FRIA Law

 Rehabilitation  shall refer 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.
 corporate rehabilitation as an attempt to conserve and administer the assets of an insolvent
corporation in the hope of its eventual return from financial stress to solvency. It contemplates
the continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and liquidity.
 to find ways and means to minimize the expenses of the distressed corporation during the
rehabilitation period by providing the best possible framework for the corporation to gradually
regain or achieve a sustainable operating form. 
 "[It] enable[s] the company to gain a new lease in life and thereby allow creditors to be paid
[t]heir claims from its earnings. Thus, rehabilitation shall be undertaken when it is shown that
the continued operation of the corporation is economically more feasible and its creditors can
recover, by way of the present value of payments projected in the plan, more, if the corporation
continues as a going concern than if it is immediately liquidated.
 Restoration is the central idea behind the remedy of corporate rehabilitation. In common
parlance, to “restore” means “to bring back to or put back into a former or original state.”
 Rehabilitation assumes that the corporation has been operational but for some
reasons like economic crisis or mismanagement had become distressed or
insolvent,  i.e., that it is generally unable to pay its debts as they fall due in the ordinary course
of business or has liability that are greater than its assets.45 Thus, the basic issues in
rehabilitation proceedings concern the viability and desirability of continuing the business
operations of the distressed corporation, 46  all with a view of effectively restoring it to a state of
solvency or to its former healthy financial condition through the adoption of a rehabilitation plan.

I. Purpose of Rehabilitation

a) BIR vs. Lepanto Ceramics Inc.

Summary of Facts: . It is likewise undisputed that the BIR - personally and by publication - was
notified of the rehabilitation proceedings involving LCI and the issuance of the Commencement
Order related thereto. Despite the foregoing, the BIR, through Misajon, et al.,  still opted to send
LCI: (a) a notice of informal conference dated May 27, 2013, informing the latter of its deficiency
internal tax liabilities for the Fiscal Year ending June 30, 2010; and (b) a Formal Letter of Demand
dated May 9, 2014, requiring LCI to pay deficiency taxes in the amount of P567,5 l 9,348.39,
notwithstanding the written reminder coming from LCI's court-appointed receiver of the pendency
of rehabilitation proceedings concerning LCI and the issuance of a commencement order.

Facts: In 2011, respondent Lepanto Ceramics filed a petition for corporate rehabilitation
pursuant to FRIA Law, before the RTC of Calamba City.
LCI alleged that due to the financial difficulties it has been experiencing, it had entered
into a state of insolvency considering its inability to pay its obligations as they become
due and that its total liabilities amounting to ₱4,213 ,682, 715. 00 (4 Billion), which far
exceed its total assets worth ₱1,112,723,941.00 (1Billion).
The LCI also admitted in the Petition its tax liabilities to the national government in the
amount of at least ₱6,355,368.00 (6 Million).
Rehabilitation Court issued a Commencement Order wherein the following are declared:
(a)  declared LCI to be under corporate rehabilitation;
(b)  suspended all actions or proceedings, in court or otherwise, for the enforcement of
claims against LCI;
(c) prohibited LCI from making any payment of its liabilities outstanding as of even date,
except as may be provided under RA 10142; and
(d)  directed the BIR to file and serve on LCI its comment or opposition to the petition ,
or its claims against LCI. 

Accordingly, the Commencement Order (CO) was published in a newspaper of

general circulation and the same, together with the petition for corporate
rehabilitation, were personally served upon LCI's creditors, including the BIR.

Despite of the CO, the BIR sent LCI a notice of informal conference informing the latter
of its deficiency internal tax liabilities for the Fiscal Year ending June 30, 2010. In
response, LCI's court-appointed receiver, Roberto L. Mendoza, sent BIR a letter-reply,
reminding the latter of the pendency of LCI's corporate rehabilitation proceedings, as
well as the issuance of a CO in connection therewith.

Subsequently, the BIR sent LCI a FLD requiring LCI to pay deficiency taxes. This
prompted LCI to file a petition for indirect contempt against petitioners before RTC Br.
35. In said petition, LCI asserted that petitioners' act of pursuing the BIR's claims for
deficiency taxes against LCI outside of the pending rehabilitation proceedings in spite of
the Commencement Order is a clear defiance of the aforesaid Order. As such, petitioners
must be cited for indirect contempt in accordance with Rule 71 of the Rules of Court in
relation to Section 16 of RA 10142.

On the one hand, the BIR asserts, among others, that their acts do not amount to a
defiance of the Commencement Order as it was done merely to toll the prescriptive
period in collecting deficiency taxes, and thus, sanctioned by the Rules of Procedure of
the FRIA; (d)  their acts of sending a Notice of Informal Conference and Formal Letter of
Demand do not amount to a "legal action or other recourse" against LCI outside of the
rehabilitation proceedings; and (e)  the indirect contempt proceedings interferes with the
exercise of their functions to collect taxes due to the government.

The RTC Br. 35 found Ass.Comm, Misajon guilty of indirect contempt and, accordingly,
ordered them to pay a fine of ₱5,000.00 each. 

Issue: WON the RTC Br. 35 the RTC Br. 35 correctly found Misajon, et al.  to have defied
the Commencement Order and, accordingly, cited them for indirect contempt

Ruling: The SC ruled that the RTC Br. 35 correctly cited them for indirect contempt.

Upon the issuance of a Commencement Order - which includes a Stay or Suspension

Order - all actions or proceedings, in court or otherwise, for the enforcement of "claims"
against the distressed company shall be suspended. 

Under the same law, claim "shall refer to all claims or demands of whatever nature or
character against the debtor or its property, whether for money or otherwise, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the government, whether national or
local, including taxes, tariffs and customs duties; and (2) claims against directors
and officers of the debtor arising from acts done in the discharge of their functions falling
within the scope of their authority: Provided,  That, this inclusion does not prohibit the
creditors or third parties from filing cases against the directors and officers acting in their
personal capacities."

To clarify, however, creditors of the distressed corporation are not without remedy as

they may still submit their claims to the rehabilitation court for proper consideration so
that they may participate in the proceedings, keeping in mind the general policy of the
law "to ensure or maintain certainty and predictability in commercial affairs, preserve and
maximize the value of the assets of these debtors, recognize creditor rights and respect
priority of claims, and ensure equitable treatment of creditors who are similarly situated."
In other words, the creditors must ventilate their claims before the rehabilitation court,
and any "[a]ttempts to seek legal or other resource against the distressed corporation
shall be sufficient to support a finding of indirect contempt of court."

the acts of sending a notice of informal conference and a Formal Letter of Demand are
part and parcel of the entire process for the assessment and collection of deficiency
taxes from a delinquent taxpayer,33 - an action or proceeding for the enforcement of a
claim which should have been suspended pursuant to the Commencement
Order. Unmistakably, Misajon, et al.  's foregoing acts are in clear defiance of the
Commencement Order.

In sum, it was improper for Misajon, et al.  to collect, or even attempt to collect,
deficiency taxes from LCI outside of the rehabilitation proceedings concerning the latter,
and in the process, willfully disregard the Commencement Order lawfully issued by the
Rehabilitation Court.

BPI Savings vs. St. Michael Medical Center

Facts: Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole
proprietors of St. Michael Diagnostic and Skin Care Laboratory Services and Hospital (St.
Michael Hospital), With a vision to upgrade St. Michael Hospital... into a modern, well-
equipped and full service tertiary 11-storey hospital, Sps. Rodil... incorporated SMMCI,
with which entity they planned to... eventually consolidate St. Michael Hospital's
operations.

In May 2004, construction of a new hospital building on the adjoining properties

commenced

To finance the costs of construction, SMMCI applied for a loan with petitioner BPI Family
Savings Bank secured by a Real Estate Mortgage after suffering financial losses due to
problems with the first building contractor,[12] Sps. Rodil temporarily deferred the
original construction plans for the 11-storey hospital building and, instead, engaged the
services of another contractor for the completion of the remaining structural works of the
unfinished building.

The lack of funds for the finishing works of the

3rd, 4th and 5th floors, however, kept the new building from becoming completely
functional and, in turn, hampered the plans for the physical transfer of St. Michael
Hospital's operations to SMMCI.
 As of May 2006, SMMCI was still neither operational nor earning revenues. Hence, it was
only able to pay the interest on its BPI Family loan... from the income of St. Michael
Hospital

BPI Family demanded immediate payment of the entire loan obligation[15] and, soon after, filed a
petition for extrajudicial foreclosure[16] of the real properties covered by the mortgage

SMMCI filed a Petition for Corporate Rehabilitation... before the RTC, with prayer for the issuance of a
Stay Order as it foresaw the impossibility of meeting its obligation to

BPI Family

SMMCI claimed that it had to defer the construction of the projected 11-storey hospital building due to
the problems it had with its first contractor as well as the rise of the cost of construction materials

While several persons approached Sps. Rodil signifying their interest to invest in the corporation, they
needed enough time to complete their audit and... due diligence of the company

In its proposed Rehabilitation Plan,[23] SMMCI merely sought for BPI Family (a) to defer foreclosing on
the mortgage and (b) to agree to a moratorium of at least two (2) years during which SMMCI either
through St. Michael Hospital or its... successor will retire all other obligations. After which, SMMCI can
then start servicing its loan obligation to the bank under a mutually acceptable restructuring agreement

Finding the Rehabilitation Petition to be sufficient in form and substance, the RTC issued a Stay Order...
the same... was referred to the court-appointed Rehabilitation Receiver, Dr. Uriel S. Halum

Dr. Halum gave credence to the feasibility study conducted by Mrs. Nenita Alibangbang... who was
commissioned in 2008 to do a... study on the viability of the project, finding that the same was feasible
given that St. Michael Hospital, whose operations SMMCI will eventually absorb, registered outstanding
revenue performance for the last seven years of its operation with an average growth rate of 42.21%...
annually.[30] Accordingly, Dr. Halum found that SMMCI may be rehabilitated because it is a viable option
but, nevertheless, opined that it will take more than what it had proposed to successfully bring the
company back to good financial health considering... the finding that its obligation actually extends
beyond the bank, and also includes accounts payable due to suppliers and informal lenders... the RTC
approved the Rehabilitation Plan with the modifications recommended by the Rehabilitation Receiver...
the CA affirmed the RTC's approval of the Rehabilitation Plan

Issues:

whether or not the CA correctly affirmed SMMCI's Rehabilitation Plan as approved by the RTC.

Ruling:

The petition is meritorious.

rehabilitation assumes that the corporation has been operational but for some reasons like economic
crisis or mismanagement had become distressed or insolvent, i.e., that it is generally unable to pay its
debts as they fall due in the... ordinary course of business or has liability that are greater than its assets.
[45] Thus, the basic issues in rehabilitation proceedings concern the viability and desirability of continuing
the business operations of the distressed corporation,[46]  all with a view of effectively restoring it to a
state of solvency or to its former healthy financial condition through the adoption of a rehabilitation plan.

it cannot be said that the petitioning corporation, SMMCI, had been in a position of successful operation
and solvency at the time the Rehabilitation Petition was filed on August 11, 2010. While it had indeed
"commenced business" through the preparatory act of... opening a credit line with BPI Family to finance
the construction of a new hospital building for its future operations, SMMCI itself admits that it has not
formally operated nor earned any income since its incorporation. This simply means that there exists no
viable business... concern to be restored.
the Court observes that SMMCI could not have even complied with the form and substance of a proper
rehabilitation petition, and submit its accompanying documents, among others, the required financial
statements of a going concern.

this defect is not negated by the submission of the financial documents pertaining to St. Michael Hospital,
which is a separate and distinct entity from SMMCI. While the CA gave considerable weight to St. Michael
Hospital's supposed "profitability," as explicated in... its own financial statements, as well as the feasibility
study conducted by Mrs. Alibangbang,[48]  in affirming the RTC, it has unwittingly lost sight of the
essential fact that SMMCI stands as the sole petitioning debtor in this case; as such, its... rehabilitation
should have been primarily examined from the lens of its own financial history. While SMMCI claims that
it would absorb St. Michael Hospital's operations, there was dearth of evidence to show that a merger
was already agreed upon between them. Accordingly, St.

Michael Hospital's financials cannot be utilized as basis to determine the feasibility of SMMCI's
rehabilitation.

Note further that while it appears that Sps. Rodil effectively owned and exercised control over the two
entities, such fact does not, by and of itself, warrant their singular treatment for to do so would only
confuse the objective of the proceedings which is to ascertain whether... the petitioning corporation, and
not any other entity related thereto (except if joining as a co-petitioning debtor), may be rehabilitated.

the CA even disregarded the fact that SMMCI's Rehabilitation Plan... failed to comply with the
fundamental requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a... material
financial commitment to support the rehabilitation and an accompanying liquidation analysis

A material financial commitment becomes significant in gauging 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.[... aside from the harped on merger of St. Michael Hospital with SMMCI, the only proposed
source of revenue the Rehabilitation Plan suggests is the capital which would come from SMMCI's
potential investors, which negotiations are merely pending. Evidently, both... propositions commonly
border on the speculative and, hence, hardly fit the description of a material financial commitment which
would inspire confidence that the rehabilitation would turn out to be successful.

SMMCI likewise failed to include any liquidation analysis in its Rehabilitation Plan.

with no SMMCI financial statement on record, it is unclear to the Court what assets it possesses in order
to determine the values to be derived... if liquidation has to be had thereby. Accordingly, this prevents
the Court from ascertaining if the petitioning debtor's 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 crucial factor in a corporate rehabilitation case. Again, the financial records of
St. Michael Hospital, being a separate and distinct entity whose merger with SMMCI only exists in the
realm of probability, cannot be taken as a substitute to fulfill... the requirement. What remains pertinent
are the financial statements of SMMCI for it solely stands as the debtor to be rehabilitated, or liquidated
in this case.

The failure of the Rehabilitation Plan to state any material financial commitment to support rehabilitation,
as well as to include a liquidation analysis, translates to the conclusion that the RTC's stated
considerations for approval... are actually unsubstantiated, and hence, insufficient to decree SMMCI's
rehabilitation. It is well to... emphasize that the remedy of rehabilitation should be denied to corporations
that do not qualify under the Rules. Neither should it be allowed to corporations 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.[59] 

Unfortunately, these negative indicators have all surfaced to the fore, much to SMMCI's chagrin.

II. Nature of the Proceedings

 Proceedings shall be in rem.

 JD acquired upon publication of the notice of the commencement of the proceedings
in any newspaper of general circulation in the PH in the manner prescribed by the
rules of procedure to be promulgated by the SC.
 Proceedings- conducted in a summary and non-adversarial manner
 JD from SEC to RTC.

 It is a special proceeding in rem wherein the petitioner seeks to establish the status of a party or
a particular fact, i.e., the inability of the corporate debtor to pay its debts when they fall due. It is
summary and non-adversarial in nature. Its end goal is to secure the approval of a
rehabilitation plan to facilitate the successful recovery of the corporate debtor. It does
not seek relief from an injury caused by another party.