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SPECIAL COMMERCIAL LAWS (SCL) CASES

TOPIC: E-Commerce Act, Financial Rehabilitation and Insolvency Act (FRIA)

MCC INDUSTRIAL SALES CORPORATION, petitioner, vs.

SSANGYONG CORPORATION, respondents.

G.R. No. 170633; October 17, 2007

Facts:

Petitioner is engaged in the business of importing and wholesaling stainless steel products. One
of its suppliers is the responded, an international trading company with head office in Seoul,
South Korea and regional headquarters in Makati City, Philippines. The two corporations
conducted business through telephone calls and facsimile or telecopy transmissions. Respondent
would send the pro forma invoices containing the details of the steel product order to petitioner;
if the latter conforms thereto, its representative affixes his signature on the faxed copy and sends
it back to the respondent, again by fax.

Respondent filed a civil action for damages due to breach of contract against petitioner before
the Regional Trial Court of Makati City. In its complaint, respondent alleged that defendants
breached their contract when they refused to open the letter of credit in the amount of
US$170,000.00 for the remaining 100MT of steel under Pro Forma Invoice Nos. ST2-POSTS0401-
1 and ST2-POSTS0401-2.

After respondent rested its case, petitioner filed a Demurrer to Evidence alleging that respondent
failed to present the original copies of the pro forma invoices on which the civil action was based.
Petitioner contends that the photocopies of the pro forma invoices presented by respondent
Ssangyong to prove the perfection of their supposed contract of sale are inadmissible in evidence
and do not fall within the ambit of R.A. No. 8792, because the law merely admits as the best
evidence the original fax transmittal. On the other hand, respondent posits that, from a reading
of the law and the Rules on Electronic Evidence, the original facsimile transmittal of the pro forma
invoice is admissible in evidence since it is an electronic document and, therefore, the best
evidence under the law and the Rules. Respondent further claims that the photocopies of these
fax transmittals (specifically ST2-POSTS0401-1 and ST2-POSTS0401-2) are admissible under the
Rules on Evidence because the respondent sufficiently explained the non-production of the
original fax transmittals.

Issue:

Whether the print-out and/or photocopies of facsimile transmissions are electronic evidence and
admissible as such?

Held:

Electronic document shall be regarded as the equivalent of an original document under the Best
Evidence Rule, as long as it is a printout or output readable by sight or other means, showing to
reflect the data accurately. Thus, to be admissible in evidence as an electronic data message or
to be considered as the functional equivalent of an original document under the Best Evidence
Rule, the writing must foremost be an “electronic data message” or an “electronic document.

The Implementing Rules and Regulations (IRR) of R.A. No. 8792 defines the “Electronic Data
Message” refers to information generated, sent, received or stored by electronic, optical or
similar means, but not limited to, electronic data interchange (EDI), electronic mail, telegram,
telex or telecopy.

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The phrase “but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex
or telecopy” in the IRR’s definition of “electronic data message” is copied from the Model Law
on Electronic Commerce adopted by the United Nations Commission on International Trade Law
(UNCITRAL), from which majority of the provisions of R.A. No. 8792 were taken. While Congress
deleted this phrase in the Electronic Commerce Act of 2000, the drafters of the IRR reinstated it.
The deletion by Congress of the said phrase is significant and pivotal.

Moreover, when Congress formulated the term “electronic data message,” it intended the same
meaning as the term “electronic record” in the Canada law. This construction of the term
“electronic data message,” which excludes telexes or faxes, except computer-generated faxes, is
in harmony with the Electronic Commerce Law’s focus on “paperless” communications and the
“functional equivalent approach” that it espouses. Facsimile transmissions are not, in this sense,
“paperless,” but verily are paper-based.

[I]n an ordinary facsimile transmission, there exists an original paper-based information or data
that is scanned, sent through a phone line, and re-printed at the receiving end. … [I]n a virtual or
paperless environment, technically, there is no original copy to speak of, as all direct printouts of
the virtual reality are the same, in all respects, and are considered as originals. Ineluctably, the
law’s definition of “electronic data message,” which, as aforesaid, is interchangeable with
“electronic document,” could not have included facsimile transmissions, which have an original
paper-based copy as sent and a paper-based facsimile copy as received. These two copies are
distinct from each other, and have different legal effects. While Congress anticipated future
developments in communications and computer technology when it drafted the law, it excluded
the early forms of technology, like telegraph, telex and telecopy (except computer-generated
faxes, which is a newer development as compared to the ordinary fax machine to fax machine
transmission), when it defined the term “electronic data message.”

[T]he terms “electronic data message” and “electronic document,” as defined under the
Electronic Commerce Act of 2000, do not include a facsimile transmission. Accordingly, a
facsimile transmission cannot be considered as electronic evidence. It is not the functional
equivalent of an original under the Best Evidence Rule and is not admissible as electronic
evidence.

ASSOCIATE JUSTICE DELILAH VIDALLON-MAGTOLIS, COURT OF APPEALS, Complainant, vs.

CIELITO M. SALUD, CLERK IV, COURT OF APPEALS, Respondent.

A.M. No. CA-05-20-P; September 9, 2005

Facts:

Respondent is charged and held liable for offenses on inefficiency and incompetence of official
duty; conduct grossly prejudicial to the best interest of the service; and directly and indirectly
having financial and material interest in an official transaction considering his undue interest in
the service of the order of release and actual release of Melchor Lagua.

Lagua was found guilty of homicide and was then detained at the Bureau of Prisons National
Penitentiary in Muntinlupa City. Lagua’s petition for bond was approved in a Resolution where
the appellate court directed the issuance of an order of release in favor of Lagua. The resolution
was brought to the office of Atty. Madarang, Division Clerk of Court, for promulgation.

Respondent served the resolution and order of release of Lagua at the National Penitentiary,
where Lagua was detained for homicide.

Meanwhile, Atty. Madarang received a call from a certain Melissa Melchor, who introduced
herself as Lagua’s relative, asking how much more they had to give to facilitate Lagua’s
provisional liberty, and that they sought the help of a certain Rhodora Valdez of RTC Pasig, but
was told that they still had a balance. When Atty. Madarang was able to get the mobile number

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of respondent, he represented himself as Lagua’s relative and exchanged text messages with said
respondent for a possible pay-off for the Lagua’s provisional liberty. Atty. Madarang later
discovered that the respondent did not properly serve the copies of the Resolution and Order of
Release upon the accused-appellant and his counsel. but gave them to a certain Art Baluran,
allegedly Lagua’s relative.

Later on, Complainant called the respondent to her office. When confronted, the respondent
denied extorting or receiving money for Lagua’s release, or in any other case. He, however,
admitted serving the copies of resolution and order of release intended for Lagua and his counsel
to Art Baluran. Complainant then lodged the complaint against the respondent in a Letter dated
November 14, 2003.

Issue:

Whether or not the admission of text messages as evidence constitutes a violation of right to
privacy of the accused?

Held:

No. The respondent’s claim that the admission of the text messages as evidence against him
constitutes a violation of his right to privacy is unavailing. Text messages have been classified as
“ephemeral electronic communication” under Section 1(k), Rule 2 of the Rules on Electronic
Evidence, and “shall be proven by the testimony of a person who was a party to the same or has
personal knowledge thereof.” Any question as to the admissibility of such messages is now moot
and academic, as the respondent himself, as well as his counsel, already admitted that he was
the sender of the first three messages on Atty. Madarang’s cell phone.

This was also the ruling of the Court in the recent case of Zaldy Nuez v. Elvira Cruz-Apao. In that
case, the Court, in finding the respondent therein guilty of dishonesty and grave misconduct,
considered text messages addressed to the complainant asking for a million pesos in exchange
for a favorable decision in a case pending before the CA. The Court had the occasion to state:

… The text messages were properly admitted by the Committee since the same are now covered
by Section 1(k), Rule 2 of the Rules on Electronic Evidence, which provides:

“Ephemeral electronic communication” refers to telephone conversations, text messages … and


other electronic forms of communication the evidence of which is not recorded or retained.”

ZALDY NUEZ, Complainant, vs.

ELVIRA CRUZ-APAO, Respondent.

A.M. No. CA-05-18-P; April 12, 2005

Facts:

The complaint arose out of respondent’s solicitation of One Million Pesos (P1,000,000.00) from
Zaldy Nuez (Complainant) in exchange for a speedy and favorable decision of the latter’s pending
case in the Court of Appeals.

Complainant earlier sought the assistance of Imbestigador. The crew of the TV program
accompanied him to PAOCCF-SPG where he lodged a complaint against respondent for extortion.
Thereafter, he communicated with respondent again to verify if the latter was still asking for the
money and to set up a meeting with her. Upon learning that respondent’s offer of a favorable
decision in exchange for One Million Pesos (P1,000,000.00) was still standing, the plan for the
entrapment operation was formulated by Imbestigador in cooperation with the PAOCC.

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During the hearing of this case, respondent would like the court to believe that she never had
any intention of committing a crime, that the offer of a million pesos for a favorable decision
came from complainant and that it was complainant and the law enforcers who instigated the
whole incident.

When she was asked if she had sent the text messages contained in complainant’s cellphone and
which reflected her cellphone number, respondent admitted those that were not incriminating
but claimed she did not remember those that clearly showed she was transacting with
complainant.

Respondent thus stated that she met with complainant only to tell the latter to stop calling and
texting her, not to get the One Million Pesos (P1,000,000.00) as pre-arranged.

Issue:

Whether or not the text messages are admissible as evidence in court?

Held:

Yes. Complainant was able to prove by his testimony in conjunction with the text messages from
respondent duly presented before the Committee that the latter asked for One Million Pesos
(P1,000,000.00) in exchange for a favorable decision of the former’s pending case with the CA.
The text messages were properly admitted by the Committee since the same are now covered
by Section 1(k), Rule 2 of the Rules on Electronic Evidence65 which provides:

“Ephemeral electronic communication” refers to telephone conversations, text messages . . . and


other electronic forms of communication the evidence of which is not recorded or retained.”

Under Section 2, Rule 11 of the Rules on Electronic Evidence, “Ephemeral electronic


communications shall be proven by the testimony of a person who was a party to the same or
who has personal knowledge thereof . . . .” In this case, complainant who was the recipient of
said messages and therefore had personal knowledge thereof testified on their contents and
import. Respondent herself admitted that the cellphone number reflected in complainant’s
cellphone from which the messages originated was hers. Moreover, any doubt respondent may
have had as to the admissibility of the text messages had been laid to rest when she and her
counsel signed and attested to the veracity of the text messages between her and complainant.
It is also well to remember that in administrative cases, technical rules of procedure and evidence
are not strictly applied.

The Court has no doubt as to the probative value of the text messages as evidence in determining
the guilt or lack thereof of respondent in this case.

Archbishop Fernando Capalla,et al vs The Honorable Commission on Elections


GR No. 201112, 201121, 201127, 201413, June 2012
En Banc (Peralta J)

A winning bidder is not precluded from modifying or amending certain provisions of the
contract bided upon. However, such changes must not constitute substantial or material
amendments that would alter the basic parameters of the contract and would constitute a
denial to the other bidders of the opportunity to bid on the terms.

FACT:

Pursuant to its authority to use an Automated Election System (AES), the Commission on
Elections (COMELEC) posted and published an invitation to apply for eligibility and to bid for the
2010 Poll Automation Project. COMELEC awarded the contract for the project to respondent
Smartmatic-TIM. Thereafter, COMELEC and Smartmatic-TIM entered into a Contract for the

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Provision of an Automated Election System for the May 10, 2010 Synchronized National and Local
Elections (AES Contract, for brevity). The contract between the COMELEC and Smartmatic-TIM
was one of the “lease of the EAS with option to purchase (OTP) the goods listed in the contract.”
In said contract, the COMELEC was given until December 31, 2010 within which to exercise the
option.

In a letter, Smartmatic-TIM, through its Chairman Cesar Flores (Flores), proposed a temporary
extension of the option period to buy PCOS machines until March 31, 2011. The COMLEC did not
exercise the option within the extended period. Several extensions were given for the COMELEC
to exercise the OTP until its final extension on March 31, 2012. On March 29, 2012, the COMELEC
issued a resolution resolving to accept Smarmatic-TIM’s offer to extend the period to exercise
the OTP until March 31, 2012.

Archbishop Capalla, et al. thus assailed the validity and constitutionality of the COMELEC
resolution for the purchase of the subject PCOS machines as well as the Extension Agreement
and the Deed of Sale covering said goods mainly on the ground that the option period provided
for in the AES contract between the COMELEC and Smartmatic-TIM had already lapsed and, thus,
could no longer be extended. Such extension being prohibited by the contract.

ISSUE:
Whether or not the unilateral extension of the option period which Smarmatic-TIM granted to
COMELEC and which the latter accepted constitutes circumvention of the law on public bidding.

HELD:

It is a basic rule in the interpretation of contracts that an instrument must be construed so as to


give effect to all the provisions of the contract. In essence, the contract must be read and taken
as a whole. While the contract indeed specifically required the COMELEC to notify Smartmatic-
TIM of its OTP the subject goods until December 31, 2010, a reading of the other provisions of
the AES contract would shoe that the parties are given the right to amend the contract which
may include the period within which to exercise the option. There is, likewise, no prohibition on
the extension of the period, provided that the contract I still effective.

Considering, however that the AES contract is not an ordinary contract as it involves procurement
by a government agency, the rights and obligations of the parties are governed not only by the
Civil Code but also RA 9184. In this jurisdiction, public bidding is the established procedure in the
grant of government contracts. The award of public contracts, through public bidding, is a matter
of public policy. The parties are, therefore, not at full liberty to amend or modify the provisions
of the contract bided upon.

A winning bidder is not precluded from modifying or amending certain provisions of the contract
bided upon. However, such changes must not constitute substantial or material amendments
that would alter the basic parameters of the contract and would constitute a denial to the other
bidders of the opportunity to bid on the same terms. The determination of whether or not a
modification or amendment of a contract to bided out constitutes a substantial amendment rests
on whether the contract, when taken as a whole, would contain substantially different terms and
conditions that would have the effect of altering the technical and/or financial proposals
previously submitted by the other bidders. The modifications in the contract executed between
the government and the winning bidder must be such as to render the executed contract to be
an entirely different contract from the one bided upon.

Smartmatic-TIM was not granted additional right that was not previously available to the other
bidders. Admittedly, the AES contract was not awarded to Smartmatic-TIM after compliance with
all the requirements of a competitive public bidding. Although the AES contract was amended
after the award of the contract to Smartmatic-TIM, the amendment only pertains to the period
within which the COMELEC could exercise the option because of its failure to exercise the same
prior to the deadline originally agreed upon by the parties.

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CASE DIGEST: BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO V.
MISAJON, GROUP SUPERVISOR ROLANDO M. BALBIDO, and EXAMINER REYNANTE DP.
MARTIREZ, Petitioners, vs. LEPANTO CERAMICS, INC., Respondent. (G.R. No. 224764; April 24,
2017)

Lepanto Ceramics, Inc. (LCI) filed a petition for corporate rehabilitation under RA 10142 with the
RTC in Calamba City. Aside from financial difficulties, the petition for rehab also alleged LCI's tax
liability at 6.3 million pesos. The Rehabilitation (Rehab Court) issued a Commencement Order
(Order).

The Order declared LCI under rehab and suspended all actions or proceedings, in court or
otherwise, for the enforcement of claims against LCI. It also directed the BIR to file and serve on
LCI its comment or opposition to the petition, or its claims against LCI.

Despite this, petitioners, acting as Assistant Commissioner, Group Supervisor, and Examiner, sent
LCI a notice of informal conference, informing the latter of its tax liabilities for the fiscal year
ending June 30, 2010. Despite receiving LCI's letter-reply regarding the pendency of a rehab
proceeding, the BIR sent LCI a Formal Letter of Demand.

A petition for indirect contempt of court was filed by LCI against petitioners for defying the Order.
In their defense, petitioners insist that the issue has already become moot and academic
because, in the meantime, LCI had already been declared rehabilitated. Also, petitioners argue
that their acts do not amount to a defiance of the Commencement Order as it was done merely
to toll the prescriptive period in collecting deficiency taxes, that their acts of sending a Notice of
Informal Conference and Formal Letter of Demand do not amount to a "legal action or other
recourse" against LCI outside of the rehabilitation proceedings and that the indirect contempt
proceedings interferes with the exercise of their functions to collect taxes due to the
government.

ISSUE: Are petitioners guilty of indirect contempt for issuing a notice of informal conference
despite the fact that they simply wanted to toll the prescriptive period and considering the
lifeblood doctrine?

Yes, they are guilty of indirect contempt.

According to RA 10142, upon the issuance of a commencement order, the distressed corporation
shall be temporarily immune from the enforcement of all claims against it, including all claims of
the government, whether national or local, including taxes, tariffs and customs duties.

To clarify, however, creditors of the distressed corporation are not without remedy as they may
still submit their claims to the rehabilitation court for proper consideration so that they may
participate in the proceedings, keeping in mind the general policy of the law.

Petitioners' act of issuing a notice of informal conference and later a formal letter of demand, all
despite the written reminder by LCI regarding the pendency of the rehab proceeding, is in clear
defiance of the Commencement Order.

As aptly put by the RTC Br. 35, they could have easily tolled the running of such prescriptive
period, and at the same time, perform their functions as officers of the BIR, without defying the
Commencement Order and without violating the laudable purpose of RA 10142 by simply
ventilating their claim before the Rehabilitation Court.

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BPI FAMILY SAVINGS BANK v. ST. MICHAEL MEDICAL CENTER, GR No. 205469, 2015-03-25

Facts:

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

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

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

The lack of funds for the finishing works of the

3rd, 4th and 5th floors, however, kept the new building from becoming completely functional
and, in turn, hampered the plans for the physical transfer of St. Michael Hospital's operations to
SMMCI.

as of May 2006, SMMCI... was still neither operational nor earning revenues. Hence, it was only
able to pay the... interest on its BPI Family loan... from the income of St. Michael Hospital

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

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

BPI Family

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

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

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

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

Dr. Halum gave credence to the feasibility study conducted by Mrs. Nenita Alibangbang... who
was commissioned in 2008 to do a... study on the viability of the project, finding that the same
was feasible given that St. Michael Hospital, whose operations SMMCI will eventually absorb,

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registered outstanding revenue performance for the last seven years of its operation with an
average growth rate of 42.21%... annually.[30] Accordingly, Dr. Halum found that SMMCI may be
rehabilitated because it is a viable option but, nevertheless, opined that it will take more than
what it had proposed to successfully bring the company back to good financial health
considering... the finding that its obligation actually extends beyond the bank, and also includes
accounts payable due to suppliers and informal lenders... the RTC approved the Rehabilitation
Plan with the modifications recommended by the Rehabilitation Receiver... the CA affirmed the
RTC's approval of the Rehabilitation Plan

Issues:

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

Ruling:

The petition is meritorious.

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

it cannot be said that the petitioning corporation, SMMCI, had been in a position of successful
operation and solvency at the time the Rehabilitation Petition was filed on August 11, 2010.
While it had indeed "commenced business" through the preparatory act of... opening a credit
line with BPI Family to finance the construction of a new hospital building for its future
operations, SMMCI itself admits that it has not formally operated nor earned any income since
its incorporation. This simply means that there exists no viable business... concern to be restored.

the Court observes that SMMCI could not have even complied with the form and substance of a
proper rehabilitation petition, and submit its accompanying documents, among others, the
required financial statements of a going concern.

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

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

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

the CA even disregarded the fact that SMMCI's Rehabilitation Plan... failed to comply with the
fundamental requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a...

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material financial commitment to support the rehabilitation and an accompanying liquidation
analysis

A material financial commitment becomes significant in gauging the resolve, determination,


earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or... the
would-be investors of the debtor-corporation indicating their readiness, willingness and ability
to contribute funds or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation.[... aside from the harped on merger of St. Michael
Hospital with SMMCI, the only proposed source of revenue the Rehabilitation Plan suggests is
the capital which would come from SMMCI's potential investors, which negotiations are merely
pending. Evidently, both... propositions commonly border on the speculative and, hence, hardly
fit the description of a material financial commitment which would inspire confidence that the
rehabilitation would turn out to be successful.

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

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

The failure of the Rehabilitation Plan to state any material financial commitment to support
rehabilitation, as well as to include a liquidation analysis, translates to the conclusion that the
RTC's stated considerations for approval... are actually unsubstantiated, and hence, insufficient
to decree SMMCI's rehabilitation. It is well to... emphasize that the remedy of rehabilitation
should be denied to corporations that do not qualify under the Rules. Neither should it be allowed
to corporations whose sole purpose is to delay the enforcement of any of the rights of the
creditors, which is rendered obvious by:

(a) the absence of a sound and workable business plan; (b) baseless and unexplained
assumptions, targets, and goals; and (c) speculative capital infusion or complete lack thereof for
the execution of the business plan.[59]

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

Principles:

Restoration is the central idea behind the remedy of corporate rehabilitation.

Case law explains that corporate rehabilitation contemplates a... continuance of corporate life
and activities in an effort to restore and reinstate the corporation to its former position of
successful operation and solvency, the purpose being to enable the company to gain a new lease
on life and allow its creditors to be paid their... claims out of its earnings.

Consistent therewith is the term's statutory definition under Republic Act No. 10142... which
provides:

Section 4. Definition of Terms. As used in this Act, the term:... x x x x

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its continuance of operation is economically feasible

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and its creditors can recover by way of the present value of payments... projected in the plan,
more if the debtor continues as a going concern than if it is immediately liquidated.

GOLDEN CANE FURNITURE MANUFACTURING CORPORATION, Petitioner, v. STEELPRO


PHILIPPINES, INC., SOCIAL SECURITY SYSTEM, AIR LIQUIDE PHILIPPINES, INC., CLARK
DEVELOPMENT CORPORATION, PHILIPPINE NATIONAL BANK, BUREAU OF INTERNAL REVENUE,
UP-TOWN INDUSTRIES SALES, INC., Respondents.

DECISION

BRION, J.:

This is a petition for review on certiorari1 filed by Golden Cane Furniture Manufacturing
Corporation (Golden Cane) from the November 27, 2009 and August 16, 2011 resolutions of the
Court of Appeals (CA) in CA-G.R. SP No. 111530.2 The CA dismissed Golden Cane's petition for
certiorari from the Regional Trial Court's (RTC) May 11, 20093 and August 27, 20094 orders in
Comm. Case No. 058.5

The CA dismissed the petition for certiorari for being the wrong remedy to challenge the RTC's
dismissal of Golden Cane's petition for corporate rehabilitation.

Antecedents

On November 3, 2008, Golden Cane filed a Petition for Corporate Rehabilitation with the RTC of
San Fernando, Pampanga. The petition was raffled to Branch 42 and docketed as Comm. Case
No. 058.6

On November 11, the RTC issued a Stay Order and set the initial hearing on January 7, 2009.7

On May 11, 2009, the RTC denied due course to the petition because of: (1) litis pendentia and
forum shopping due to the pendency of a separate Petition for Suspension of Payments involving
the same parties filed by Golden Cane in 2007; (2) the consistent failure of the rehabilitation
receiver to fulfill her duties; (3) the receiver's failure to file her bond on time; and (4) the
receiver's failure to submit Golden Cane's interim financial statements. The RTC dismissed the
petition and lifted the Stay Order.8

On June 25, 2009, Golden Cane moved for reconsideration of the dismissal.9

The RTC denied the motion for reconsideration on August 27, 2009.10 Golden Cane received a
copy of the denial on October 2, 2009.11

On November 23, 2009, Golden Cane elevated the case to the CA via a petition for certiorari. The
petition was docketed as CA-G.R. SP No. 111530.12

On November 27, 2009, the CA dismissed the petition outright for being the wrong mode of
appeal.13 The CA held that the correct remedy is a petition for review under Rule 43 of the Rules
of Court pursuant to A.M. No. 04-9-07-SC.14

Golden Cane moved to reconsider the dismissal but the CA denied the motion on August 16,
2011.15 Hence, on September 28, 2011, Golden Cane filed the present petition for review on
certiorari.

Golden Cane argues: (1) that A.M. No. 08-10-SC, or the 2008 Rules of Procedure on Corporate
Rehabilitation (the 2008 Rules) took effect on January 16, 2009, and superseded A.M. No. 04-9-
07-SC; (2) that under Rule 8 of the 2008 Rules, an order denying due course to the petition for
rehabilitation rendered before the approval or disapproval of the rehabilitation plan is not

10
appealable to the CA under Rule 43; (3) that the remedy against such an order is a petition for
certiorari under Rule 65 of the Rules of Court.

The Issue

The lone issue is whether the correct remedy to challenge the outright dismissal of Golden Cane's
petition for rehabilitation is a petition for review under Rule 43 or a petition for certiorari under
Rule 65, both of the Rules of Court.

Our Ruling

We affirm the CA's ruling.

A corporate rehabilitation case is a special proceeding in rem wherein the petitioner seeks to
establish the status of a party or a particular fact, i.e., the inability of the corporate debtor to pay
its debts when they fall due.16 It is summary and non-adversarial in nature.17 Its end goal is to
secure the approval of a rehabilitation plan to facilitate the successful recovery of the corporate
debtor.18 It does not seek relief from an injury caused by another party.19

Jurisdiction over corporate rehabilitation cases originally fell within the jurisdiction of the
Securities and Exchange Commission (SEC) which had absolute jurisdiction, control, and
supervision over all Philippine corporations.20 With the enactment of the Securities Regulation
Code in 2000, this jurisdiction was transferred to the Regional Trial Courts.21

Consequently, this Court enacted A.M. No. 00-8-10-SC or the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules) which took effect on December 15, 2000. Under the
Interim Rules, a motion for reconsideration was a prohibited pleading.22 Orders issued by the
rehabilitation court were also immediately executory unless restrained by the appellate court.23

The Interim Rules, however, did not specifically indicate the mode of appeal that governed
corporate rehabilitation cases. Thus, in 2004, the Court enacted A.M. No. 04-9-07-SC to clarify
the proper mode of appeal from decisions and final orders of Rehabilitation Courts:
chanRoblesvirtualLawlibrary
Whereas, there is a need to clarify the proper mode of appeal in these cases in order to prevent
cluttering the dockets of the courts with appeals and/or petitions for certiorari;

Wherefore, the Court Resolves:

1. All decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies
under Republic Act No. 8799 shall be appealable to the Court of Appeals through a petition for
review under Rule 43 of the Rules of Court.24ChanRoblesVirtualawlibrary
In 2008, this Court enacted the Rules of Procedure on Corporate Rehabilitation25 (2008 Rules).
The 2008 Rules included motions for reconsideration as a relief from any order of the court prior
to the approval of the rehabilitation plan.
RULE 8
PROCEDURAL REMEDIES

Section 1. Motion for Reconsideration. - A party may file a motion for reconsideration of any
order issued by the court prior to the approval of the rehabilitation plan. No relief can be
extended to the party aggrieved by the court's order on the motion through a special civil action
for certiorari under Rule 65 of the rules of Court. Such order can only be elevated to the Court of
Appeals as an assigned error in the petition for review of the decision or order approving or
disapproving the rehabilitation plan.

An order issued after the approval of the rehabilitation plan can be reviewed only through a
special civil action for certiorari under Rule 65 of the Rules of Court.

11
Section 2. Review of Decision or Order on Rehabilitation Plan. - An order approving or
disapproving a rehabilitation plan can only be reviewed through a petition for review to the Court
of Appeals under Rule 43 of the Rules of Court within fifteen (15) days from notice of the decision
or order.26 [emphasis supplied]
Notably, the 2008 Rules also allowed a petition for certiorari under Rule 65 of the Rules of Court
as a recourse, but only against an order issued after the approval of the rehabilitation plan. Lastly,
the 2008 Rules adopted the mode of appeal prescribed in A.M. No. 04-9-07-SC against an order
approving or disapproving the rehabilitation plan.

In 2010, Congress enacted the Financial Rehabilitation and Insolvency Act (FRIA)27 which
updated the existing laws on corporate rehabilitation. The Court promulgated A.M. No. 12-12-
11-SC, or the Financial Rehabilitation Rules of Procedure (2013 Rules) on August 27, 2013.28

The 2013 Rules adopted the same remedies as the 2008 Rules against interlocutory orders of the
rehabilitation court. However, the 2013 Rules eliminated the remedy of appeal from the
rehabilitation court's approval or disapproval of the rehabilitation plan:

RULE 6
PROCEDURAL REMEDIES

Section 1. Motion for Reconsideration. - A party may file a motion for reconsideration of any
order issued by the court prior to the approval of the Rehabilitation Plan. No relief can be
extended to the party aggrieved by the court's order on the motion through a special civil action
for certiorari under Rule 65 of the Rules of Court.

An order issued after the approval of the Rehabilitation Plan can be reviewed only through a
special civil action for certiorari under Rule 65 of the Rules of Court.

Section 2. Review of Decision or Order on Rehabilitation Plan. - An order approving or


disapproving a rehabilitation plan can only be reviewed through a petition for certiorari to the
Court of Appeals under Rule 65 of the Rules of Court within fifteen (15) days from notice of the
decision or order.29ChanRoblesVirtualawlibrary
Under the 2013 Rules, the Rehabilitation Court's final order approving or disapproving a
rehabilitation plan is no longer subject to appeal; it can only be reviewed through a petition for
certiorari. The 2013 Rules narrowed the scope of appellate review from errors of law and fact
under Rule 43,30 to errors of jurisdiction or abuse of discretion under Rule 65.31 It effectively
lends more credence to the factual findings and the judgment of rehabilitation courts.

Golden Cane's petition for corporate rehabilitation falls under the regime of the Interim Rules.

Golden Cane filed its petition for rehabilitation on November 3, 2008 under the regime of the
Interim Rules. The initial hearing was also held on January 7, 2009, before the effectivity of the
2008 Rules.32 The transitory provision of the 2008 Rules states:

Rule 9
Final Provisions

Sec. 2. Transitory Provision. - Unless the court orders otherwise to prevent manifest injustice,
any pending petition for rehabilitation that has not undergone the initial hearing prescribed
under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity
of these Rules Shall be governed by these rules.
Accordingly, the Interim Rules - not the 2008 Rules - apply to Golden Cane's petition for corporate
rehabilitation.

The dismissal of the petition for rehabilitation, even if due to technical grounds or due to its
insufficiency, amounts to a failure of rehabilitation.33 It is a final order because it finally disposes
of the case, leaving nothing else to be done. Pursuant to A.M. No. 04-9-07-SC, the correct remedy

12
against all decisions and final orders of the rehabilitation courts in proceedings governed by the
Interim Rules is a petition for review to the CA under Rule 43 of the Rules of Court. A petition for
certiorari under Rule 65 of the Rules of Court is evidently the wrong mode of appeal.

Even if Golden Cane's petition were under the regime of the 2008 Rules, the correct remedy
would still have been a petition for review to the Court of Appeals under Rule 43.34 The outright
dismissal of the petition can be seen as equivalent to the disapproval of the rehabilitation plan.
Ultimately, the result is the failure of rehabilitation.

The result would have been different if Golden Cane's petition had been filed under the regime
of the 2013 Rules. The 2013 Rules eliminated appeals from the dismissal of the petition or the
approval/disapproval of the rehabilitation plan and specifically indicated certiorari as the correct
remedy.

All things considered, we find no reversible error in the resolution of the CA. It correctly dismissed
Golden Cane's petition for certiorari for being the wrong mode of appeal.

WHEREFORE, we DENY the petition. Costs against the petitioner.

SO ORDERED.

Carpio, (Chairperson), Del Castillo, Mendoza, and Leonen, JJ., concur.

PHILIPPINE BANK OF COMMUNICATIONS, Petitioner,

vs.

BASIC POLYPRINTERS AND PACKAGING CORPORATION, Respondent.

G.R. No. 187581 October 20, 2014

PONENTE: Bersamin

TOPIC: FRIA, insolvency, rehabilitation plan

FACTS:

Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group of
Companies filed a joint petition for suspension of payments with approval of the proposed
rehabilitation in the RTC. The RTC issued a stay order, and eventually approved the rehabilitation
plan, but the CA reversed the RTC and directed the petitioning corporations to file their individual
petitions for suspension of payments and rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, averring therein that: (a) its
business since incorporation had been very viable and financially profitable; (b) it had obtained
loans from various banks, and had owed accounts payable to various creditors; (c) the Asian
currency crisis, devaluation of the Philippine peso, and the current state of affairs of the
Philippine economy; (d) its operations would be hampered and would render rehabilitation
difficult should its creditors enforce their claims through legal actions, including foreclosure
proceedings; (e) included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of petitioner PBCOM and other banks

13
ISSUES:

Whether or not liquidity is an issue in a petition for rehabilitation


Whether or not material financial commitment is required in a rehabilitation plan

HELD:

FIRST ISSUE: No.

The Court held that liquidity is not an issue in a petition for rehabilitation.

Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected in the
plan more if the corporation continues as a going concern that if it is immediately liquidated.” It
contemplates a continuance of corporate life and activities in an effort to restore and reinstate
the corporation to its former position of successful operation and solvency.

Two-pronged purpose of rehabilitation proceedings

Equitable purpose: To efficiently and equitably distribute the assets of the insolvent debtor to its
creditors; and
Rehabilitative purpose: To provide the debtor with a fresh start
On the one hand, they attempt to provide for the efficient and equitable distribution of an
insolvent debtor’s remaining assets to its creditors; and on the other, to provide debtors with a
“fresh start” by relieving them of the weight of their outstanding debts and permitting them to
reorganize their affairs. 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.

Consequently, the basic issues in rehabilitation proceedings concern the viability and desirability
of continuing the business operations of the petitioning corporation. The determination of such
issues was to be carried out by the court-appointed rehabilitation receiver.

Moreover, Republic Act No. 10142 (FRIA of 2010), a law that is applicable hereto, has defined a
corporate debtor as a corporation duly organized and existing under Philippine laws that has
become insolvent. The term insolvent is defined in said law as “the financial condition of a debtor
that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business
or has liabilities that are greater than its or his assets.”

As such, the contention that rehabilitation becomes inappropriate because of the perceived
insolvency of Basic Polyprinters was incorrect.

SECOND ISSUE: Yes.

The Court held that a material financial commitment is significant in a rehabilitation plan.

A material financial commitment becomes significant in gauging the resolve, determination,


earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-
be investors of the debtor-corporation indicating their readiness, willingness and ability to

14
contribute funds or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation.

However, the Court held that Basic Polyprinters commitment was insufficient for the following
reasons:

The commitment to add P10,000,000.00 working capital appeared to be doubtful considering


that the insurance claim from which said working capital would be sourced had already been
written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation.

The conversion of all deposits for future subscriptions to common stock and the treatment of all
payables to officers and stockholders as trade payables was hardly constituting material financial
commitments. Such “conversion” of cash advances to trade payables was, in fact, a mere re-
classification of the liability entry and had no effect on the shareholders’ deficit.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to
address the low demands for their products and the effect of direct competition from stores like
SM, Gaisano, Robinsons, and other malls.

Basic Polyprinters’s proposal to enter into the dacion en pagoto create a source of “fresh capital”
was not feasible because the object thereof would not be its own property but one belonging to
its affiliate, TOL Realty and Development Corporation, a corporation also undergoing
rehabilitation.

Hence, the Court held that the rehabilitation plan for Basic Polyprinters to be genuine and in
good faith, for it was, in fact, unilateral and detrimental to its creditors and the public.

MARILYN VICTORIO-AQUINO, Petitioner,

vs.

PACIFIC PLANS, INC. and MAMERTO A. MARCELO, JR. (Court-Appointed Rehabilitation Receiver
of Pacific Plans, Inc.), Respondents.

G.R. No. 193108 December 10, 2014

PONENTE: Peralta

TOPIC: FRIA, cram-down power of rehabilitation court

FACTS:

Respondent Pacific Plans, Inc. (now “APEC”) is engaged in the business of selling pre-
need plans and educational plans, including traditional open-ended educational plans
(PEPTrads). PEPTrads are educational plans where respondent guarantees to pay the planholder,
without regard to the actual cost at the time of enrolment, the full amount of tuition and other
school fees of a designated beneficiary.

Petitioner is a holder of two (2) units of respondent’s PEPTrads.

On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing
planholders as they fall due, respondent filed a Petition for Corporate Rehabilitation with the
Regional Trial Court, praying that it be placed under rehabilitation and suspension of payments.
At the time of filing of the Petition for Corporate Rehabilitation, respondent had more or less
34,000 outstanding PEPTrads.

15
On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the suspension
of payments of the obligations of respondent and ordering all creditors and interested parties to
file their comments/oppositions, respectively, to the Petition for Corporate Rehabilitation. The
same Order also appointed respondent Marcelo as the rehabilitation receiver.

Pursuant to the prevailing rules on corporate rehabilitation, respondent submitted to the


Rehabilitation Court its proposed rehabilitation plan. Under the terms thereof, respondent
proposed the implementation of a “Swap,” which will essentially give the planholder a means to
exit from the PEPTrads at terms and conditions relative to a termination value that is more
advantageous than those provided under the educational plan in case of voluntary termination.

The rehabilitation receiver submitted an Alternative Rehabilitation Plan and was


approved by the Court. However due to the fact that the value of the Philippine Peso
strengthened and appreciated, the rehabilitation receiver submitted a Modified Rehabilitation
Plan.

ISSUE:

Whether or not the Rehabilitation Court has the authority to sanction a rehabilitation
plan, or the modification thereof, even when the essential feature of the plan involves forcing
creditors to reduce their claims against respondent.

HELD:

YES. The Court upheld the “cram-down” power of the Rehabilitation Court pursuant to
Sec. 23 of FRIA which states that the court may approve a rehabilitation plan over the opposition
of creditors, holding a majority of the total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly
unreasonable.

Moreover, notwithstanding the rejection of the Rehabilitation Plan by the creditors, the
court may confirm the Rehabilitation Plan if all of the following circumstances are present:

1) The Rehabilitation Plan complies with the requirements specified in this Act;
2) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
3) The shareholders, owners or partners of the juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan; and
4) The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would have
received if the debtor were under liquidation.

VIVA SHIPPING LINES v. KEPPEL PHILIPPINES MINING, GR No. 177382, 2016-02-17

Facts:

Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for Corporate Rehabilitation before
the Regional Trial Court

Viva Shipping Lines owned only two (2) maritime vessels... only PI47,630,000.00 of real property
and its vessels were marked as "free assets."[

According to Viva Shipping Lines, the devaluation of the Philippine peso, increased competition,
and mismanagement of its businesses made it difficult to pay its debts as they became due.[13]
It also stated that "almost all [its] vessels were rendered unserviceable either because of age and
deterioration that [it] can no longer compete with modern made vessels owned by other
operators."[14]

16
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of funding
such as the sale of old vessels and commercial lots of its sister company, Sto. Domingo Shipping
Lines.[15] It also proposed the conversion of the Ocean Palace Mall into a hotel, the acquisition
of two (2) new vessels for shipping operations, and the "re-operation"[16] of an oil mill in
Buenavista, Quezon.[17]... the Regional Trial Court found that Viva Shipping Lines' Amended
Petition to be "sufficient in form and substance," and issued a stay order.[... the City of Batangas,
Keppel Philippines Marine, Inc., and Metropolitan Bank and Trust Company (Metrobank) filed
their respective comments and oppositions to Viva Shipping Lines' Amended Petition.[22]

Pilipinas Shell... filed its Comment/Opposition with Formal Notice of Claim

Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a Manifestation and
Registration of Monetary Claim stating that Viva Shipping Lines owes her P232,000.00 as
separation and 13th month pay.[25] The Securities and Exchange Commission filed a Comment
informing the Regional Trial Court that Viva Shipping Lines violated certain laws and rules of the
Commission

Viva Shipping Lines' former employees Alejandro Olit, Nida Montilla, Pio Hernandez, Eugenio
Baculo, and Harlan Bacaltos[34] (Alejandro Olit, et al.) filed their comment on the Amended
Petition, informing the Regional Trial Court of their pending complaint against Viva Shipping Lines
before the National Labor Relations Commission... the Regional Trial Court lifted the stay order
and dismissed Viva Shipping Lines' Amended Petition for failure to show the company's viability
and the feasibility of rehabilitation

The Regional Trial Court found that Viva Shipping Lines' assets all appeared to be non-performing.
Further, it noted that Viva Shipping Lines failed to show any evidence of consent to sell real
properties belonging to its sister company.[41]

Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules of Court
before the Court of Appeals.[42] It only impleaded Hon. Adolfo V. Encomienda, the Presiding
Judge of the trial court that rendered the assailed decision. It did not implead any of its creditors,
but served copies of the Petition on counsels for Metrobank, Keppel Philippines Marine, Inc.,
Pilipinas Shell, City of Batangas, Province of Quezon, and City of Lucena.[43] Viva Shipping Lines
neither impleaded nor served a copy of the Petition on its former employees or their counsels.

The Court of Appeals dismissed Viva Shipping Lines' Petition for Review

It found that Viva Shipping Lines failed to comply with procedural requirements under Rule
43,[45] The Court of Appeals ruled that due to the failure of Viva Shipping Lines to implead its
creditors as respondents, "there are no respondents who may be required to file a comment on
the petition, pursuant to Section 8 of Rule 43,"[46]

Viva Shipping Lines moved for reconsideration.[47] It argued that its procedural misstep was
cured when it served copies of the Petition on the Regional Trial Court and on its former
employees

Viva Shipping Lines filed before this court a Petition for Review on Certiorari assailing the January
5, 2007 and March 30, 2007 Court of Appeals Resolutions

Issues:

First, whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines' Petition for
Review on procedural grounds; andSecond, whether petitioner was denied substantial justice
when the Court of Appeals did not give due course to its petition.

Ruling:

17
We deny the Petition.

Any final order or decision of the Regional Trial Court may be subject of an appeal.[121] In Re:
Mode of Appeal in Cases Formerly Cognizable by the Securities and Exchange Commission,[122]
this court clarified that all decisions and final orders falling under the Interim Rules of Procedure
on Corporate Rehabilitation shall be appealable to the Court of Appeals through a petition for
review under Rule 43 of the Rules of Court.[123]New Frontier Sugar Corporation v. Regional Trial
Court, Branch 39, Iloilo City[124] clarifies that an appeal from a final order or decision in
corporate rehabilitation proceedings may be dismissed for being filed under the wrong mode of
appeal

It is true that Rule 1, Section 6 of the Rules of Court provides that the "[r]ules shall be liberally
construed in order to promote their objective of securing a just, speedy and inexpensive
disposition of every action and proceeding." However, this provision does not negate the entire
Rules of Court by providing a license to disregard all the other provisions. Resort to liberal
construction must be rational and well-grounded, and its factual bases must be so clear such that
they outweigh the intent or purpose of an apparent reading of the rules.

Rule 43 prescribes the mode of appeal for corporate rehabilitation cases:

Petitioner did not comply with some of these requirements. First, it did not implead its creditors
as respondents. Instead, petitioner only impleaded the Presiding Judge of the Regional Trial
Court, contrary to Section 6(a) of Rule 43. Second, it did not serve a copy of the Petition on some
of its creditors, specifically, its former employees. Finally, it did not serve a copy of the Petition
on the Regional Trial Court.

The Court of Appeals correctly dismissed petitioner's Rule 43 Petition * as a consequence of non-
compliance with procedural rules. Rule 43, Section 7 of the Rules of Court states:Sec. 7. Effect of
failure to comply with requirements. - The failure of the petitioner to comply with any of the
foregoing requirements regarding the payment of the docket and other lawful fees, the deposit
of costs, proof of service of the petition, and the contents of and the documents which should
accompany the petition shall be sufficient ground for the dismissal thereof.

Our courts are not only courts of law, but are also courts of equity.[129] Equity is justice outside
legal provisions, and must be exercised in the absence of law, not against it

The first rule breached by petitioner is the failure to implead all the indispensable parties.
Petitioner did not even interpose reasons why it should be excused from compliance with the
rule

The Rules of Court requires petitioner to implead respondents as a matter of due process. Under
the Constitution, "[n]o person shall be deprived of life, liberty or property without due process
of the law."134 An appeal to a corporate rehabilitation case may deprive creditor-stakeholders
of property. Due process dictates that these creditors be impleaded to give n them an
opportunity to protect the property owed to them.Creditors are indispensable parties to a
rehabilitation case, even if a rehabilitation case is non-adversarial.

A corporate rehabilitation case cannot be decided without the creditors' participation. The
court's role is to balance the interests of the corporation, the creditors, and the general public.

This court cannot exercise its equity jurisdiction and allow petitioner to circumvent the
requirement to implead its creditors as respondents. Tolerance of such failure will not only be
unfair to the creditors, it is contrary to the goals of corporate rehabilitation, and will invalidate
the cardinal principle of due process of law.

The failure of petitioner to implead its creditors as respondents cannot be cured by serving copies
of the Petition on its creditors. Since the creditors were not impleaded as respondents, the copy
of the Petition only serves to inform them that a petition has been filed before the appellate

18
court. Their participation was still significantly truncated. Petitioner's failure to implead them
deprived them of a fair hearing.

The next procedural rule that petitioner pleaded to suspend is the rule requiring it to furnish all
parties with copies of the Rule 43 Petition.

Petitioner admitted its failure to furnish its former employees with copies of the Petition because
they belatedly filed their claims before the Regional Trial Court.This argument is specious at best;
at worst, it foists a fraud on this court. The former employees were unable to raise their claims
on time because petitioner did not declare them as creditors. The Amended Petition did not
contain any information regarding pending litigation between petitioner and its former
employees. The only way the former employees could become aware of the corporate
rehabilitation proceedings was either through the required publication or through news
informally circulated among their colleagues. Clearly, it was petitioner who caused the belated
filing of its former employees' claims when it failed to notify its employees of the corporate
rehabilitation proceedings. Petitioner's failure was conveniently and disreputably hidden from
this court.

Petitioner's belated compliance with the requirement to serve the Petition for Review on its
former employees did not cure the procedural lapse.

This court cannot be a party to the inequitable way that petitioner's employees were treated.

Petitioner also pleaded to be excused from the requirement under Rule 6, Section 5 of the Rules
of Court to serve a copy of the Petition on the originating court.

Petitioner had 15 days to file a Rule 43 petition, which should include the proof of service to the
originating court. Rushing the compilation of the pleading with the annexes has nothing to do
with being able to comply with the requirement to submit a proof of service of the copy of the
petition for review to the originating court. If at all, it further reflects the unprofessional way that
petitioner and its counsel treated our rules.As this court has consistently ruled, "[t]he right to
appeal is not a natural right[,] nor a part of due process; it is merely a statutory privilege, and
may be exercised only in the manner and in accordance with the provisions of the law."[138]

In line with this, liberality in corporate rehabilitation procedure only generally refers to the trial
court, not to the proceedings before the appellate court. The Interim Rules of Procedure on
Corporate Rehabilitation covers petitions for rehabilitation filed before the Regional Trial Court.
Thus, Rule 2, Section 2 of the Interim Rules of Procedure on Corporate Rehabilitation, which
refers to liberal construction, is limited to the Regional Trial Court

Petitioner's excuses do not trigger the application of the policy of liberality in construing
procedural rules. For the courts to exercise liberality, petitioner must show that it is suffering
from an injustice not commensurate to the thoughtlessness of its procedural mistakes. Not only
did petitioner exercise injustice towards its creditors, its Rule 43 Petition for Review did not show
that the Regional Trial Court erred in dismissing its Amended Petition for Corporate
Rehabilitation.

The Regional Trial Court correctly dismissed the Amended Petition for Corporate Rehabilitation.
The dismissal of the Amended Petition did not emanate from petitioner's failure to provide
complete details on its assets and liabilities but on the trial court's finding that rehabilitation is
no longer viable for petitioner. Under the Interim Rules of Procedure on Corporate Rehabilitation,
a "petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of
one hundred eighty (180) days from the date of the initial hearing."[143] The proceedings are
also deemed terminated upon the trial court's disapproval of a rehabilitation plan, "or a
determination that the rehabilitation plan may no longer be implemented in accordance with its
terms, conditions, restrictions, or assumptions."[144]

19
The Regional Trial Court correctly dismissed petitioner's rehabilitation plan. It found that
petitioner's assets are non-performing.[152] Petitioner admitted this in its Amended Petition
when it stated that its vessels were no longer serviceable.[153] In Wonder Book Corporation v.
Philippine Bank of Communications,[154] a rehabilitation plan is infeasible if the assets are nearly
fully or fully depreciated. This reduces the probability that rehabilitation may restore and
reinstate petitioner to its former position of successful operation and solvency.

Petitioner's rehabilitation plan should have shown that petitioner has enough serviceable assets
to be able to continue its business. Yet, the plan showed that the source of funding would be to
sell petitioner's old vessels. Disposing of the assets constituting petitioner's main business cannot
result in rehabilitation. A business primarily engaged as a shipping line cannot operate without
its ships.

The other part of the rehabilitation plan entails selling properties of petitioner's sister company.
As pointed out by the Regional Trial Court, this plan requires conformity from the sister company.
Even if the two companies have the same directorship and ownership, they are still two separate
juridical entities. In BPI Family Savings Bank v. St. Michael Medical Center,[155] this court refused
to include in the financial and liquidity assessment the financial statements of another
corporation that the petitioning-corporation plans to merge with.

Principles:

Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and decisions in
corporate rehabilitation cases filed under the Interim Rules of Procedure on Corporate
Rehabilitation.[1] Liberality in the application of the rules is not an end in itself. It must be pleaded
with factual basis and must be allowed for equitable ends. There must be no indication that the
violation of the rule is due to negligence or design. Liberality is an extreme exception, justifiable
only when equity exists.

Corporate rehabilitation is a remedy for corporations, partnerships, and associations "who


[foresee] the impossibility of meeting [their] debts when they respectively fall due."[94] A
corporation under rehabilitation continues with its corporate life and activities to achieve
solvency,[95] or a position where the corporation is able to pay its obligations as they fall due in
the ordinary course of business. Solvency is a state where the businesses' liabilities are less than
its assets.[96]Corporate rehabilitation is a type of proceeding available to a business that is
insolvent. In general, insolvency proceedings provide for predictability that commercial
obligations will be met despite business downturns. Stability in the economy results when there
is assurance to the investing public that obligations will be reasonably paid

The rationale in corporate rehabilitation is to resuscitate businesses in financial distress because


"assets . . . are often more valuable when so maintained than they would be when
liquidated."[98] Rehabilitation assumes that assets are still serviceable to meet the purposes of
the business. The corporation receives assistance from the court and a disinterested
rehabilitation receiver to balance the interest to recover and continue ordinary business, all the
while attending to the interest of its creditors to be paid equitably. These interests are also
referred to as the rehabilitative and the equitable purposes of corporate rehabilitation.[99]...
there are instances when corporate rehabilitation can no longer be achieved. When
rehabilitation will not result in a better present value recovery for the creditors,[105] the more
appropriate remedy is liquidation.[106]It does not make sense to hold, suspend, or continue to
devalue outstanding credits of a business that has no chance of recovery. In such cases, the
optimum economic welfare will be achieved if the corporation is allowed to wind up its affairs in
an orderly manner. Liquidation allows the corporation to wind up its affairs and equitably
distribute its assets among its creditors.[107]Liquidation is diametrically opposed to
rehabilitation. Both cannot be undertaken at the same time.[108] In rehabilitation, corporations
have to maintain their assets to continue business operations. In liquidation, on the other hand,
corporations preserve their assets in order to sell them. Without these assets, business
operations are effectively discontinued. The proceeds of the sale are distributed equitably among
creditors, and surplus is divided or losses are re-allocated

20
There are two kinds of "liberality" with respect to the construction of provisions of law. The first
requires ambiguity in the text of the provision and usually pertains to a situation where there can
be two or more viable meanings given the factual context presented by a case. Liberality here
means a presumption or predilection to interpret the text in favor of the cause of the party
requesting for "liberality."Then there is the "liberality" that actually means a request for the
suspension of the operation of a provision of law, whether substantive or procedural. This
liberality requires equity. There may be some rights that are not recognized in law, and if courts
refuse to recognize these rights, an unfair situation may arise.[128] Specifically, the case may be
a situation that was not contemplated on or was not possible at the time the legal norm was
drafted or promulgated.

Bank of the Philippine Islands v. Sarabia Manor Hotel Corp.[145] provides the test to help trial
courts evaluate the economic feasibility of a rehabilitation plan: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

G.R. No. 75414 June 4, 1990

ALEMAR'S SIBAL & SONS, INC., petitioner,


vs.
HONORABLE JESUS M. ELBINIAS, in his capacity as the Presiding Judge of Regional Trial Court,
National Capital Region, Branch CXLI (141), Makati, and G.A. YUPANGCO & CO., INC.,
respondents.

Ledesma, Saludo & Associates for petitioner.

Rudy B. Canal for private respondent.

FERNAN, C.J.:

Assailed in this petition for certiorari with prayer for preliminary mandatory injunction is the
order dated May 15, 1986 issued by respondent Regional Trial Court, Branch 141 (Makati)
denying petitioner's motion to discharge the writ of execution despite an earlier order
suspending proceedings in said court.

On December 11, 1984, private respondent G.A. Yupangco and Co. Inc. (G.A. Yupangco) filed an
action with respondent trial court for collection of a sum of money with prayer for damages and
preliminary attachment against Alemar's Bookstore, a business entity owned and managed by
petitioner Alemar's Sibal & Sons, Inc. (Alemar's). 1

On August 30, 1985, respondent court rendered its decision, to wit:

Wherefore, finding plaintiffs claim to be substantiated, the Court hereby renders judgment by
default, ordering defendant, Alemar's Book Store, to pay G.A. Yupangco & Co., Inc., the following:

1) P 39,502.57 representing defendant's unpaid obligation, plus 2% per month interest


beginning December 11, 1984, until fully paid;

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2) the stipulated 25% of the recoverable amount as attorney's fees; and

3) cost of suit.2

Subsequently, on September 23, 1985, Ledesma, Saludo and Associates, as intervenor-movant,


filed an omnibus motion informing the respondent trial court that the petitioner Alemar's has
been placed under rehabilitation receivership by the Securities and Exchange Commission and
that movant has been appointed as its receiver. It prayed that it be allowed to intervene, that
the decision of August 30, 1985 be set aside and that further proceedings in this case be
suspended. 3 Attached to its motion is the order of the Securities and Exchange Commission
dated August 1, 1984 which states in part:

Therefore, pursuant to Presidential Decree No. 902-A, as amended, the Securities and Exchange
Commission hereby appoints as Rehabilitation Receiver, Ledesma, Saludo & Associates ... in order
to meet the imminent danger of dissipation, loss, wastage or destruction of the assets and other
properties and deterioration of vital financial ratios ... of said corporation and to ensure the
orderly payment of claims against the said corporation.

All actions for claims against the corporation pending before any court, tribunal, board or body
are suspended accordingly.

No disbursements or expenditures of funds shall be made other than what is usual in the ordinary
course of the business operations of the corporation. All withdrawals against the accounts of the
corporation shag be signed or authorized by any partner designated by the Rehabilitation
Receiver. Resolutions of the Board of Directors of Alemar's Sibal & Sons, Inc. pertaining to check
signatories shall be made subject to the foregoing conditions. 4

In its opposition, G.A. Yupangco maintained that it received notice of the receivership only on
January 10, 1985 or after one month after the collection suit. It further averred that the motion
to intervene by the receiver was not seasonably made. Accordingly, on October 29, 1985,
respondent court issued an order, the dispositive portion of which reads:

Wherefore, on the ground raised by plaintiff that movant now is barred from its present action,
the court hereby denies the motion for intervention, and the motion to set the aforesaid
judgment by default; however, movant's motion to suspend the proceedings in this Court is
granted as plaintiff may present said judgment by default to the receiver as the basis for the
settlement of its claim defendant. 5

In a motion dated January 7, 1986, G.A. Yupangco urged the issuance of a writ of execution to
implement the August 30, 1985 default judgment which had become final and executory, there
being no motion for reconsideration or appeal. The corresponding writ was issued on January 15,
1986. 6

Petitioner Alemar's moved for the discharge of the writ on the ground that its issuance was
improper since the proceedings in Civil Case No. 9252 have been suspended pursuant to the
October 29, 1985 order. Respondent court, however, held the resolution of the motion in
abeyance.

On January 31, 1986, the branch manager of the Bank of the Philippine Islands, after having
previously stopped payment of the cashier's check issued to satisfy the August 30, 1985 money
judgment, allowed the encashment of said check in the amount of P62,240.00. And in compliance
with a subsequent order of the respondent court, BPI also compensated G.A. Yupangco for the
delay in payment in an amount equivalent to the interest of P62,240.00 from January 17, 1986
to January 31, 1986 or a total of 14 days. 7

Contending that the payment of P 62,240.00 to G.A. Yupangco through the BPI has defeated the
purpose for which petitioner has been placed under receivership, petitioner filed a supplement

22
to its motion to discharge the writ of execution praying that the aforesaid payment be returned
to petitioner or to its account with the BPI.

On May 15, 1986, respondent court issued the questioned order denying petitioner's motions to
discharge the writ of execution. It reasoned:

... To discharge the writ would only cause undue delay in plaintiffs effort at satisfying its claim
under the judgment by default that had become final and executory. The fact that defendant is
under receivership presupposes that it has been declared insolvent, and the receiver is supposed
to have brought into its custody all available assets in defendant's name. The continuing
effectivity of the writ of execution will not prejudice defendant unless some assets of defendant
have been improperly left out beyond reach of the receiver and/or creditors. On the other hand,
to discharge the writ will leave plaintiff with no recourse to enforce the judgment in its favor....
8

Hence this petition which raises the issue of whether or not respondent court can validly proceed
with the execution of a final decision for the payment of a sum of money despite the fact that
the judgment debtor has been placed under receivership.

It is the general rule that once a decision becomes final and executory, its enforcement becomes
the ministerial duty of the court. Equally settled is that the rule admits of certain exceptions, one
of which is where it becomes imperative in the higher interest of justice to direct the deferment
of execution. In the instant case, the stay of execution is warranted by the fact that petitioner
Alemar's has been placed under "rehabilitation receivership".

What are the legal consequences of such a receivership? For one thing, the SEC has expressly
decreed that "all actions for claims against the corporation pending before any court ... are
suspended accordingly". Respondent court apparently demurred to the SEC action when it
granted petitioner's motion to suspend its own proceedings. It even went as far as to suggest to
the creditor to present the "judgment by default to the receiver as the basis for settlement of its
claim against defendant". So when respondent court ordered the execution of its August 30, 1985
judgment, it assumed a rather myopic view of its own suspension order. Verily, the proceedings
sought to be suspended by the order of October 29, 1985 necessarily includes the issuance of the
writ of execution.

The cases of Central Bank vs. Morfe, 9 and Lipana vs. Development Bank of Rizal, 10 are most
enlightening on why an execution in this particular instance could be legally held in abeyance
despite a final judgment. In both cases, there was an attempt by a creditor to enforce payment
against a bank (which was either declared insolvent or placed under receivership) by obtaining a
favorable judgment in the regular court and insisting upon its execution on the ground that the
courts cannot validly obstruct the enforcement of judgments that have become final and
executory.

The rationale behind the Court's imprimatur of the stay of execution in the aforementioned cases
is squarely applicable to the instant petition even if Alemar's is obviously not a banking
institution.

It must be stressed that the SEC had earlier ordered the suspension of all actions for claims
against Alemar's in order that all the assets of said petitioner could be inventoried and kept intact
for the purpose of ascertaining an equitable scheme of distribution among its creditors.

During rehabilitation receivership, the assets are held in trust for the equal benefit of all creditors
to preclude one from obtaining an advantage or preference over another by the expediency of
an attachment, execution or otherwise. For what would prevent an alert creditor, upon learning
of the receivership, from rushing posthaste to the courts to secure judgments for the satisfaction
of its claims to the prejudice of the less alert creditors.

23
As between creditors, the key phrase is "equality is equity." 11 When a corporation threatened
by bankruptcy is taken over by a receiver, all the creditors should stand on an equal footing. Not
anyone of them should be given any preference by paying one or some of them ahead of the
others. This is precisely the reason for the suspension of all pending claims against the
corporation under receivership. Instead of creditors vexing the courts with suits against the
distressed firm, they are directed to file their claims with the receiver who is a duly appointed
officer of the SEC.

When respondent court ruled in favor of G.A. Yupangco in the collection case, it only determined
the exact extent of petitioner's indebtedness and in no way gave G.A. Yupangco a priority over
the other creditors. However, it clearly exceeded its jurisdiction when it allowed G.A. Yupangco
to encash the check of P 62,240.00 pursuant to the writ of execution. In so doing, respondent
court gave G.A. Yupangco an undue preference by reducing the assets of the petitioner
corporation for its sole benefit to the grave damage and prejudice of the other creditors, and
thus frustrating the very purpose for which petitioner has been placed under receivership.

WHEREFORE, the writ is granted. The questioned order of respondent court dated May 15, 1986
denying petitioner's motion to discharge the writ of execution in Civil Case No. 9252 is hereby
reversed and set aside. All proceedings in connection with the aforesaid case are declared
suspended. Private respondent G.A. Yupangco is ordered to return to petitioner Alemar's the
amount it had actually received through the Bank of the Philippine Islands. This decision is
immediately executory. No costs.

SO ORDERED.

Gutierrez, Jr. and Bidin, JJ., concur.

Feliciano and Cortes, JJ., is on leave.

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