TITLE: WONDER BOOK CORPORATION, petitioner, vs.

PHILIPPINE
BANK OF COMMUNICATIONS
G.R. No. 187316
Date of Promulgation: July 16, 2012
Ponente: J. Reyes, Second Division

Doctrine: Rehabilitation is therefore available to a corporation who, while

illiquid, has assets that can generate more cash if used in its daily
operations than sold. Its liquidity issues can be addressed by a practicable
business plan that will generate enough cash to sustain daily operations,
has a definite source of financing for its proper and full implementation, and
anchored on realistic assumptions and goals. This remedy should be denied
to corporations whose insolvency appears to be irreversible and whose sole
purpose is to delay the enforcement of any of the rights of the creditors.

Sections cited: Section 23, Rule 4 of the Interim Rules; Section 5 of

the Interim Rules

Facts: Wonder Book and 8 other corporations, collectively known as the

Limtong Group of Companies (LGC), filed a joint petition for rehabilitation
with the RTC. The RTC issued a Stay Order. The CA later reversed the
Order of the RTC and dismissed LGC's petition for rehabilitation.

Wonder Book filed a petition for rehabilitation. Wonder Book cited the
following as causes for its inability to pay its debts as they fall due: (a) high
interest rates, penalties and charges imposed by its creditors; (b) low
demand for gift items and greeting cards due to the widespread use of
cellular phones and economic recession; (c) competition posed by other
stores; and (d) the fire on July 19, 2002 that destroyed its inventories worth
P264 Million, which are insured for P245 Million but yet to be collected.
Wonder Book’s rehabilitation plan put forward a payment program that
guaranteed full payment of its loan from PBCOM after fifteen (15) years at a
reduced interest. RTC approved the rehabilitation plan.

PBCOM filed a petition for review of the approval of Wonder Book’s

rehabilitation plan, which the CA granted. According to the CA, Wonder
Book’s financial statements reveal that it is not merely illiquid but in a state
of insolvency. The CA noted that Wonder Book failed to support its petition
with reassuring “material financial commitments”. The CA also noted that
Wonder Book’s expected profits during the rehabilitation period are not
sufficient to cover its liabilities and reverse its dismal financial state.

Issues: Whether or not Wonder Book's petition for rehabilitation is

impressed with merit
Ruling: No. Under Section 23, Rule 4 of the Interim Rules, a rehabilitation
plan may be approved if there is a showing that rehabilitation is feasible
and the opposition entered by the creditors holding a majority of the total
liabilities is unreasonable. In determining whether the objections to the
approval of a rehabilitation plan are reasonable or otherwise, the court has
the following to consider: (a) that the opposing creditors would receive
greater compensation under the plan than if the corporate assets would be
sold; (b) that the shareholders would lose their controlling interest as a
result of the plan; and (c) that the receiver has recommended approval.

Rehabilitation is therefore available to a corporation who, while illiquid, has

assets that can generate more cash if used in its daily operations than sold.
Its liquidity issues can be addressed by a practicable business plan that will
generate enough cash to sustain daily operations, has a definite source of
financing for its proper and full implementation, and anchored on realistic
assumptions and goals. This remedy should be denied to corporations
whose insolvency appears to be irreversible and whose sole purpose is to
delay the enforcement of any of the rights of the creditors, which is
rendered obvious by the following: (a) the absence of a sound and workable
business plan; (b) baseless and unexplained assumptions, targets and goals;
(c) speculative capital infusion or complete lack thereof for the execution of
the business plan; (d) cash flow cannot sustain daily operations; and (e)
negative net worth and the assets are near full depreciation or fully
depreciated.

Another reason for this Court's denial of Wonder Book's petition is its
failure to comply with Section 5 of the Interim Rules, which enumerates the
minimum requirements of an acceptable rehabilitation plan. It is imperative
for a distressed corporation seeking rehabilitation to present "material
financial commitments" as this is critical in determining its resolve,
determination, earnestness and good faith in financing its proposed
rehabilitation plan. 

Disposition: WHEREFORE, premises considered, the petition

is DENIED and the Decision dated March 25, 2009 of the Court of Appeals
in CA-G.R. SP No. 102860 is AFFIRMED.

Expanded Ratio: The figures appearing on Wonder Book's financial documents

and the nature and value of its assets are indeed discouraging. First, as of August
2006, Wonder Book's total assets are worth P144,922,218.00 and its total liabilities
amount to P306,141,399.00 and this is a clear evidence of its actual insolvency, not
mere illiquidity, and dispossession of financial leverage. Second, bulk or
approximately seventy-two percent (72%) of its current assets consists of
inventories and the average turn-over rate is seventy-three (73) days, hence,
cannot be relied on for a quick cash flow.  Third, a majority or seventy-seven
percent (77%) of its non-current assets is comprised of deferred tax assets or taxes
that have been paid on income that have not yet been reported, hence, may only be
used to decrease future tax liability but not for the increase of capital, the finance
of operations or the purchase of an asset.  Fourth, its property and equipment
comprise only two percent (2%) of its non-current assets. Apart from the fact that
these consist largely of personal properties — computers and store equipment —
that are certain to depreciate over time, there is no evidence that the valuation
assigned to them by Wonder Book is attributable to an independent third-party
appraiser. There is likewise no mention of their actual market values as, more
often than not, they will be sold for less than their book value.

Apart from the fact that the deposits for future subscriptions in the amount
of P319,000.00 39 is insignificant as compared to Wonder Book's capital
deficiency of P161,219,121.00, 40 its projected balance sheet reveals that
Wonder Book has no intention to carry out this commitment. No adjustment
in its paid-up capital is reflected in the balance sheet attached to Wonder
Book's rehabilitation plan as the amount thereof is consistently pegged at
P4,500,000.00 until the end of the rehabilitation period. Indeed, this
commitment is far from being "material" as it will not even create a dent on
Wonder Book's capital deficit. Furthermore, it will not qualify as a
"commitment" and is, in fact, a mere artifice, as Wonder Book's balance
sheet unequivocally demonstrates.
On the other hand, treating its debts to its stockholders and officers as
trade payables only signifies that no priority in payment will be accorded to
them but this does not provide Wonder Book with the means to finance the
activities supposedly ensuring its successful rehabilitation.
While Wonder Book mentioned that there are individuals who have
expressed their interest in investing and financing its business plans, their
identities were not disclosed nor were the evidence of the existence of these
funds proved. It was alleged before this Court that one of its stockholders
paid the amount of P13,600,000.00 to one of Wonder Book's suppliers and
this constitutes sufficient compliance with the commitment of substantial
capital infusion. However, apart from being belated, uncorroborated and
unreflected in Wonder Book's rehabilitation plan and balance sheet, this
supposed payment will not do wonders to change the undisputed fact that
Wonder Book will still be saddled with a deficit of P50,960,000.00 by the
end of the fifteen-year period.
The foregoing only goes to show that rehabilitation is a vain waste of effort
and resources and a mere exercise in futility. Worse, that Wonder Book will
still post a negative net worth after its rehabilitation plan is fully
implemented suggests that the remedy of rehabilitation is availed without a
reasonable expectation that Wonder Book will regain its prior status of
viability and profitability but with a mere crapshoot that the value of its
present pool of assets will increase during the rehabilitation period. Given
Wonder Book's admission that fifteen (15) years do not suffice for it to
register a positive net worth, it is logical to assume that the only thing the
stockholders are gunning for is the recovery of their investments or a
portion thereof after the corporate debts are satisfied from the liquidation
of the corporate assets. This Court cannot sanction such a selfish venture.
While there is no absolute certainty in rehabilitation, the sacrifice that the
creditors are compelled to make can only be considered justified if the
restoration of the corporation's former state of solvency is feasible due to a
sound business plan with an assured funding. Such cannot be said in this
case, hence, PBCOM's skepticism is not unfounded.