A Case Study

Of
Victorias Milling Company Inc.
A Bittersweet Struggle (Part 1 of 3)
By
Bunquin, Sean Dominic M.
Bato, April Dawn
Bobo, Stellamariz
Bordonada, Jesus Aporto
Ecleo, Nilody
Gabonada, John Michael
Jyrcelle Angelica Beringuel

M-F 12:00-2:00

Introduction
We are tasked to analyze cases related to Victorias Milling Company; it would be
good to note that we were assigned only one of the three cases, which will not show the
full picture only part of it. The findings will be presented in the order of the guide
questions. This section will give a summary on the events happening on this part of the
case as per the format in the case given, which was subdivided into sections. It is as
follows:
Summary of the case
Prologue
An unexpected development occurred in early 1997, news of cash flow problems
and undetermined liabilities reached the creditors of Victorias Milling Inc., The company
had just reported a 242.4% increase in its profit by the end of the first quarter of 1995
and everything was quiet in 1996. There were no headlines relating to problems
regarding Victorias Milling Inc.
The Creditors Meeting
A meeting was held on March 10,1997 at the PCIBank Tower by 32
representatives of the creditors of Victorias Milling Inc.(VMCI). First they tried to
determine two things, the exact extent of VMCIs liabilities and the number of creditors.
Only estimates were reached and it was as follows: 1) As to the number of creditors the
minimum would obviously not be below the creditors present here, however; with
Refined Sugar Deliver Order (RSDO)

holders and Refined Sugar Delivery Receipt

(RSDR) holders, it could amount to 800. 2) As to the liabilities again the minimum would
be the amount of the 32 institutions claims against VMCI which is 4.423 billion,
however; including the creditors of VMCIs subsidiaries Negros Marketing Co. Inc.
(Nonemarco) and Caneland Sugar Corp. (Caneland) it could reach 6.725 billion. and
they it appears that the total assets of VMCI amount to 7.1 billion roughly.
There is disbelief as to why this information is not known, considering that the
auditor of VMCI is SGV, which is one of the countrys top auditing firms. However, a

representative pointed that they indeed have copies of the information however its
reliability is under question due to the suspicious moves done by VMCI which involved
basically terminating relations with SGV upon it engaging the auditing services of
Joaquin Cunanan & Co., and Jardine Davies.
Another representative questioned the handling of the stock inventories RSDOs
and the RSDRs, it seems that this has been fraudulently handled in order to facilitate
the issuance of funds and as to the physical count by the creditors officers, it seems
that certainty cannot be reached due to the fact that labels and marks are easily altered
or transferred.
The meeting progressed to a point in which they were considering the creation of
a working committee which would facilitate either the liquidation of VMCI or its
rehabilitation. The unsecured creditors composing the majority seem to oppose the idea
of liquidation for many reasons one of which is rumours circulating regarding the 7.1
billion assets of VMCI as being false and that the true amount would not even reach half
of that in which case the unsecured creditors may not even be able to get what is due to
them, other possibilities such as VMCI filing a suspension of payment, which would be
favourable to them because both secured and unsecured creditors would be treated
equally, to the disadvantage of the secured creditors as this would mean lesser amount
received compared to liquidation.
On the viewpoint of rehabilitation, at the time it had never been done in the
country and considering the economic situation, short or midterm recovery was unlikely,
as one representative pointed out. After much deliberation, the creditors agreed to form
a working committee to help rehabilitate VMCI.
The Background of the Company
Victorias Milling Company Incorporated is the largest sugar mill operator in the
Philippines and one of the largest in Southeast Asia. It has the capacity to produce 30%
of the Philippines daily requirement of refined sugar. The company has expanded into
other industries such as packaging, food and engineering. VMCI organized Victorias
Food Corporation (VMC) which makes sardines, luncheon meat, bacon and ham.

Victorias Quality Packaging Corporation (VQPC) as one can tell packages stuff.
Needless to say the specifics of their subsidiaries can be viewed in the case, however;
a noteworthy subsidiary of VMCI is North Negros Marketing Co. Inc. (Nonemarco) is an
independent entity hired by VMCI to market its sugar and other products. In 1993 VMCI
became the parent of Nonemarco, VMCI is said to have monopolized the sugar refining
business up until 1994, by then majority of raw sugar mills built their own white sugar
facilities, which enhanced their capacities.
By mid- July 1997, for the first time in 78 years VMCI indefinitely shutdown
though they planned to resume operations at the beginning of the next milling season in
September, the likelihood however is slim at best.
Findings:

1. How did the Board of Directors in the case fare against the OECD's consensus
on

the

responsibilities

of

the

board? What

particular

areas

need

improvement? What concrete measures can ensure such improvements?

Here are the particular areas that need improvement for Victorias Milling
Company Inc.:
a) Ensuring the strategic guidance of the company
b) Monitoring of managerial performance and the prevention of conflicts of
interest
c) Oversight of functions they need to ensure conformity with applicable laws
d) Objectivity and independence of judgement
e) Failure to act in the best interest of all stakeholders
f) Take into account all interests in the company: shareholders, employees,
public
g) Acting in good faith, due care, and diligence
h) Effective implementation of policies and procedures
i) Duty of loyalty - responsibility and accountability

Here are the recommended measures to take.

a) The executives needs to know of their duties and responsibilities
b) They need to set up a code of conduct
c) Sound internal control system must also be established as well as proper
implementation and compliance
d) They need to oversee operations to ensure integrity of Financial reporting
e) Policies must be reviewed
f) Proper communication
2. Discuss the OECD's principle of the equitable treatment of shareholders. What
elements of this principle were applied with regard to VMCI's creditors? What
areas were missed?
We have searched the internet for the principles relating to the equitable
treatment of shareholders and this is what we came across (taken from
www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf)
The corporate governance framework should ensure the equitable
treatment of all shareholders, including minority and foreign shareholders.
All shareholders should have the opportunity to obtain effective redress for
violation of their rights. The principles also state that:

All shareholders of the same series of a class should be treated

equally.
1. Within any series of a class, all shares should carry the
same rights. All investors should be able to obtain
information about the rights attached to all series and
classes of shares before they purchase. Any changes in
voting rights should be subject to approval by those classes
of shares which are negatively affected.
2. Minority shareholders should be protected from abusive
actions by, or in the interest of, controlling shareholders
acting either directly or indirectly, and should have effective
means of redress.

3. Votes should be cast by custodians or nominees in a

manner agreed upon with the beneficial owner of the shares.
4. Impediments to cross border voting should be eliminated.
5. Processes and procedures for general shareholder
meetings should allow for equitable treatment of all
shareholders. Company procedures should not make it
unduly difficult or expensive to cast votes

Insider trading and abusive self-dealing should be prohibited

Members of the board and key executives should be required to
disclose to the board whether they, directly, indirectly or on behalf of
third parties, have a material interest in any transaction or matter
directly affecting the corporation.

Now with this in mind it is time to put this in the context of the case study.
Since we are correlating creditors with rules regarding shareholders not all of the
principles may be applicable. In the creditors meeting it is clear that both
secured and unsecured creditors sides were discussed everybody was given the
chance to say what they had to say specifically on the topic of liquidation or
rehabilitation both sides deliberated on the pros and cons of choosing one
alternative over the other, in a nutshell if liquidation were considered it would
have been beneficial to the secured stockholders, however; this will likely lead
VMCI to file for a suspension of payment which would be beneficial to the
unsecured creditors, in summary it is highly likely that only one side benefits in
liquidation. The option of rehabilitation however is beneficial to both sides, the
disadvantage however that considering the conditions at the time this seemed
highly unlikely to succeed, and reading the case study would show this was
indeed the case it took a long time before a rehabilitation plan was chosen.
The above is a clear application of the OECD equitable shareholder
principle that any major decisions should not impede upon the rights of fellow
stockholders the concept of which is that no one be unjustly benefitted over

another.
3. Are the minor players of VMCI (such as the workers and middle employees, as
well as the minor shareholders) taken into serious consideration in the major
players' struggle

to

rehabilitate

it?

Why?

Why

not?

The formation of the rehabilitation plan was a messy one as shown in the
minutes of the meeting of March 10, 1997 at first VMCI agreed to ask its
shareholders to waive their pre-emptive rights in a stockholders meeting,
however; this was not followed through, in February 1999 VMCIs Board of
Directors fought with the SEC appointed management committee (mancom)
rehabilitation plan, besides not honouring RSDOs they opposed a provision from
the mancoms rehabilitation plan regarding the waiving of existing stockholders
pre-emptive rights, arguing that the execution of their plan would not be affected
heavily by the pre-emptive right. So in regards to minor stockholders it is clear
VMCI considered them in making its rehabilitation plan.
In regards to its employees however it seemed that they were thought of as
disposable assets in forging its first rehabilitation plan they planned to cut cost by
retrenching employees which would lead to 2148 out of 4343 being displaced
which is a 51% reduction of manpower, furthermore workgroups were workforce ,
however to be fair, VMCI did consider the laid off employees at first, as proven by
the petition VMCI filed to SEC before the end of July 1997, which was the
creation of a management committee to oversee the operations of the entity one
of the stated functions is to pay off wages of employees and their benefits. In
conclusion, VMCI did consider the employees but in the end the results were
unfavourable to the workforce.
4. What were the conflicts that were brought into focus in the formulation of the
rehabilitation plan? Are these conflicts legitimate? How can the conflicts in
the formulation of the rehabilitation plan be fully addressed?
In order to show the conflicts, we shall put first the proposed plan of VMCI and
the mancom
The VMCI Rehabilitation Plan is as follows:

 Reduction of costs
Cutting of manpower by 51% and merging groups of similar functions
Shortening of milling and refinish operations
Intensifying sale of products other than sugar
The Mancom rehabilitation plan is as follows:
Priority to the improvement and revival of operations
Debt restructuring
Infusion of capital
Payment of creditors
Disposal of non strategic assets
As one can tell the proposals of the two groups are very different, and this
resulted into conflicts, it is so strong that by the end of April 1998 (three months
later) none of the plans have been implemented, because of this rehabilitation hit
another hiccup the two groups wanted their own plans to be implemented.

The conflicts that rose are as follows:

Whether to honour RSDOs issued to BPI and Dao Heng knowing that
the due diligence report uncovered irregularities and that legally a

corporation cannot commit a crime.

Whether to waive the pre-emptive rights of the shareholders or not.

The conflicts are legitimate; it took two years from this point for a
rehabilitation plan to be approved furthermore if they had forced one plan over
the other it may not be implemented smoothly hence a buffer zone was required,
and the case says as much however it did not go into details as to the specifics.
Let us put into consideration what was wrong though VMCIs plan focused
resolving cash flow and generation of revenue problems, its solution was cost
cutting which is not always the only solution, manco wanted to boost operations
which was needed.

5. Does the rehabilitation plan promise the possibility of putting VMCI back on
track? Why or why not? What areas must the rehabilitation plan focus on to
significantly

improve

VMCI's

chances for

an

economic

comeback?

The benefits of the rehabilitation plan were deliberated by the creditors in

the meeting of March 10, 1997. It was clear that in order for both the secured and
non-secured creditors to get more than minimum of what they loaned; they had
to take the risk of rehabilitating VMCI. As noted in the case study the
rehabilitation was unlikely and unpromising due to many factors such as the
slump in the sugar industry, the Asian financial crisis, and the fact that at the
time, it would be the first attempt to rehabilitation. Reading the case study
allowed us to see the area of weakness and problems that rose in the
rehabilitation efforts, communication and coordination is what would summarize it
perfectly.
The areas that needed to be considered in the rehabilitation plan having a
chance of succeeding are as follows:

Cooperation, plans to uphold the rehabilitation plans were stifled by many

factors on example is five creditor banks of nonemarco refused to respect
the agreement because nonemarco did not honor the RSDOs they have
issued to PCIBank, BPILeasing, Metrobank, Landbank which by the looks
of it were legally valid, in connection to this the stubbornness of VMCI to
act

on

this

helped

delay

the

rehabilitation

process.

Everything should be in writing, seeing as that the initial plans were not

followed because the agreement was in principle

Consider the review of corporate strategies, plans of action, risk policy
conflicts of interest monitoring internal control system and governance

practices
Improvement

of

operations

and

number of employees the company employs.

Conclusion

boost

of

sales

the

It is clear from the events that occurred in the case study that Victorias Milling Company
Inc. governance was not one which was lacking in elements, particularly transparency. It
is said that lacking one of the elements was a sign of bad governance, and indeed the
results of this were devastating, it led to the downfall of a company which had survived
World War II, droughts, economic slumps and so much more. The recommendation is to
follow

the

principles

of

good

governance

to

heart.