AEC 65 ACD3 -

BUSINESS LAWS
AND REGULATIONS
Braga, Charmyl Mae S.
Cañete, Mica A.
Dael, Angela Meriel R,
Noval, Kent Verzell N.
Pacturan, Czarina Jane A.
Salacinas, Jewel S.
Bank of the Philippines Islands v
Sarabia Manor Hotel Corp. (G.R.
No. 175844, July 29, 2013)
report
outline
Summary of Facts The feasibility of the
rehabilitation plan of Sarabia.

The purpose of corporate

rehabilitation and its The ruling of the court
proceedings

Effect of approval and the cram

down rule.
SUMMARY OF
FACTS
 SUMMARY OF FACTS
Sarabia has been in the hotel business for over
30 years, with principal place of business at 101
General Luna Street, Iloilo City.

In 1997, Sarabia obtained a P150,000,000.00

special loan package from Far East Bank and
Trust Company (FEBTC) in order to finance the
construction of a five-storey hotel building (New
Building) for the purpose of expanding its hotel
business.
An additional P20,000,000.00 stand-by credit line was approved by FEBTC in
the same year, these were secured by real estate mortgages over several
parcels of land owned by Sarabia and a comprehensive surety agreement
dated September 1, 1997 signed by its stockholders. By virtue of a merger,
Bank of the Philippine Islands (BPI) assumed all of FEBTC’s rights against
Sarabia.
 SUMMARY OF FACTS

Sarabia started to pay interests on its

loans as soon as the funds were
released in October 1997. However,
largely because of the delayed
completion of the New Building,
Sarabia incurred various cash flow
problems.

On July 26 2002, Sarabia filed a Petition for corporate

rehabilitation (rehabilitation petition) with prayer for the
issuance of a stay order before the RTC as it foresaw the
impossibility to meet its maturing obligations to its creditors when
they fall due.
SUMMARY OF FACTS
Sarabia claimed that its cash
position when it was forced to take
over the construction of the New
Building due to the recurring
default of its contractor, Santa Ana
– AJ Construction Corporation
(contractor),13 and its subsequent
abandonment of the said project.14
Accordingly, the New Building was
completed only in the latter part of
2000, or two years past the
original target date of August 1998,
thereby skewing Sarabia’s
projected revenues.
 SUMMARY OF FACTS
Sarabia failed to generate enough
cash flow to service its maturing
obligations to its creditors, namely:
(a) BPI (in the amount of
₱191,476,421.42); (b) Rural Bank of
Pavia (in the amount of
₱2,500,000.00); (c) Vic Imperial
Appliance Corp. (Imperial Appliance)
(in the amount of ₱5,000,000.00);
(d) its various suppliers (in the
amount of ₱7,690,668.04); (e) the
government (for minimum corporate
income tax in the amount of
₱547,161.18); and (f) its stockholders
(in the amount of ₱18,748,306.35).
 SUMMARY OF FACTS
The proposed rehabilitation plan of Sarabia included the
restructuring of all its outstanding loans, where the interest payments
pegged at a uniform escalating rate of:

(a) 7% per annum (p.a.) for the years 2002 to 2005;

(b) 8% p.a. for the years 2006 to 2010;
(c) 10% p.a. for the years 2011 to 2013;
(d) 12% p.a. for the years 2014 to 2015; and
(e) 14% p.a. for the year 2018
Sarabia sought to make annual payments on the principal loans
starting in 2004, also in escalating amounts depending on cash flow.
Further, it proposed that it should pay off its outstanding obligations to
the government and its suppliers on their respective due dates, for the
sake of its day to day operations.
SUMMARY OF FACTS

On August 2, 2002, the Regional Trial Court

issued a Stay Order with Liberty B.
Valderrama as the rehabilitation receiver
after finding the rehabilitation petition of
Sarabia sufficient in form and substance.
After several hearings, the RTC gave due
course to the rehabilitation petition and
referred it to the Receiver for evaluation.
 SUMMARY OF FACTS
In July 10, 2003, the Receiver made the following
recommendations on Sarabia’s rehabilitation:

a. the total outstanding balance as of December 31, 2002 shall be recomputed,

with the interest for the years 2001 and 2002 capitalized and treated as part of the
1. Restructure the principal;
loans with
Sarabia’s b. waive all penalties;
creditors, namely,
c. extend the payment period to seventeen (17) years, i.e., from 2003 to 2019, with
BPI, Imperial a two-year grace period in principal payment;
Appliance, Rural
Bank of Pavia, and d. fix the interest rate at 6.75% p.a. plus 10% value added tax on interest for the
entire term of the restructured loans;
Barcelo Gestion
Hotelera, S.L. e. the interest and principal based on the amortization schedule shall be payable
(Barcelo), under annually at the last banking day of each year; and
the following terms
f. any deficiency shall be paid personally by Sarabia’s stockholders in the event it
and conditions: fails to generate enough cash flow; on the other hand, any excess funds
generated at the end of the year shall be paid to the creditors to accelerate the
debt servicing;
 SUMMARY OF FACTS
In July 10, 2003, the Receiver made the following
recommendations on Sarabia’s rehabilitation:

2. Pay Sarabia’s 3. Convert the Advances 4. Require Sarabia’s 5. No compensation

outstanding from stockholders stockholders to pay or cash dividends
payables with amounting to its payables to the shall be paid to the
its suppliers ₱18,748,306.00 to hotel recorded as stockholders during
and the stockholder’s equity and Accounts the rehabilitation
other advances amounting Receivable – Trade, period, except
government so
to ₱42,688,734.00 as of amounting to those who are
as not to disrupt
the December 31, 2002 ₱285,612.17 as of directly employed
hotel tentative financial December 31, 2001, by the hotel as a full
operations; statements to Deferred and its remaining time officer,
Credits; the said receivables after employee or
conversion should such date; consultant covered
increase stockholders’ by a valid contract
equity to ₱268,545,731.00 and for a reasonable
and bring the debt to fee;
equity ratio to 0.85:1;
 SUMMARY OF FACTS
In July 10, 2003, the Receiver made the following
recommendations on Sarabia’s rehabilitation:

6. All capital 7. Terminate the 8. Appoint a 9. Open a debt 10. Release the
expenditures which management new servicing surety
are over and above contract with management account and obligations of
what is provided in Barcelo, thereby team which transfer all Sarabia’s
the case flow of the saving an excess funds
would be stockholders,
rehabilitation plan thereto, which in
estimated required to considering the
which will materially no case should
₱25,830,997.00 submit a adequate
affect Sarabia’s cash
in management comprehensive be less than collaterals and
position but which
fees, over and ₱500,000.00 at securities
are deemed business plan
above the the end of the covered by the
necessary in order to to support the month; the funds
maintain the hotel’s salaries and generation of rehabilitation
benefits of will be drawn plan and the
competitiveness in the target
the industry shall be certain payable to the continuing
revenue as creditors only
subject to the RTC’s managerial mortgages
reported in the based on the
approval prior to its employees; over Sarabia’s
implementation; rehabilitation amortization properties.
plan; schedule; and
The purpose of
corporate
rehabilitation
and its proceedings.
 The purpose of
corporate
rehabilitation
and its proceedings.
Recognizing the volatile nature of every business, the rules
on corporate rehabilitation have been crafted in order to give
companies sufficient leeway to deal with debilitating financial
predicaments in the hope of restoring or reaching a
sustainable operating form if only to best accommodate the
various interests of all its stakeholders, may it be the
corporation’s stockholders, its creditors and even the
general public.

In this light, case law has defined 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.
 The purpose of
corporate
rehabilitation
and its proceedings.

Verily, the purpose of rehabilitation proceedings

is to enable the company to gain a new lease on
life and thereby allow creditors to be paid their
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.
Effect of approval
and the cram
down rule.
 Also kno
m wn as the
4 o f t h e I n t e r i provision “cram-do
tio n 2 3 , R u le , which is wn” clau
Sec o n C o r p o r a te the FRIA, currently se, this
o f P r o c e d u re is necess incorpora
Rule s R u le s ) creditors ary to cu ted in
li ta t io n (In t e r im ’ natural rb the ma
Re h ab i p la n tendency jority
r e h a b ilit a t io n own term to dictate
sta t e s t h a t a e s a nd condi their
d e v e n o v e r t h rehabilita
t tio ns to the
y b e a p p r o v e greater l ion , a b sent due
ma d i to r s h o l d in g ong-term regard to
o n o f th e c r e benefit o the
oppositi r p o r a t io n ’ s t o ta l Otherwis
e stated, f all stake
y o f t h e c o it forces holders.
a majorit a s h o w in g t h a t accept th
e terms a the credi
s if t h e r e is rehabilita nd condi tors to
liabilitie a s i b le a n d t h e tion plan tions of t
ab il it a t io n is fe viability o , preferri he
reh c r e d it o r s is ver imme ng long-t
p o s it io n o f th e recovery diate but erm
o p n a b le . . It is with incomple
re a s o aforesaid in the pa t
manifestly un provision ra m e
e
ters of th
the appro th at the Co e
val of Sa u
rabia’s re rt examines
habilitati
on.

Effect of approval
and the cram down
rule.
Feasibility of
Sarabia’s
Rehabilitation
 Feasibility of
Sarabia’s
Rehabilitation
Sarabia has the financial capability
to undergo rehabilitation.

Sarabia’s financial history shows that it has the inherent capacity

to generate funds to repay its loan obligations if applied through
the proper financial framework. The Receiver’s examination and
analysis of Sarabia’s financial data reveals that the latter’s
business is not only an on-going but also a growing concern, given
its current fiscal position, the prospect of substantial and
continuous revenue generation is a realistic goal.
 Feasibility of
Sarabia’s
Rehabilitation
Sarabia’s ability to sustainable
profits over a long period of time.

Sarabia’s projected revenues shall have a steady year-on-year

growth from the time that it applied for rehabilitation until the end of
its rehabilitation plan in 2018, albeit with decreasing growth rates
(growth rate is at 26% in 2003, 5% in 2004-2007, 3% in 2008-2018).
The projected sustainability of its business, as mapped out in the
approved rehabilitation plan, makes Sarabia’s rehabilitation a more
viable option to satisfy the interests of its stakeholders in the long
run as compared to its immediate liquidation.
 Feasibility of
Sarabia’s
Rehabilitation
Interests of Sarabia’s creditors:

(b) the conversion of the

(c) all capital expenditures
(a) any deficiency in the advances from
which are over and above what
required minimum stockholders amounting
is provided in the cash flow of
to P18,748,306.00 and
payments to creditors the approved rehabilitation plan
deferred credits
which will materially affect the
based on the amounting to
cash position of the hotel but
presented amortization P42,688,734 as of the
which are deemed necessary in
December 31, 2002
schedule shall be paid tentative audited financial
order to maintain the hotel’s
personally by Sarabia’s competitiveness in the industry
statements to
shall be subject to the approval
stockholders; stockholder’s equity was
by the Court prior to
granted;
implementation;
 Feasibility of
Sarabia’s
Rehabilitation
Interests of Sarabia’s creditors:
(d) the formation of Sarabia’s (e) the maintenance of all
new management team and Sarabia’s existing real
the requirement that the estate mortgages over
latter shall be required to hotel properties as
submit a comprehensive collaterals and
business plan to support the securities in favor of BPI
generation of revenues as until the former’s full and
reported in the final liquidation of its
Rehabilitation Plan, both outstanding loan
short term and long term; obligations with the
latter;
(f) the reinstatement of the
comprehensive surety
agreement of Sarabia’s
stockholders regarding the
former’s debt to BPI.68 With
these terms and
conditions69 in place, the
subsisting obligations of
Sarabia to its creditors
would, more likely than not,
be satisfied.
the ruling of
the court
ruling of the
court
Opposition of a distressed
corporation’s majority creditor
is manifestly unreasonable if it
counter-proposes unrealistic
payment terms and conditions
which would, more likely than
not, impede rather than aid its
rehabilitation
 ruling of the
court
BPI’s opposition to the approved interest rate to
be manifestly unreasonable . It must be pointed
out that oppositions which push for high
interests rates are generally frowned upon in
rehabilitation proceedings given that the
inherent purpose of a rehabilitation is to find
ways and means to minimize the expenses of
the distressed corporation during the
rehabilitation period.
ruling of the
court
BPI’s interests as a secured creditor are
adequately protected by the maintenance of all
Sarabia’s existing real estate mortgages over its
hotel properties as collateral as well as by the
reinstatement of the comprehensive surety
agreement of Sarabia’s stockholders, among
other terms in the approved rehabilitation plan.
ruling of the
court
As to the matter of Sarabia’s WHEREFORE, the petition of
alleged misrepresentations, the BPI is DENIED. Accordingly,
records disclose that Sarabia the Decision dated April 24,
already clarified its initial
2006 and Resolution dated
statements in its rehabilitation
December 6, 2006 of the Court
petition by submitting, on its own
accord, a supplemental affidavit of Appeals, Cebu City in CA-
explains that the increase in its GR. CV. No. 81596 are hereby
properties and assets was indeed AFFIRMED.
by recognition of revaluation
thank you