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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-56568 May 20, 1987

REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of Internal
Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF MANILA, BRANCH XVII,
QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACION OBRERO DE LA INDUSTRIA TABAQUERA Y
OTROS TRABAJADORES DE FILIPINAS (FOITAF) USTC EMPLOYEES ASSOCIATION WORKERS UNION-
PTGWO, respondents.

Oscar A. Pascua for assignee F. Candelaria.

Teofilo C. Villarico for respondent Federation.

Pedro A. Lopez for respondent USTC.

FELICIANO, J.:

The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980 of the Court of First
Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of Voluntary Insolvency of Quality Tobacco Corporation,
Quality Tobacco Corporation, Petitioner," and of the Order dated 19 January 1981 of the same court denying the motion for
reconsideration of the earlier Order filed by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.

In the voluntary insolvency proceedings commenced in May 1977 by private respondent Quality Tobacco Corporation
(the "Insolvent"), the following claims of creditors were filed:

(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as separation pay for
their members. This amount plus an additional sum of P280,672.99 as attorney's fees had been awarded by the
National Labor Relations Commission in NLRC Case No. RB-IV-9775-77. 1

(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF), as separation
pay for their members, an amount similarly awarded by the NLRC in the same NLRC Case.

(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the period 1 October 1967
to 28 February 1973;

(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various importations by the
Insolvent. These obligations appear to be secured by surety bonds. 2 Some of these imported items are apparently
still in customs custody so far as the record before this Court goes.

In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claims of USTC and
FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their respective members embodied
in final awards of the National Labor Relations Commission were to be preferred over the claims of the Bureau of
Customs and the Bureau of Internal Revenue. The trial court, in so ruling, relied primarily upon Article 110 of the
Labor Code which reads thus:

Article 110. Worker preference in case of bankruptcy — In the event of bankruptcy or liquidation of
an employer's business, his workers shall enjoy first preference as regards wages due them for
services rendered during the period prior to the bankruptcy or liquidation, any provision of law to

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the contrary notwithstanding. Union paid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of the employer.

The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the Labor Code is
not applicable as it speaks of "wages," a term which he asserts does not include the separation pay claimed by the
Unions. "Separation pay," the Solicitor General contends, is given to a laborer for a separation from employment
computed on the basis of the number of years the laborer was employed by the employer; it is a form of penalty or
damage against the employer in favor of the employee for the latter's dismissal or separation from service. 3

Article 97 (f) of the Labor Code defines "wages" in the following terms:

Wage' paid to any employee shall mean the remuneration or earnings, however designated, capable
of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or
commission basis, or other method of calculating the same, which is payable by an employer to an
employee under a written or unwritten contract of employment for work done or to be done, or for
services rendered or to be rendered, and includes the fair and reasonable value, as determined by
the Secretary of Labor, of board, lodging, or other facilities customarily furnished by the employer to
the employee. 'Fair and reasonable value' shall not include any profit to the employer or to any
person affiliated with the employer.(emphasis supplied)

We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection, that in Philippine
Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers Union, 4 the Solicitor General took a different
view and there urged that the term "wages" under Article 110 of the Labor Code may be regarded as embracing within its
scope severance pay or termination or separation pay. In PCIB, this Court agreed with the position advanced by the Solicitor
General.5 We see no reason for overturning this particular position. We continue to believe that, for the specific purposes
of Article 110 and in the context of insolvency termination or separation pay is reasonably regarded as forming part
of the remuneration or other money benefits accruing to employees or workers by reason of their having previously
rendered services to their employer; as such, they fall within the scope of "remuneration or earnings — for services
rendered or to be rendered — ." Liability for separation pay might indeed have the effect of a penalty, so far as the
employer is concerned. So far as concerns the employees, however, separation pay is additional remuneration to
which they become entitled because, having previously rendered services, they are separated from the employer's
service. The relationship between separation pay and services rendered is underscored by the fact that separation
pay is measured by the amount (i.e., length) of the services rendered. This construction is sustained both by the
specific terms of Article 110 and by the major purposes and basic policy embodied in the Labor Code. 6 It is also the
construction that is suggested by Article 4 of the Labor Code which directs that doubts — assuming that any
substantial rather than merely frivolous doubts remain-in the interpretation of the provisions of the labor Code and
its implementing rules and regulations shall be "resolved in favor of labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedings instituted by the Insolvent
cannot, however, rest on a reading of Article 110 of the labor Code alone.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110
must be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference
of credits, which provisions find particular application in insolvency proceedings where the claims of all creditors,
preferred or non-preferred, may be adjudicated in a binding manner. 7 It is thus important to begin by outlining the
scheme constituted by the provisions of the Civil Code on this subject.

Those provisions may be seen to classify credits against a particular insolvent into three general categories, namely:

(a) special preferred credits listed in Articles 2241 and 2242,

(b) ordinary preferred credits listed in Article 2244; and

(c) common credits under Article 2245.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once that these credits
constitute liens or encumbrances on the specific movable or immovable property to which they relate. Article 2243
makes clear that these credits "shall be considered as mortgages or pledges of real or personal property, or liens
within the purview of legal provisions governing insolvency." It should be emphasized in this connection that "duties,
taxes and fees due [on specific movable property of the insolvent] to the State or any subdivision thereof" (Article
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2241 [1]) and "taxes due upon the [insolvent's] land or building (2242 [1])"stand first in preference in respect of the
particular movable or immovable property to which the tax liens have attached. Article 2243 is quite explicit: "[T]axes
mentioned in number 1, Article 2241 and number 1, Article 2242 shall first be satisfied. " The claims listed in numbers
2 to 13 in Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in order of precedence; such
claims enjoy their privileged character as liens and may be paid only to the extent that taxes have been paid from the
proceeds of the specific property involved (or from any other sources) and only in respect of the remaining balance
of such proceeds. What is more, these other (non-tax) credits, although constituting liens attaching to particular
property, are not preferred one over another inter se. Provided tax liens shall have been satisfied, non-tax liens or
special preferred credits which subsist in respect of specific movable or immovable property are to be treated on an
equal basis and to be satisfied concurrently and proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with
Articles 2246 to 2249 establish a two-tier order of preference. The first tier includes only taxes, duties and fees due on
specific movable or immovable property. All other special preferred credits stand on the same second tier to be
satisfied, pari passu and pro rata, out of any residual value of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence over
ordinary preferred credits so far as concerns the property to which the liens have attached. The specially preferred
credits must be discharged first out of the proceeds of the property to which they relate, before ordinary preferred
creditors may lay claim to any part of such proceeds. 9

If the value of the specific property involved is greater than the sum total of the tax liens and other specially preferred
credits, the residual value will form part of the "free property" of the insolvent — i.e., property not impressed with
liens by operation of Articles 2241 and 2242. If, on the other hand, the value of the specific movable or immovable is
less than the aggregate of the tax liens and other specially preferred credits, the unsatisfied balance of the tax liens
and other such credits are to the treated as ordinary credits under Article 2244 and to be paid in the order of
preference there set up. 10

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow such
property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and other assets of
the insolvent applied in a certain sequence or order of priority. 11

Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In this sequence,
certain taxes and assessments also figure but these do not have the same kind of overriding preference that Articles
2241 No. 1 and 2242 No. I create for taxes which constituted liens on the taxpayer's property. Under Article 2244,

(a) taxes and assessments due to the national government, excluding those which result in tax liens
under Articles 2241 No. 1 and 2242 No. 1 but including the balance thereof not satisfied out of the
movable or immovable property to which such liens attached, are ninth in priority;

(b) taxes and assessments due any province, excluding those impressed as tax liens under Articles
2241 No. 1 and 2242 No. 1, but including the balance thereof not satisfied out of the movable or
immovable property to which such liens attached, are tenth in priority; and

(c) taxes and assessments due any city or municipality, excluding those impressed as tax liens
under Articles 2241 No. I and 2242 No. 2 but including the balance thereof not satisfied out of the
movable or immovable property to which such liens attached, are eleventh in priority.

It is within the framework of the foregoing rules of the Civil Code that the question of the relative priority of the claims
of the Bureau of Customs and the Bureau of Internal Revenue, on the one hand, and of the claims of the Unions for
separation pay of their members, on the other hand, is to be resolved. A related vital issue is what impact Article 110
of the labor Code has had on those provisions of the Civil Code.

A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-

Under Section 1204 of the Tariff and Customs Code, 12 the liability of an importer for duties, taxes and fees and other charges
attaching on importation constitute a personal debt due from the importer to the government which can be discharged only by
payment in full of all duties, taxes, fees and other charges legally accruing It also constitutes a lien upon the articles imported
which may be enforced while such articles are in the custody or subject to the control of the government. (emphasis supplied)

Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of a specially
preferred credit under Article 2241, No. 1, of the Civil Code. only in respect of the articles importation of which by the
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Insolvent resulted in the assessment of the unpaid taxes and duties, and which are still in the custody or subject to
the control of the Bureau of Customs. The goods imported on one occasion are not subject to a lien for customs duties and
taxes assessed upon other importations though also effected by the Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on which such duties and taxes are due, would have to be paid out of the
Insolvent's "free property" in accordance with the order of preference embodied in Article 2244 of the Civil Code. Such
unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of the Civil Code and hence would be ninth in
priority.

B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —

Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13 later reenacted in Identical terms as Section
301 of the Tax Code of 1977, 14 an unpaid "internal revenue tax," together with related interest, penalties and costs,
constitutes a lien in favor of the Government from the time an assessment therefor is made and until paid, "upon all property
and rights to property belonging to the taxpayer."

Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes imposed under the National Internal
Revenue Code, specifically Title VIII, Chapter IX of the old Tax Code and little VIII, Chapter VII of the Tax Code of
1977. 15 Tobacco inspection fees are collected both for purposes of regulation and control and for purposes of revenue
generation: half of the said fees accrues to the Tobacco Inspection Fund created by Section 12 of Act No. 2613, as amended
by Act No. 3179, while the other half accrues to the Cultural Center of the Philippines. Tobacco inspection fees, in other words,
are imposed both as a regulatory measure and as a revenue-raising measure. In Commissioner of Internal Revenue us.
Guerrero, et al 16 this Court held, through Mr. Chief Justice Concepcion, that the term "tax" is used in Section 315 of the old
Tax Code:

not in the limited sense [of burdens imposed upon persons and/or properties, by way of contributions to the
support of the Government, in consideration of general benefits derived from its operation], but, in
a broad sense, encompassing all government revenues collectible by the Commissioner of Internal Revenue
under said Code, whether involving taxes, in the strict technical sense thereof, or not. x x x As used in Title
IX of said Code, the term 'tax' includes 'any national internal revenue tax, fee or charge imposed by the
Code. 17

It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a claim for
unpaid internal revenue taxes 18 which gives rise to a tax lien upon all the properties and assets, movable and
immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil
Code, this tax claim must be given preference over any other claim of any other creditor, in respect of any and all
properties of the Insolvent. 19

C. Claims of the Unions for Separation Pay of Their Members —

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages
either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages
do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242
of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number
6. "claims for laborers' wages, on the goods manufactured or the work done;" or by Article 2242, number 3: "claims
of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other
works, upon said buildings, canals or other works." To the extent that claims for unpaid wages fall outside the scope
of Article 2241, number 6 and 2242, number 3, they would come within the ambit of the category of ordinary preferred
credits under Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of their members
constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets owned by the Insolvent. And even in respect of such tobacco
and tobacco products produced by the Insolvent, the claims of the Unions may be given effect only after the Bureau
of Internal Revenue's claim for unpaid tobacco inspection fees shall have been satisfied out of the products so
manufactured by the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of the Insolvent in favor of
workmen who constructed or repaired such building or other real property. Article 2242, number 3, does not however appear
relevant in the instant case, since the members of the Unions to whom separation pay is due rendered services to the
Insolvent not (so far as the record of this case would show) in the construction or repair of buildings or other real property, but
rather, in the regular course of the manufacturing operations of the Insolvent. The Unions' claims do not therefore constitute a
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lien or encumbrance upon any immovable property owned by the Insolvent, but rather, as already indicated, upon the
Insolvent's existing inventory (if any of processed tobacco and tobacco products.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete scheme of classification,
concurrence and preference of credits in insolvency set out in the Civil Code. We believe and so hold that Article 110 of the
Labor Code did not sweep away the overriding preference accorded under the scheme of the Civil Code to tax claims of the
government or any subdivision thereof which constitute a lien upon properties of the Insolvent. It is frequently said that taxes
are the very lifeblood of government. The effective collection of taxes is a task of highest importance for the sovereign. It is
critical indeed for its own survival. It follows that language of a much higher degree of specificity than that exhibited in Article
110 of the Labor Code is necessary to set aside the intent and purpose of the legislator that shines through the precisely
crafted provisions of the Civil Code. It cannot be assumed simpliciter that the legislative authority, by using in Article 110 the
words "first preference" and "any provision of law to the contrary notwithstanding" intended to disrupt the elaborate and
symmetrical structure set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to subsume the
sovereign itself within the term "other creditors" in stating that "unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of employer." Insistent considerations of public policy prevent us from giving to
"other creditors" a linguistically unlimited scope that would embrace the universe of creditors save only unpaid employees.

We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil Code. Bearing in mind
the overriding precedence given to taxes, duties and fees by the Civil Code and the fact that the Labor Code does not impress
any lien on the property of an employer, the use of the phrase "first preference" in Article 110 indicates that what Article 110
intended to modify is the order of preference found in Article 2244, which order relates, as we have seen, to property of the
Insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242. We have
noted that Article 2244, number 2, establishes second priority for claims for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the commencement of the proceedings in insolvency." Article 110 of the
Labor Code establishes "first preference" for services rendered "during the period prior to the bankruptcy or liquidation, " a
period not limited to the year immediately prior to the bankruptcy or liquidation. Thus, very substantial effect may be given to
the provisions of Article 110 without grievously distorting the framework established in the Civil Code by holding, as we so
hold, that Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly, by removing the
one year limitation found in Article 2244, number 2; and (b) secondly, by moving up claims for unpaid wages of laborers or
workers of the Insolvent from second priority to first priority in the order of preference established I by Article 2244.

Accordingly, and by way of recapitulating the application of Civil Code and Labor Code provisions to the facts herein, the trial
court should inventory the properties of the Insolvent so as to determine specifically: (a) whether the assets of the Insolvent
before the trial court includes stocks of processed or manufactured tobacco products; and (b) whether the Bureau of Customs
still has in its custody or control articles imported by the Insolvent and subject to the lien of the government for unpaid customs
duties and taxes.

In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco products, such inventories must be
subjected firstly to the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees. The remaining value of
such inventories after satisfaction of such fees (or should such inspection fees be satisfied out of other properties of the
Insolvent) will be subject to a lien in favor of the Unions by virtue of Article 2241, number 6. In case, upon the other hand, the
Insolvent no longer has any inventory of processed or manufactured product, then the claim of the Unions for separation pay
would have to be satisfied out of the "free property" of the Insolvent under Article 2244 of the Civil Code. as modified by Article
110 of the Labor Code.

Turning to (b), should the Bureau of Customs no longer have any importations by the Insolvent still within customs custody or
control, or should the importations still held by the Bureau of Customs be or have become insufficient in value for the purpose,
customs duties and taxes remaining unpaid would have only ninth priority by virtue of Article 2244, number 9. In respect
therefore of the Insolvent's "free property, " the claims of the Unions will enjoy first priority under Article 2244 as modified and
will be paid ahead of the claims of the Bureau of Customs for any customs duties and taxes still remaining unsatisfied.

It is understood that the claims of the Unions referred to above do not include the 10% claim for attorney's fees. Attorney's
fees incurred by the Unions do not stand on the same footing as the Unions' claims for separation pay of their members.

WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and 19 January 1981 of the trial
court are modified accordingly. This case is hereby remanded to the trial court for further proceedings in insolvency compatible
with the rulings set forth above. No pronouncement as to costs.

SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 86932 June 27, 1990

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and DOROTHY S. ANCHETA, MA. MAGDALENA Y. ARMARILLE,
CONSTANTE A. ANCHETA, CONSTANTE B. BANAYOS, EVELYN BARRIENTOS, JOSE BENAVIDEZ, LEONARDO
BUENAAGUA, BENJAMIN BAROT, ERNESTO S. CANTILLER, EDUARDO CANDA, ARMANDO CANDA, AIDA DE LUNA,
PACIFICO M. DE JESUS, ALFREDO ESTRERA, AURELIO A. FARINAS, FRANCISCO GREGORIO, DOMELINA
GONZALES, JUANA JALANDONI, MANUEL MALUBAY, FELICIANO OCAMPO, MABEL PADO, GEMINIANO PLETA,
ERNESTO S. SALAMAT, JULIAN TRAQUENA, JUSFIEL SILVERIO, JAMES CRISTALES, FRANCISCO BAMBIO, JOSE
T. MARCELO, JR., SUSAN M. OLIVAR, ERNESTO JULIO, CONSTANTE ANCHETA, JR., ENRIQUE NABUA and JAVIER
P. MATARO, respondents.

The Legal Counsel for petitioner.

CA. Ancheta & C.B. Banayos for private respondents.

REGALADO, J.:

The present petition for certiorari seeks the reversal of the decision of the National Labor Relations Commission
(NLRC) in, NLRC-NCR Case No. 00-07-02500-87, dated January 16, 1986, 1 which dismissed the appeal of the
Development Bank of the Philippines (DBP) from the decision of the labor arbiter ordering it to pay the unpaid wages,
13th month pay, incentive pay and separation pay of herein private respondents.

Philippine Smelters Corporation (PSC), a corporation registered under Philippine law, obtained a loan in 1983 from
the Development Bank of the Philippines, a government-owned financial institution created and operated in
accordance with Executive Order No. 81, to finance its iron smelting and steel manufacturing business. To secure
said loan, PSC mortgaged to DBP real properties with all the buildings and improvements thereon and chattels, with
its President, Jose T. Marcelo, Jr., as co-obligor.

By virtue of the said loan agreement, DBP became the majority stockholder of PSC, with stockholdings in the amount
of P31,000,000.00 of the total P60,226,000.00 subscribed and paid up capital stock. Subsequently, it took over the
management of PSC.

When PSC failed to pay its obligation with DBP, which amounted to P75,752,445.83 as of March 31, 1986, DBP
foreclosed and acquired the mortgaged real estate and chattels of PSC in the auction sales held on February 25, 1987
and March 4, 1987.

On February 10, 1987, forty (40) petitioners filed a Petition for Involuntary Insolvency in the Regional Trial Court,
Branch 61 at Makati, Metropolitan Manila, docketed therein as Special Proceeding No. M-1359, 2against PSC and DBP,
impleading as co-respondents therein Olecram Mining Corporation, Jose Panganiban Ice Plant and Cold Storage, Inc. and
PISO Bank, with said petitioners representing themselves as unpaid employees of said private respondents, except PISO
Bank.

On February 13, 1987, herein private respondents filed a complaint with the Department of Labor against PSC for nonpayment
of salaries, 13th month pay, incentive leave pay and separation pay. On February 20, 1987, the complaint was amended to
include DBP as party respondent. The case was thereafter indorsed to the Arbitration Branch of the National Labor Relations
Commission (NLRC). DBP filed its position paper on September 7, 1987, invoking the absence of employer-employee
relationship between private respondents and DBP and submitting that when DBP foreclosed the assets of PSC, it did so as a
foreclosing creditor.

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On January 30, 1988, the labor arbiter rendered a decision, the dispositive portion of which directed that "DBP as foreclosing
creditor is hereby ordered to pay all the unpaid wages and benefits of the workers which remain unpaid due to PSC's
foreclosure." 3

On appeal by DBP, the NLRC sustained the ruling of the labor arbiter, holding DBP liable for unpaid wages of private
respondents "not as a majority stockholder of respondent PSC, but as the foreclosing creditor who possesses the assets of
said PSC by virtue of the auction sale it held in 1987." In addition, the NLRC held that the labor arbiter is correct in assuming
jurisdiction because "the worker's preference to the amount secured by DBP by virtue of said foreclosure sales of PSC
properties arose out of or are connected or interwoven with the labor dispute brought forth by appellees against PSC and
DBP. 4 Hence, the present petition by DBP.

DBP contends that the labor arbiter and the NLRC committed a grave abuse of discretion (1) in assuming jurisdiction over
DBP; (2) in applying the provisions of Article 110 of the Labor Code, as amended; and (3) in not enforcing and applying
Section 14 of Executive Order No. 81.

We find merit in the petition.

It is to be noted that in their comment, private respondents tried to prove the existence of employer-employee relationship
based on the fact that DBP is the majority stockholder of PSC and that the majority of the members of the board of directors of
PSC are from DBP. 5 We do not believe that these circumstances are sufficient indicia of the existence of an employer-
employee relationship as would confer jurisdiction over the case on the labor arbiter, especially in the light of the express
declaration of said labor arbiter and the NLRC that DBP is being held liable as a foreclosing creditor. At any rate, this
jurisdictional defect was cured when DBP appealed the labor arbiter's decision to the NLRC and thereby submitted to its
jurisdiction.

The pivotal issue for resolution is whether DBP, as foreclosing creditor, could be held liable for the unpaid wages, 13th month
pay, incentive leave pay and separation pay of the employees of PSC.

We rule in the negative.

During the dates material to the foregoing proceedings, Article 110 of the Labor Code read:

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary
notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to a share
in the assets of the employer.

In conjunction therewith, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code
provided:

Sec. 10. Payment of wages in mm of bankruptcy.-Unpaid wages earned by the employees before the
declaration of bankruptcy or judicial liquidation of the employer's business shall be given first preference and
shall be paid in full before other creditors may establish any claim to a share in the assets of the employer.

Interpreting the above provisions, this Court, in Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et
al., 6 explicated as follows:

It is quite clear from the provisions that a declaration of bankruptcy or a judicial liquidation must be present
before the worker's preference may be enforced. ... .

xxx xxx xxx

Moreover, the reason behind the necessity for a judicial proceeding or a proceeding in rem before the
concurrence and preference of credits may be applied was explained by this Court in the case of Philippine
Savings Bank v. Lantin (124 SCRA 476 [1983]). We said:

The proceedings in the court below do not partake of the nature of the insolvency
proceedings or settlement of a decedent's estate. The action filed by Ramos was only to
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collect the unpaid cost of the construction of the duplex apartment. It is far from being a
general liquidation of the estate of the Tabligan spouses.

Insolvency proceedings and settlement of a decedent's estate are both proceedings in

rem which are binding against the whole world. All persons having interest in the subject
matter involved, whether they were notified or not, are equally bound. Consequently, a
liquidation of similar import or 'other equivalent general liquidation must also necessarily
be a proceeding in rem so that all interested persons whether known to the parties or not
may be bound by such proceeding.

In the case at bar, although the lower court found that 'there were no known creditors
other than the plaintiff and the defendant herein,' this can not be conclusive. It will not bar
other creditors in the event they show up and present their claim against the petitioner
bank, claiming that they also have preferred liens against the property involved.
Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which is
supposed to be indefeasible would remain constantly unstable and questionable. Such
could not have been the intention of Article 2243 of the Civil Code although it considers
claims and credits under Article 2242 as statutory fines. Neither does the De Barreto case
...

The claims of all creditors whether preferred or non- preferred, the Identification of the preferred ones and
the totality of the employer's asset should be brought into the picture. There can then be an authoritative,
fair, and binding adjudication instead of the piece meal settlement which would result from the questioned
decision in this case.

Republic Act No. 6715, which took effect on March 21, 1989, amended Article 110 of the Labor Code to read as follows:

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards their unpaid wages and other
monetary claims, any provision of law to the contrary notwithstanding. Such unpaid wages and monetary
claims shall be paid in full before the claims of the Government and other creditors may be paid.

As a consequence, Section 1 0, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code was likewise
amended, to wit:

Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In case of bankruptcy or
liquidation of the employer's business, the unpaid wages and other monetary claims of the employees shall
be given first preference and shall be paid in full before the claims of government and other creditors may be
paid.

Despite said amendments, however, the same interpretation of Article 110 as applied in the aforesaid case of Development
Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was adopted by this Court in the recent case
of Development Bank of the Philippines vs. National Labor Relations Commission, et. al., 7 For facility of reference, especially
the rationalization for the conclusions reached therein, we reproduce the salient portions of the decision in this later case.

Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does this
means then that liquidation proceedings have been done away with?

We opine m the negative, upon the following considerations:

1. Because of its impact on the entire system of credit, Article 110 of the Labor Code cannot be viewed in
isolation but must be read in relation to the Civil Code scheme on classification and preference of credits.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in
isolation. Rather, Article 110 must be read in relation to the provisions of the Civil Code
concerning the classification, concurrence and preference of credits which provisions find
particular application in insolvency proceedings where the claims of all creditors, preferred
or non-preferred, may be adjudicated in a binding manner ... (Republic vs. Peralta (G.R.
No. L-56568, May 20, 1987, 150 SCRA 37).

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2. In the same way that the Civil Code provisions on classification of credits and the Insolvency Law have
been brought into harmony, so also must the kindred provisions of the Labor Law be made to harmonize
with those laws.

3. In the event of insolvency, a principal objective should be to effect an equitable distribution of the
insolvent's property among his creditors. To accomplish this there must first be some proceeding where
notice to all of the insolvent's creditors may be given and where the claims of preferred creditors may be
bindingly adjudicated (De Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6 SCRA 928). The
rationale therefor has been expressed in the recent case of DBP vs. Secretary of Labor (G.R. No. 79351, 28
November 1989), which we quote:

A preference of credit bestows upon the preferred creditor an advantage of having his
credit satisfied first ahead of other claims which may be established against the debtor.
Logically, it becomes material only when the properties and assets of the debtors are
insufficient to pay his debts in full; for if the debtor is amply able to pay his various
creditors, in full, how can the necessity exist to determine which of his creditors shall be
paid first or whether they shall be paid out of the proceeds of the sale of the debtor's
specific property? Indubitably, the preferential right of credit attains significance only after
the properties of the debtor have been inventoried and liquidated, and the claims held by
his various creditors have been established (Kuenzle & Streiff [Ltd.] vs. Villanueva, 41
Phil. 611 [1916]; Barretto vs. Villanueva, G.R. No. 14038, 29 December 1962, 6 SCRA
928; Philippine Savings Bank vs. Lantin, G.R. 33929, 2 September 1983,124 SCRA 476).

4. A distinction should be made between a preference of credit and a lien. A preference applies only to
claims which do not attach to specific properties. A hen creates a charge on a particular property. The right
of first preference as regards unpaid wages recognize by Article 110 does not constitute a hen on the
property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference
in application. It is a met-hod adopted to determine and specify the order in which credits should be paid in
the final distribution of the proceeds of the insolvent's assets- It is a right to a first preference in the
discharge of the funds of the judgment debtor. in the words of Republic vs. Peralta, supra:

Article 110 of the Labor Code does not purport to create a lien in favor of workers or
employees for unpaid wages either upon all of the properties or upon any particular
property owned by their employer. Claims for unpaid wages do not therefore fall at all
within the category of specially preferred claims established under Articles 2241 and 2242
of the Civil Code, except to the extent that such claims for unpaid wages are already
covered by Article 2241, number 6: 'claims for laborers' wages, on the goods
manufactured or the work done; or by Article 2242, number 3: 'claims of laborers and
other workers engaged in the construction, reconstruction or repair of buildings, canals
and other works, upon said buildings, canals or other works.' To the extent that claims for
unpaid wages fall outside the scope of Article 2241, number 6 and Article 2242, number 3,
they would come within the ambit of the category of ordinary preferred credits under
Article 2244.'

5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for
whose security it was constituted (Article 2176, Civil Code). It creates a real right which is enforceable
against the whole world. It is a lien on an Identified immovable property, which a preference is not. A
recorded mortgage credit is a special preferred credit under Article 2242 (5) of the Civil Code on
classification of credits. The preference given by Article 110, when not falling within Article 2241 (6) and
Article 2242 (3) of the Civil Code and not attached to any specific property, is an ordinary preferred credit
although its impact is to move it from second priority to first priority in the order of preference established by
Article 2244 of the Civil Code (Republic vs. Peralta, supra).

In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or hen of any kind as security is
not permitted to vote in the election of the assignee in insolvency proceedings unless the value of his
security is first fixed or he surrenders all such property to the receiver of the insolvent's estate.

6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean 'absolute
preference,' the same should be given only prospective effect in line with the cardinal rule that laws shall
have no retroactive effect, unless the contrary is provided (Article 4, Civil Code). Thereby, any infringement

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on the constitutional guarantee on non-impairment of obligation of contracts (Section 10, Article III, 1987
Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated by several years the
amendatory law, RA No. 6715. To give Article 110 retroactive effect would be to wipe out the mortgage in
DBPs favor and expose it to a risk which it sought to protect itself against by requiring a collateral in the form
of real property.

In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any
effective way prior to the time of its presentation in distribution proceedings. It will find application when, in
proceedings such as insolvency, such unpaid wages shall be paid in full before the 'claims of the
Government and other creditors' may be paid. But, for an orderly settlement of a debtor's assets, all
creditors must be convened, their claims ascertained and inventoried, and thereafter the preference
determined in the course of judicial proceedings which have for their object the subjection of the property of
the debtor to the payment of his debts or other lawful obligations. Thereby, an orderly determination of
preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L-33929, September 2,
1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-interest, since those
proceedings are proceedings in rem; and the legal scheme of classification, concurrence and preference of
credits in the Civil Code, the Insolvency Law, and the Labor Code is preserved in harmony.

On the foregoing considerations and it appearing that an involuntary insolvency proceeding has been instituted against PSC,
private respondents should properly assert their respective claims in said proceeding. .

WHEREFORE, the petition is GRANTED. The decision of public respondent is hereby ANNULLED and SET ASIDE.

SO ORDERED.

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Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 175844 July 29, 2013

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SARABIA MANOR HOTEL CORPORATION, Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari 1 assailing the Decision2 dated April 24, 2006 and Resolution3dated
December 6, 2006 of the Court of Appeals, Cebu City (CA) in CA-G.R. CV. No. 81596 which affirmed with modification the
rehabilitation plan of respondent Sarabia Manor Hotel Corporation (Sarabia) as approved by the Regional Trial Court of Iloilo
City, Branch 39 (RTC) through its Order4 dated August 7, 2003.

The Facts

Sarabia is a corporation duly organized and existing under Philippine laws, with principal place of business at 101 General
Luna Street, Iloilo City.5 It was incorporated on February 22, 1982, with an authorized capital stock of ₱10,000,000.00, fully
subscribed and paid-up, for the primary purpose of owning, leasing, managing and/or operating hotels, restaurants, barber
shops, beauty parlors, sauna and steam baths, massage parlors and such other businesses incident to or necessary in the
management or operation of hotels.6

In 1997, Sarabia obtained a ₱150,000,000.00 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 ₱20,000,000.00 stand-by credit line was approved by FEBTC in the same year.7

The foregoing debts were secured by real estate mortgages over several parcels of land 8 owned by Sarabia and a
comprehensive surety agreement dated September 1, 1997 signed by its stockholders. 9 By virtue of a merger, Bank of the
Philippine Islands (BPI) assumed all of FEBTC’s rights against Sarabia.10

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. Thus, despite the fact that it had
more assets than liabilities at that time,11 it, nevertheless, filed, on July 26, 2002, a Petition12 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.

In the said petition, Sarabia claimed that its cash position suffered 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. In addition, it was
compelled to divert some of its funds in order to cover cost overruns. The situation became even more difficult when the grace
period for the payment of the principal loan amounts ended in 2000 which resulted in higher amortizations. Moreover, external
events adversely affecting the hotel industry, i.e., the September 11, 2001 terrorist attacks and the Abu Sayyaf issue, also
contributed to Sarabia’s financial difficulties.15 Owing to these circumstances, 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). 16

In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding loans, submitting that the interest
payments on the same be 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%

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p.a. for the year 2018. Likewise, 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.

Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued a Stay Order 18 on August 2, 2002. It
also appointed Liberty B. Valderrama as Sarabia’s rehabilitation receiver (Receiver). Thereafter, BPI filed its Opposition. 19

After several hearings, the RTC gave due course to the rehabilitation petition and referred Sarabia’s proposed rehabilitation
plan to the Receiver for evaluation.20

In a Recommendation21 dated July 10, 2003 (Receiver’s Report), the Receiver found that Sarabia may be rehabilitated and
thus, made the following recommendations:

(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial Appliance, Rural Bank of Pavia, and Barcelo
Gestion Hotelera, S.L. (Barcelo), under the following terms and conditions: (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 principal; (b) waive all penalties; (c) extend the payment period to seventeen (17) years, i.e., from 2003 to
2019, with a two-year grace period in principal payment; (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; 22 (e) the interest and principal based on the amortization
schedule shall be payable annually at the last banking day of each year; and (f) any deficiency shall be paid
personally by Sarabia’s stockholders in the event it 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; 23

(2) Pay Sarabia’s outstanding payables with its suppliers and the government so as not to disrupt hotel operations; 24

(3) Convert the Advances from stockholders amounting to ₱18,748,306.00 to stockholder’s equity and other
advances amounting to ₱42,688,734.00 as of the December 31, 2002 tentative financial statements to Deferred
Credits; the said conversion should increase stockholders’ equity to ₱268,545,731.00 and bring the debt to equity
ratio to 0.85:1;25

(4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as Accounts Receivable – Trade,
amounting to ₱285,612.17 as of December 31, 2001, and its remaining receivables after such date;26

(5) No compensation or cash dividends shall be paid to the stockholders during the rehabilitation period, except those
who are directly employed by the hotel as a full time officer, employee or consultant covered by a valid contract and
for a reasonable fee;27

(6) All capital expenditures which are over and above what is provided in the case flow of the rehabilitation plan which
will materially affect Sarabia’s cash position but which are deemed necessary in order to maintain the hotel’s
competitiveness in the industry shall be subject to the RTC’s approval prior to its implementation; 28

(7) Terminate the management contract with Barcelo, thereby saving an estimated ₱25,830,997.00 in management
fees, over and above the salaries and benefits of certain managerial employees; 29

(8) Appoint a new management team which would be required to submit a comprehensive business plan to support
the generation of the target revenue as reported in the rehabilitation plan; 30

(9) Open a debt servicing account and transfer all excess funds thereto, which in no case should be less than
₱500,000.00 at the end of the month; the funds will be drawn payable to the creditors only based on the amortization
schedule;31 and

(10) Release the surety obligations of Sarabia’s stockholders, considering the adequate collaterals and securities
covered by the rehabilitation plan and the continuing mortgages over Sarabia’s properties. 32

The RTC Ruling

In an Order33 dated August 7, 2003, the RTC approved Sarabia’s rehabilitation plan as recommended by the Receiver, finding
the same to be feasible. In this accord, it observed that the rehabilitation plan was realistic since, based on Sarabia’s financial
history, it was shown that it has the inherent capacity to generate funds to pay its loan obligations given the proper
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perspective.34 The recommended rehabilitation plan was also practical in terms of the interest rate pegged at 6.75% p.a. since
it is based on Sarabia’s ability to pay and the creditors’ perceived cost of money. 35 It was likewise found to be viable since,
based on the extrapolations made by the Receiver, Sarabia’s revenue projections, albeit projected to slow down, remained to
have a positive business/profit outlook altogether. 36

The RTC further noted that while it may be true that Sarabia has been unable to comply with its existing terms with BPI, it has
nonetheless complied with its obligations to its employees and suppliers and pay its taxes to both local and national
government without disrupting the day-to-day operations of its business as an on-going concern.37

More significantly, the RTC did not give credence to BPI’s opposition to the Receiver’s recommended rehabilitation plan as
neither BPI nor the Receiver was able to substantiate the claim that BPI’s cost of funds was at the 10% p.a. threshold. In this
regard, the RTC gave more credence to the Receiver’s determination of fixing the interest rate at 6.75% p.a., taking into
consideration not only Sarabia’s ability to pay based on its proposed interest rates, i.e., 7% to 14% p.a., but also BPI’s
perceived cost of money based on its own published interest rates for deposits, i.e., 1% to 4.75% p.a., as well as the rates for
treasury bills, i.e., 5.498% p.a. and CB overnight borrowings, i.e., 7.094%. p.a. 38

The CA Ruling

In a Decision39 dated April 24, 2006, the CA affirmed the RTC’s ruling with the modification of reinstating the surety obligations
of Sarabia’s stockholders to BPI as an additional safeguard for the effective implementation of the approved rehabilitation
plan.40 It held that the RTC’s conclusions as to the feasibility of Sarabia’s rehabilitation was well-supported by the company’s
financial statements, both internal and independent, which were properly analyzed and examined by the Receiver. 41 It also
upheld the 6.75%. p.a. interest rate on Sarabia’s loans, finding the said rate to be reasonable given that BPI’s interests as a
creditor were properly accounted for. As published, BPI’s time deposit rate for an amount of ₱5,000,000.00 (with a term of
360-364 days) is at 5.5% p.a.; while the benchmark ninety one-day commercial paper, which banks used to price their loan
averages to 6.4% p.a. in 2005, has a three-year average rate of 6.57% p.a.42 As such, the 6.75% p.a. interest rate would be
higher than the current market interest rates for time deposits and benchmark commercial papers. Moreover, the CA pointed
out that should the prevailing market interest rates change as feared by BPI, the latter may still move for the modification of the
approved rehabilitation plan.43

Aggrieved, BPI moved for reconsideration which was, however, denied in a Resolution44 dated December 6, 2006.

Hence, this petition.

The Issue Before the Court

The primordial issue raised for the Court’s resolution is whether or not the CA correctly affirmed Sarabia’s rehabilitation plan
as approved by the RTC, with the modification on the reinstatement of the surety obligations of Sarabia’s stockholders.

BPI mainly argues that the approved rehabilitation plan did not give due regard to its interests as a secured creditor in view of
the imposition of a fixed interest rate of 6.75% p.a. and the extended loan repayment period. 45 It likewise avers that Sarabia’s
misrepresentations in its rehabilitation petition remain unresolved. 46

On the contrary, Sarabia essentially maintains that: (a) the present petition improperly raises questions of fact; 47 (b) the
approved rehabilitation plan takes into consideration all the interests of the parties and the terms and conditions stated therein
are more reasonable than what BPI proposes;48 and (c) BPI’s allegations of misrepresentation are mere desperation moves to
convince the Court to overturn the rulings of the courts a quo. 49

The Court’s Ruling

The petition has no merit.

A. Propriety of BPI’s petition;

procedural considerations.

It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules of Court covers only questions of law.
In this relation, questions of fact are not reviewable and cannot be passed upon by the Court unless, the following exceptions
are found to exist: (a) when the findings are grounded entirely on speculations, surmises, or conjectures; (b) when the
inference made is manifestly mistaken, absurd, or impossible; (c) when there is a grave abuse of discretion; (d) when the
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judgment is based on misappreciation of facts; (e) when the findings of fact are conflicting; (f) when in making its findings, the
same are contrary to the admissions of both parties; (g) when the findings are contrary to those of the trial court; (h) when the
findings are conclusions without citation of specific evidence on which they are based; (i) when the facts set forth in the petition
as well as in the petitioner’s main and reply briefs are not disputed by the respondent; and (j) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record. 50

The distinction between questions of law and questions of fact is well-defined. A question of law exists when the doubt or
difference centers on what the law is on a certain state of facts. A question of fact, on the other hand, exists if the doubt
centers on the truth or falsity of the alleged facts. This being so, the findings of fact of the CA are final and conclusive and the
Court will not review them on appeal.51

In view of the foregoing, the Court finds BPI’s petition to be improper – and hence, dismissible52 – as the issues raised therein
involve questions of fact which are beyond the ambit of a Rule 45 petition for review.

To elucidate, the determination of whether or not due regard was given to the interests of BPI as a secured creditor in the
approved rehabilitation plan partakes of a question of fact since it will require a review of the sufficiency and weight of
evidence presented by the parties – among others, the various financial documents and data showing Sarabia’s capacity to
pay and BPI’s perceived cost of money – and not merely an application of law. Therefore, given the complexion of the issues
which BPI presents, and finding none of the above-mentioned exceptions to exist, the Court is constrained to dismiss its
petition, and prudently uphold the factual findings of the courts a quo which are entitled to great weight and respect, and even
accorded with finality. This especially obtains in corporate rehabilitation proceedings wherein certain commercial courts have
been designated on account of their expertise and specialized knowledge on the subject matter, as in this case.

In any event, even discounting the above-discussed procedural considerations, the Courts still finds BPI’s petition lacking in
merit.

B. Approval of Sarabia’s
rehabilitation plan; substantive
considerations.

Records show that Sarabia has been in the hotel business for over thirty years, tracing its operations back to 1972. Its hotel
building has been even considered a landmark in Iloilo, being one of its kind in the province and having helped bring progress
to the community.23 Since then, its expansion was continuous which led to its decision to commence with the construction of a
new hotel building. Unfortunately, its contractor defaulted which impelled Sarabia to take-over the same. This significantly
skewed its projected revenues and led to various cash flow difficulties, resulting in its incapacity to meet its maturing
obligations.

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. 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.54Thus, 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.55

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation56 (Interim Rules) states that a rehabilitation plan may be approved even over the opposition of the creditors
holding a majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the opposition of the
creditors is manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is currently incorporated in
the FRIA,57 is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the
rehabilitation, absent due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to
accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery.

It is within the parameters of the aforesaid provision that the Court examines the approval of Sarabia’s rehabilitation.

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i. Feasibility of Sarabia’s rehabilitation.

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a thorough examination and analysis
of the distressed corporation’s financial data must be conducted. If the results of such examination and analysis show that
there is a real opportunity to rehabilitate the corporation in view of the assumptions made and financial goals stated in the
proposed rehabilitation plan, then it may be said that a rehabilitation is feasible. In this accord, the rehabilitation court should
not hesitate to allow the corporation to operate as an on-going concern, albeit under the terms and conditions stated in the
approved rehabilitation plan. On the other hand, if the results of the financial examination and analysis clearly indicate that
there lies no reasonable probability that the distressed corporation could be revived and that liquidation would, in fact, better
subserve the interests of its stakeholders, then it may be said that a rehabilitation would not be feasible. In such case, the
rehabilitation court may convert the proceedings into one for liquidation. 58 As further guidance on the matter, the Court’s
pronouncement in Wonder Book Corporation v. Philippine Bank of Communications 59 proves instructive:

Rehabilitation is x x x available to a corporation [which], 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. 60 (Emphasis and
underscoring supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, 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. Despite its financial
constraints, Sarabia likewise continues to be profitable with its hotelier business as its operations have not been
disrupted.61 Hence, given its current fiscal position, the prospect of substantial and continuous revenue generation is a realistic
goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, 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).62 Should such projections come through, Sarabia would have the ability not
just to pay off its existing debts but also to carry on with its intended expansion. 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.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved rehabilitation plan, namely: (a) any
deficiency in the required minimum payments to creditors based on the presented amortization schedule shall be paid
personally by Sarabia’s stockholders;

(b) the conversion of the advances from stockholders amounting to ₱18,748,306.00 and deferred credits amounting to
₱42,688,734 as of the December 31, 2002 tentative audited financial statements to stockholder’s equity was granted; 64 (c) all
capital expenditures which are over and above what is provided in the cash flow of the approved rehabilitation plan which will
materially affect the cash position of the hotel but which are deemed necessary in order to maintain the hotel’s
competitiveness in the industry shall be subject to the approval by the Court prior to implementation; 65 (d) the formation of
Sarabia’s new management team and the requirement that the latter shall be required to submit a comprehensive business
plan to support the generation of revenues as reported in the Rehabilitation Plan, both short term and long term; 66 (e) the
maintenance of all Sarabia’s existing real estate mortgages over hotel properties as collaterals and securities in favor of BPI
until the former’s full and final liquidation of its outstanding loan obligations with the latter;67 and (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.

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Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation to be feasible.

ii. Manifest unreasonableness of BPI’s opposition.

Although undefined in the Interim Rules, it may be said that the 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. The unreasonableness becomes further manifest if the rehabilitation plan, in fact,
provides for adequate safeguards to fulfill the majority creditor’s claims, and yet the latter persists on speculative or unfounded
assumptions that his credit would remain unfulfilled.

While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall consider certain incidents in determining
whether the opposition is manifestly unreasonable, 70 BPI neither proposes Sarabia’s liquidation over its rehabilitation nor
questions the controlling interest of Sarabia’s shareholders or owners. It only takes exception to: (a) the imposition of the fixed
interest rate of 6.75% p.a. as recommended by the Receiver and as approved by the courts a quo, proposing that the original
escalating interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen years be applied instead; 71 and (b) the fact that
Sarabia’s misrepresentations in the rehabilitation petition, i.e., that it physically acquired additional property whereas in fact the
increase was mainly due to the recognition of Revaluation Increment and because of capital expenditures, were not taken into
consideration by the courts a quo.72

Anent the first matter, 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. It is the objective of a rehabilitation proceeding to
provide the best possible framework for the corporation to gradually regain or achieve a sustainable operating form. Hence, if
a creditor, whose interests remain well-preserved under the existing rehabilitation plan, still declines to accept interests
pegged at reasonable rates during the period of rehabilitation, and, in turn, proposes rates which are largely counter-
productive to the rehabilitation, then it may be said that the creditor’s opposition is manifestly unreasonable.

In this case, the Court finds BPI’s opposition on the approved interest rate to be manifestly unreasonable considering that: (a)
the 6.75% p.a. interest rate already constitutes a reasonable rate of interest which is concordant with Sarabia’s projected
rehabilitation; and (b) on the contrary, BPI’s proposed escalating interest rates remain hinged on the theoretical assumption of
future fluctuations in the market, this notwithstanding the fact that its interests as a secured creditor remain well-preserved.

The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest rate is actually higher than BPI’s
perceived cost of money as evidenced by its published time deposit rate (for an amount of ₱5,000,000.00, with a term of 360-
364 days) which is only set at 5.5% p.a.; second, the 6.75% p.a. is also higher than the benchmark ninety one-day commercial
paper, which is used by banks to price their loan averages to 6.4% p.a. in 2005, and has a three-year average rate of 6.57%
p.a.; and third, 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.

As to the matter of Sarabia’s alleged misrepresentations, records disclose that Sarabia already clarified its initial statements in
its rehabilitation petition by submitting, on its own accord, a supplemental affidavit dated October 24, 2002 73 that explains that
the increase in its properties and assets was indeed by recognition of revaluation increment. 74 Proceeding from this fact, the
CA observed that BPI actually failed to establish its claimed defects in light of Sarabia’s assertive and forceful explanation that
the alleged inaccuracies do not warrant the dismissal of its petition. 75 Thus, absent any compelling reason to disturb the CA's
finding on this score, the Court deems it proper to dismiss BPI's allegations of misrepresentation against Sarabia.

As a final point, BPI claims that Sarabia's projections were "too optimistic," its management was "extremely
incompetent"76 and that it was even forced to pay a pre-termination penalty due to its previous loan with the Landbank of the
Philippines.77 Suffice it to state that bare allegations of fact should not be entet1ained as they are bereft of any probative
value.78 In any event, even if it is assumed that the said allegations are substantiated by clear and convincing evidence, the
Court, absent any cogent basis to proceed otherwise, remains steadfast in its preclusion to thresh out matters of fact on a Rule
45 petition, as in this case.

All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby sustained. In view of the foregoing
pronouncements, the Court finds it unnecessary to delve on the other ancillary issues as herein raised.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006 and Resolution dated December 6,
2006 of the Court of Appeals, Cebu City in CA-G.R. CV. No. 81596 are hereby AFFIRMED. SO ORDERED.

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