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Pryce Corporation vs. Court of Appeals

*
G.R. No. 172302. February 4, 2008.

PRYCE CORPORATION, petitioner, vs. THE COURT OF

APPEALS and CHINA BANKING CORPORATION,
respondents.

Corporation Law; Creditors; Receivership; Instances before

receivers may be appointed.—Section 6 provides that the petition
must be “sufficient in form and substance.” In Rizal Commercial
Banking Corporation v. Intermediate Appellate Court, 320 SCRA
279 (1999), this Court held that under Section 6(c) of P.D. No.
902-A, receivers may be appointed whenever: (1) necessary
in order to preserve the rights of the parties-litigants;
and/or (2) protect the interest of the investing public and
creditors. The situations contemplated in these instances
are serious in nature. There must exist a clear and
imminent danger of losing the corporate assets if a
receiver is not appointed. Absent such danger, such as where
there are sufficient assets to sustain the rehabilitation plan and
both investors and creditors are amply protected, the need for
appointing a receiver does not exist. Simply put, the purpose of
the law in directing the appointment of receivers is to
protect the interests of the corporate investors and
creditors.

Same; Same; Same; Serious Situation Test; The “serious

situation test” laid down by Rizal Commercial Banking
Corporation has not been met or at least substantially complied
with.—We agree with the Court of Appeals that the petition for
rehabilitation does not allege that there is a clear and imminent
danger that petitioner will lose its corporate assets if a receiver is
not appointed. In other words, the “serious situation test” laid
down by Rizal Commercial Banking Corporation has not
been met or at least substantially complied with. Significantly,
the Stay Order dated July 13, 2004 issued by the RTC does not
state any serious situation affecting petitioner’s corporate assets.
We observe that in appointing Mr. Gener T. Mendoza as
Rehabilitation Receiver, the only basis of the lower court was
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its finding that “the petition is sufficient in form and

substance.” However, it did not specify any reason or

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* FIRST DIVISION.

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Pryce Corporation vs. Court of Appeals

ground to sustain such finding. Clearly, the petition failed to

comply with the “serious situation test.”

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

     R.R. Torralba & Associates for petitioner.
          Lim, Vigilia, Alcala, Dumlao, Alameda & Casiding
for respondent.

SANDOVAL-GUTIERREZ, J.:

For our resolution is a petition1 for review on certiorari

seeking to reverse the Decision of the Court of Appeals
(Seventh Division) dated July 28, 2005 in CA-G.R. SP No.
88479.
Pryce Corporation, petitioner, was incorporated under
Philippine laws on September 7, 1989. Its primary purpose
was to develop real estate in Mindanao. It engaged in the
development of memorial parks, operated a major hotel in
Cagayan de Oro City, and produced industrial gases.
The 1997 Asian financial crisis, however, badly affected
petitioner’s operations, resulting in heavy losses. It could
not meet its obligations as they became due. It incurred
losses of P943.09 million in 2001, P479.05 million in 2002,
and P125.86 million in 2003.
Thus, on July 12, 2004, petitioner filed with the
Regional Trial Court (RTC), Branch 138, Makati City,2
acting as Commercial Court, a petition for rehabilitation,
docketed as Special Proceedings No. M-5901. Petitioner
prayed for the appointment of a Rehabilitation Receiver

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from among the nominees named therein and the staying

of the enforcement of all

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1 Rollo, Vol. I, pp. 55-70. Penned by Associate Justice Vicente Q. Roxas

and concurred in by Associate Justices Portia AliñoHormachuelos and
Juan Q. Enriquez.
2 Rollo, Vol. II, pp. 1105-1119.

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Pryce Corporation vs. Court of Appeals

claims, monetary or otherwise against it. Petitioner also

prayed that after due hearing, its proposed Rehabilitation
Plan be approved. 3 The salient features of the proposed
Rehabilitation Plan are:

[1] the bank creditors will be paid through dacion en

pago of assets already mortgaged to them, to the
extent sufficient to pay off the outstanding
obligations. The excess assets, if any, will be freed
from liens and encumbrances and released to the
petitioner.
[2] in case the value of the mortgaged assets for dacion
is less than the amount of the obligation to be paid,
the deficiency shall be settled by way of dacion of
memorial park lots owned by the petitioner.
[3] pricing of the assets for dacion shall be based on the
average of two valuation appraisals from
independent third-party appraisers accredited with
the Bangko Sentral ng Pilipinas (BSP) to be chosen
by the creditors and acceptable to the petitioner,
except for memorial park lots which shall be valued
at P16,000 per lot.
[4] all penalties shall be waived by the creditors.
[5] interest on the loans shall be accrued only up to
June 30, 2003.
[6] titles of properties and sales documents held by the
bank as additional security but without actual
mortgage on the properties will also be released to
the petitioner after the dacion.
[7] memorial park mother titles mortgaged to a
creditor bank shall be priced based on the value of

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individual memorial lots comprising those titles,

the mother titles shall be released to the petitioner.
[8] for purpose of the dacion, the foreign currency loan
from China Banking Corporation, the only US
Dollar-denominated obligation, will be converted to
peso based on the average exchange rate for the
year 2003 (P54.2033 to US$1.00), being the mean of
12 monthly averages, as quoted on the statistics
web page of the Bangko Sentral ng Pilipinas.

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3 As summarized by the trial court in its Order dated September 13,

2004. See Rollo, Vol. I, p. 154.

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[9] the bank creditors will avail of the tax exemption

and benefits offered under the Special Purpose
Vehicle (SPV) Law or R.A. No. 9182 to minimize the
dacion-related costs for all parties concerned. Any
concerned bank or financial institution which does
not avail of said tax exemption through its own
fault will shoulder the applicable taxes and related
fees for the dacion transaction.
[10] trade creditors will be paid through dacion of
memorial park lots.
[11] any other debt not covered by mortgaged (sic) of
assets or not falling under the aforementioned
categories shall be paid through dacion of memorial
park lots.
4
On July 13, 2004, the RTC issued a “Stay Order” directing
that: all claims against petitioner be deferred; the initial
hearing of the petition for rehabilitation be set on
September 1, 2004; and all creditors and interested parties
should file their respective comments/oppositions to the
petition. In the same Order, the RTC then appointed Gener
T. Mendoza as Rehabilitation Receiver.
The petition was opposed by petitioner’s bank-creditors.
The Bank of the Philippine Islands claimed that the
petition and the proposed Rehabilitation Plan are coercive
and violative of the contract. The Land Bank of the
Philippines contended, among others, that the petition is
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unacceptable because of the unrealistic valuation of the

properties subject of the dacion en pago.
The China Banking Corporation, respondent herein,
alleged in its opposition that petitioner is solvent and that
it filed the petition to force its creditors to accept dacion
payments. In effect, petitioner passed on to the creditors
the burden of marketing and financing unwanted memorial
lots, while exempting it (petitioner) from paying interests
and penalties.

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4 Rollo, Vol. I, pp. 135-136.

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5
On September 13, 2004, the RTC issued an Order, the
dispositive portion of which reads:

“WHEREFORE, the Petition is given due course. Let the

Rehabilitation Plan, Annex “J,” Petition, be referred to Mr. Gener
Mendoza, Rehabilitation Receiver, for evaluation and
recommendation to be submitted not later than December 15,
2004.
SO ORDERED.”

On December 6, 2004, the Rehabilitation Receiver, in

compliance with the above Order, submitted an Amended
Rehabilitation Plan, recommending the following:

1. Payment of all bank loans and long-term

commercial papers (LTCP) through dacion en pago
of PC’s real estate assets;
2. Payment of all non-bank, trade and other payables
amounting to at least P500,000 each through a
dacion of memorial park lots; and
3. Payment in cash over a three-year period, without
interest, of all non-bank, trade and other payables
amounting to less than P500,000 each. There are
290 of these creditors but their aggregate exposure
to PC is only P7.64 million.

The Rehabilitation Receiver further proposed the following

amendments with respect to the dacion payments to
petitioner’s bank creditors:
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1. The asset base from which the creditors may choose

to be paid has been broadened. Each creditor will
no longer be limited to assets already mortgaged to
it and may elect to be paid from the many other
assets of the company, including even those
mortgaged to other creditors. Any secured creditor,
however, shall have priority to acquire the assets
mortgaged to it.
2. A third appraiser has been added to the two
proposed by PC to undertake valuation of assets
earmarked for dacion. With three appraisers, more
representative values are likely to be obtained.

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5 Id.¸ pp. 153-155.

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Pryce Corporation vs. Court of Appeals

3. Valuation of the memorial lots has been configured

to dovetail with values approved in the corporate
rehabilitation of Pryce Gases, Inc. (PGI), a
subsidiary of PC. Thus, any memorial lot ceded to
secured creditors shall be valued at P13,125 per lot,
and P17,500/lot for unsecured creditors.

On January 17, 2005, the RTC issued an Order approving

the Amended Rehabilitation Plan and finding petitioner
eligible to be placed in a state of corporate rehabilitation;
and directing that its assets shall be held and disposed of
and its liabilities paid and liquidated in the manner
specified in the said Order.
Consequently, on February 23, 2005, respondent filed
with the Court of Appeals a petition for review, docketed as
CAG.R. SP No. 88479. Respondent alleged that in
approving the Amended Rehabilitation Plan, the RTC
impaired the obligations of contracts, voided contractual
stipulation and contravened the “avowed policy of the
State” to maintain a competitive financial system.
On July 28, 2005, the Court of Appeals rendered its
Decision granting respondent’s petition and reversing the
assailed Orders of the RTC, thus:

“WHEREFORE, premises considered, petition is hereby

GRANTED. The assailed July 13, 2004, September 13, 2004 and
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January 17, 2005 Orders of the Regional Trial Court of Makati

City, Branch 138, are hereby REVERSED and SET ASIDE.
SO ORDERED.”

Petitioner herein seasonably filed a motion for

reconsideration but it was denied by the appellate court in
its Resolution dated April 12, 2006.
Hence, the instant recourse raising the sole issue of
whether the Court of Appeals erred in denying the petition
for rehabilitation of petitioner Pryce Corporation.

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Section 6 of the
6
Interim Rules of Procedure on Corporate
Rehabilitation provides:

“SEC. 6. Stay Order.—If 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, whether for money or otherwise
and whether such enforcement is by court action or otherwise,
against the debtor, its guarantors and sureties not solidarily
liable with the debtor; (c) prohibiting the debtor from selling,
encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business; (d)
prohibiting the debtor from making any payment of its liabilities
outstanding as of the date of filing of the petition; (e) prohibiting
the debtor’s suppliers of goods or services from withholding
supply of goods and services in the ordinary course of business for
as long as the debtor makes payments for the services and goods
supplied after the issuance of the stay order; (f) directing the
payment in full of all administrative expenses incurred after the
issuance of the stay order; (g) fixing the initial hearing on the
petition not earlier than forty five (45) days but not later
than sixty (60) days from the filing thereof; (h) directing the
petitioner to publish the Order in a newspaper of general
circulation in the Philippines once a week for two (2) consecutive
weeks; (i) directing all creditors and all interested parties
(including the Securities and Exchange Commission) to file and
serve on the debtor a verified comment on or opposition to
the petition, with supporting affidavits and documents, not
later than ten (10) days before the date of the initial hearing and
putting them on notice that their failure to do so will bar them
from participating in the proceedings; and (j) directing the

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creditors and interested parties to secure from the court

copies of the petition and its annexes within such time as to
enable themselves to file their comment on or opposition to the
petition and to prepare for the initial hearing of the petition.”

Section 6 provides that the petition must be “sufficient in

form and substance.” In Rizal Commercial Banking
Corpora-

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6 A.M. No. 00-8-10-SC which took effect on December 15, 2000.

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7
tion v. Intermediate Appellate Court, 8this Court held that
under Section 6(c) of P.D. No. 902-A, receivers may be
appointed whenever: (1) necessary in order to
preserve the rights of the parties-litigants; and/or (2)
protect the interest of the investing public and creditors.
The situations contemplated in these instances are
serious in nature. There must exist a clear and
imminent danger of losing the corporate assets if a
receiver is not appointed. Absent such danger, such as
where there are sufficient assets to sustain the
rehabilitation plan and both investors and creditors are
amply protected, the need for appointing a receiver does
not exist. Simply put, the purpose of the law in
directing the appointment of receivers is to protect
the interests of the corporate investors and
creditors.
We agree with the Court of Appeals that the petition for
rehabilitation does not allege that there is a clear and
imminent danger that petitioner will lose its corporate
assets if a receiver is not appointed. In other words, the
“serious situation test” laid down by Rizal
Commercial Banking Corporation has not been met
or at least substantially complied with. Significantly, the
Stay Order dated July 13, 2004 issued by the RTC does not
state any serious situation affecting petitioner’s corporate
assets. We observe that in appointing Mr. Gener T.
Mendoza as Rehabilitation Receiver, the only basis of the
lower court was its finding that “the petition is
sufficient in form and substance.” However, it did not
specify any reason or ground to sustain such
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7 G.R. No. 74851, December 9, 1999, 320 SCRA 279.

8 Entitled “Reorganization of the Securities and Exchange Commission
with Additional Powers and Placing Said Agency Under the
Administrative Supervision of the Office of the President.” The Decree
was subsequently amended by Presidential Decree Nos. 1653, 1758, and
1799, and by Republic Act No. 8799 (The Securities Regulation Code of
2000), which transferred jurisdiction over rehabilitation cases from the
SEC to Regional Trial Courts sitting as Commercial Courts.

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finding. Clearly, the petition failed to comply with the

“serious situation test.”
As aptly held by the Court of Appeals:

“There are serious requirements before rehabilitation can be

ordered. That is why this stay order is issued only after a
management committee or receiver is appointed. Before a
management committee or receiver is appointed, the law
expressly states the serious requirements that must first exist: (1)
an imminent danger (National Development Company and New
Agrix, Inc. v. Philippine Veterans Bank, G.R. Nos. 84132-33,
December 10, 1990, 192 SCRA 257) of dissipation, loss, wastage or
destruction of assets or of paralization of business operations of
the liquid corporation which may be prejudicial to the interest of
minority stockholders, parties-litigants or to the general public, or
(2) there is a necessity to preserve the rights and interests of the
parties-litigants, of the investing public and of creditors.
In the case at bench, when the commercial court appointed a
rehabilitation receiver, the very next day after the filing of the
Petition for Rehabilitation, it is highly doubtful and well-nigh
impossible, that, without any hearing yet held, the
commercial court could have already gathered enough
evidence before it to determine whether there was any
imminent danger of dissipation of assets or of paralization
of business operations 9to warrant the appointment of a
rehabilitation receiver.”

In determining whether petitioner’s financial situation is

serious and whether there is a clear and imminent danger
that it will lose its corporate assets, the RTC, acting as
commercial court, should conduct a hearing wherein both
parties can present their respective evidence. Hence, a
remand of the records of this case to the RTC is imperative.
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WHEREFORE, we DENY the petition. The assailed

Decision of the Court of Appeals in CA-G.R. SP No. 88479
is AFFIRMED with the modification discussed above. Let
the records of this case be REMANDED to the RTC,
Branch 138,

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9 Rollo, pp. 66-67.

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Roos Industrial Construction, Inc. vs. National Labor
Relations Commission

Makati City, sitting as Commercial Court, for further

proceedings with dispatch to determine the merits of the
petition for rehabilitation. No costs.
SO ORDERED.

          Puno (C.J., Chairperson), Corona, Azcuna and

LeonardoDe Castro, JJ., concur.

Petition denied.

Note.—A court action is ipso jure suspended only upon

the appointment of a management committee or a
rehabilitation receiver. (Barotac Sugar Mills, Inc. vs. Court
of Appeals, 275 SCRA 497 [1997])

——o0o——

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