitioner contends that Rule 4, Section
6 of the Interim Rules of Procedure on Corporate Rehabilitation does not require the rehabilitation court to hold a hearing
before issuing a stay order. Considering that the Interim Rules was promulgated later than Rizal Commercial Banking
Corp. v. IAC that enunciated the “serious situations” test, petitioner Pryce Corporation argues that the test has effectively
been abandoned by the “sufficiency in form and substance test” under the Interim Rules.

ISSUE:
Is the rehabilitation court required to hold a hearing to comply with the “serious situations” test laid down in the case of
Rizal Commercial Banking Corp. v. IAC before issuing a stay order?

HELD:
No. Nowhere in the Interim Rules does it require a comprehensive discussion in the stay order on the court’s findings of
sufficiency in form and substance. Neither does the Interim Rules require a hearing before the issuance of a stay order.
What it requires is an initial hearing before it can give due course to or dismiss a petition.

The1999 Rizal Commercial Banking case had been promulgated prior to the effectivity of the Interim Rules that took effect
on December 15, 2000 which is now the applicable law in this case. Thus, the “serious situations” test therein are no
longer applicable in determining whether appointing a rehabilitation receiver. (It is applicable however for the appointment
of a management committee under the current rules)

Section 6 of the Interim Rules states explicitly that “[i]f 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 x x x.”

The reason behind the 5-day rule is to promote a speedy disposition of corporate rehabilitation cases. Compliant with the
rules, the July 13, 2004 stay order was issued not later than 5 days from the filing of the petition on July 9, 2004 after the
rehabilitation court found the petition sufficient in form and substance. When a petition filed by a debtor “alleges all the
material facts and includes all the documents required by Rule 4–2 of the Interim Rules,” it is sufficient in form and
substance. Nowhere in the Interim Rules does it require a comprehensive discussion in the stay order on the court’s
findings of sufficiency in form and substance.

The stay order and appointment of a rehabilitation receiver dated July 13, 2004 is an “extraordinary, preliminary, ex parte
remedy.” Because, the effectivity period of a stay order is only “from the date of its issuance until dismissal of the petition
or termination of the rehabilitation proceedings,” it is not a final disposition of the case. It is an interlocutory order and so
does not preclude a hearing after its issuance for purposes of observing due process.

In any event, the trial court has ample discretion to call an initial hearing when it is not confident that the allegations in the
petition are sufficient in form and substance, for so long as this hearing is held within the 5–day period from the filing of
the petition — the period within which a stay order may issue as provided in the Interim Rules

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OTHER ISSUES

1. Is the issue on the validity of the rehabilitation order now res judicata in light of the ruling in BPI vs. Pryce Corporation?

Yes. Bar by prior judgment exists “when, as between the first case where the judgment was rendered and the second
case that is sought to be barred, there is identity of parties, subject matter, and causes of action.” The elements of
res judicata through bar by prior judgment are present in this case. Respondent China Banking Corporation and BPI
are creditors of petitioner Pryce Corporation and are both questioning the rehabilitation court’s approval of the
amended rehabilitation plan. Thus, there is substantial identity of parties since they are litigating for the same matter
and in the same capacity as creditors of petitioner Pryce Corporation. There is also no question that both cases deal
with the subject matter of petitioner Pryce Corporation’s rehabilitation. The element of identity of causes of action
also exists. In separate appeals, respondent China Banking Corporation and BPI questioned the same January 17,
2005 order of the rehabilitation court before the Court of Appeals. Since the January 17, 2005 order approving the
amended rehabilitation plan was affirmed and made final in the BPI case, this plan binds all creditors, including
respondent China Banking Corporation.

In any case, the Interim Rules or the rules in effect at the time the petition for corporate rehabilitation was filed in
2004 adopts the cram–down principle which “consists of two things: (i) approval despite opposition and (ii) binding
effect of the approved plan x x x.” Thus, the January 17, 2005 order approving the amended rehabilitation plan, now
final and executory resulting from the resolution of BPI v. Pryce Corporation, binds all creditors including respondent
China Banking Corporation.

2. [Obiter dictum as this wasn’t put into issue; J. Leonen just emphasized that even without going into the procedural
issues, addressing the substantive merits of the case will yield the same result]

Is China Bank’s contention, that neither the provisions of PD No. 902–A as amended nor the Interim Rules empower
commercial courts to render without force and effect valid contractual stipulations and thus their stipulation on dacion
en pago as to Pryce’s liabilities must be respected by the court, tenable?

No. Corporate rehabilitation is one of many statutorily provided remedies for businesses that experience a downturn.
Rather than leave the various creditors unprotected, legislation now provides for an orderly procedure of equitably
and fairly addressing their concerns. Corporate rehabilitation allows a court–supervised process to rejuvenate a
corporation. Its twin, insolvency, provides for a system of liquidation and a procedure of equitably settling various
debts owed by an individual or a business. It provides a corporation’s owners a sound chance to re–engage the
market, hopefully with more vigor and enlightened services, having learned from a painful experience.

Necessarily, a business in the red and about to incur tremendous losses may not be able to pay all its creditors.
Rather than leave it to the strongest or most resourceful amongst all of them, the state steps in to equitably distribute
the corporation’s limited resources.

The cram–down principle adopted by the Interim Rules does, in effect, dilute contracts. When it permits the approval
of a rehabilitation plan even over the opposition of creditors,8 or when it imposes a binding effect of the approved
plan on all parties including those who did not participate in the proceedings, the burden of loss is shifted to the
creditors to allow the corporation to rehabilitate itself from insolvency.

Rather than let struggling corporations slip and vanish, the better option is to allow commercial courts to come in and
apply the process for corporate rehabilitation.

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A CORPORATION IN DEBT MAY QUALIFY FOR CORPORATE REHABILITATION. SEC. 1, RULE 4 OF THE INTERIM
RULES DOES NOT MAKE ANY DISTINCTION BETWEEN A CORPORATION WHICH IS ALREADY IN DEBT AND A
CORPORATION WHICH FORESEES THE POSSIBILITY OF DEBT

Metropolitan Bank & Trust Company v. Fortuna Paper Mill & Packaging Corporation
G.R. No. 190800, November 07, 2018
A.B. Reyes, Jr., J.

FACTS:
Fortuna manufactures and sells special and craft papers from waste and scrap materials. Metrobank (MBTC) extended
various credit accommodations and loan facilities to Fortuna. The credit accommodations and loan facilities extended by
MBTC to Fortuna principally amounted to P259,981,915.33. In order to secure these obligations, Fortuna mortgaged to
MBTC its real and movable properties as well as several pieces of realty owned by several sister companies.

Fortuna eventually ended up defaulting on its obligations to MBTC, and failed to pay said indebtedness despite repeated
demand. Fortuna filed on June 21, 2007 a Petition for Corporate Rehabilitation (Rehabilitation Petition) with the RTC of
Malabon. Attached therein was Fortuna's proposed Rehabilitation Plan, which consisted mainly of (i) the resumption and
continuance of its business, to be made possible by the entry of a supposed investor and a debt moratorium on principal
interest, and (ii) entry into the business condominium development.

Finding the Rehabilitation Petition sufficient in form and substance, on June 27, 2007, the RTC issued a Stay Order.
MBTC filed its Comment/Opposition and prayed for its dismissal based on the following grounds: (1) Fortuna was not
qualified for corporate rehabilitation; (2) the petition was fatally defective for non-compliance with the prescribed form in
the rules; and (3) the petition was filed solely for the purpose of unjustly delaying the payment of its debt obligations.

The RTC issued an Order approving the Rehabilitation Plan because it found the proposed Rehabilitation Plan feasible
and viable and noted Fortuna's effort to improve its financial standing by establishing a new business of realty
development in Malabon City. Aggrieved, MBTC filed a Petition for Review under Rule 43 with the CA. The CA dismissed
the petition finding the opposition of the petitioning creditors as manifestly unreasonable.

MBTC argues that a corporation may petition that it be placed under rehabilitation only if it is in the financial condition of
a debtor who foresees the majority of its debts and its failure to meet them. Thus, this element of foresight is allegedly
wanting where a debtor has already failed to meet its debts that have fallen due, such as in the case of Fortuna.

On September 24, 2018, MBTC manifested that its appeal had been rendered moot by the termination of rehabilitation
proceedings before the RTC. Nonetheless, the SC still considered it necessary to still deal with the contentions of the
petitioner, in the interest of upholding the observations of the CA on the propriety of the actions of the trial court, which
the Court reasoned would be instructive for the Bench and the practicing Bar.

ISSUE:
Is Fortuna Paper Mill & Packaging Corporation is qualified to file for corporate rehabilitation when it has already defaulted
on its debts before filing for rehabilitation?

HELD:
YES, Rehabilitation refers to the restoration of the debtor to a condition of successful operation and solvency, if it is shown
that its continuance of operation is economically feasible and its creditors can recover by way of the present value of
payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.

A plain reading of the provision shows that the Interim Rules does not make any distinction between a corporation which
is already in debt and a corporation which foresees the possibility of debt, or which would eventually yet surely fall into
the same, but may at present be free from any financial liability. Thus, since the statute is clear and free from ambiguity,
it must be given its literal meaning and applied without attempted interpretation. This is the plain meaning rule or verba
legis, as expressed in the maxim index animi sermo or speech is the index of intention. Therefore, there is no need to
distinguish whether the claim has already matured or not. What is essential in case of rehabilitation is the inability of the
debtor corporation to pay its dues as they fall due.

In any event, being qualified to file a petition does not mean that such a petition will automatically be validated. The
feasibility of the rehabilitation plan must still be decided by the rehabilitation court.

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As noted by the court in Phil. Asset Growth Two, Inc., et al. v. Fastech Synergy Phils., Inc., et al., the characteristics of
feasible rehabilitation plan are:
a. The debtor has assets that can generate more cash if used in its daily operations than if sold.
b. Liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain
daily operations.
c. The debtor has a definite source of financing for the proper and full implementation of a Rehabilitation Plan
that is anchored on realistic assumptions and goals.

On the other hand, in BPI v. Sarabia Manor, the Court ruled that a rehabilitation plan is not feasible when:
a. There is an absence of a sound and workable business plan;
b. It is founded on baseless and unexplained assumptions, targets and goals;
c. It is based on speculative capital infusion or complete lack thereof for the execution of the business plan;
d. The cash flow of the business cannot sustain daily operations; and
e. The debtor has negative net worth and the remaining assets are near full depreciation or fully depreciated.

Taking all these points into consideration, among others, in the case of Fortuna, the Court disagrees with the finding of
the lower courts that the Rehabilitation Plan is one that is economically feasible for several reasons, one of which the
Rehabilitation Plan is primarily premised on speculative investments and the lack of material financial commitments.

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