CORPORATE REHABILITATION

Reactor MCLE Seminar October 19, 2007

In the past, a distressed corporation is left with little options but to undergo insolvency
proceedings or suspension of payments when it finds itself unable to pay its obligations.
When PD 902-A was passed, the additional option of corporate rehabilitation was
allowed. Unfortunately, aside from granting the SEC the powers to pursue the
management or rehabilitation of private corporations, the said law did not mention
anything else on the subject. So, the SEC, with almost exclusive and absolute discretion,
adopted an informal set of internal rules to guide its hearing officers in the handling of
the rare cases of corporate rehabilitation. The applications for corporate rehabilitation
were treated on a case-to-case basis.
But times have changed. The power to rehabilitate corporations has been transferred to
the courts by virtue of RA 8799 or the Securities Regulation Code. The Supreme Court
promulgated an Interim Rules of Procedure on Corporate Rehabilitation to aid in the
handling of corporate rehabilitation cases. Some judges, though, have little or no
background and experience in corporate or commercial law.
Corporate Rehabilitation is intended to allow a distressed corporation to continue its
corporate life and its business as a going concern. It is very different from insolvency
proceedings and suspension of payment. Insolvency proceedings are intended to close
the operations and liquidate the assets of an insolvent corporation. It is one of the worst
options for a distressed corporation because it has to surrender its assets and operations to
the creditors. Yet, despite surrendering everything, the corporation is not discharged from
its debt. The remedy of suspension of payments grants a moratorium to the distressed
corporation, but only with the approval of a large number of the creditors, otherwise the
creditors are free to enforce their respective claims. Unlike these two options, corporate
rehabilitation can be availed of independently and even over the objections of the
creditors.
While the Supreme Court has crystallized the point that rehabilitation can go on even
over the objections of the creditors, some judges hesitate to do so. Perhaps, this is a
remnant of the time before the passage of the Interim Rules of Procedure on Corporate
Rehabilitation. There were some who argued that corporate rehabilitation is just an
offshoot of insolvency proceedings and suspension of payment, thus a rehabilitation plan
requires the consent of the creditors. This issue has been laid to rest by the Interim Rules.
Yet, because of the hesitation of some judges to act on the rehabilitation cases over the
objection of creditors, some corporations have languished in uncertainty which resulted
in the paralysis of their operations and the deterioration of their assets. Instead of being a
going-concern, the corporation stagnates. Nobody gets paid.
It is not just the hesitation of some judges to act quickly that is the problem, there are
many complex matters and issues which the Interim Rules do not discuss or resolve. To
start, there is the issue of how many directors and stockholders must approve the petition
for rehabilitation. In the case of Chas Realty & Development Corp vs. Talavera (G.R.

No. 151925, Feb. 6, 2003), it was argued that 2/3 of the directors and stockholders must
approve the filing of the petition. The Supreme Court said that the rule only requires in
the filing of the petition that the corporate actions therein proposed have been duly
approved or consented to by the directors and stockholders "in consonance with existing
laws." The question of whether such approval should be by a majority or by a two-thirds
(2/3) vote of the outstanding capital stock would depend on the existing law vis--vis the
corporate act or acts proposed to be done in the rehabilitation of the distressed
corporation. In that case, the Supreme Court ruled that only a simple majority was
required.
Another matter which may put the judge in a quandary is its jurisdiction over the
petitioner, especially if the petitioner is a foreign corporation or branch which is
registered and is doing business in the Philippines.
After determining the sufficiency of the petition in form and substance, the judge has to
issue a Stay Order. Among other things, the stay order will appoint a Rehabilitation
Receiver and will suspend all pending claims against the petitioning corporation. A Stay
Order trumps any and all cases filed by the creditors of the corporation. However, if the
properties of the petitioner have already been foreclosed and their titles have already been
consolidated by the winning bidder in the auction sale, then the Stay Order cannot undo
what has already been done. In the case of New Frontier Sugar Corp vs. RTC, the
Supreme Court opined that the suspension of the enforcement of all claims against the
corporation is subject to the rule that it shall commence only from the time the
Rehabilitation Receiver is appointed. So, the petitioner whose properties have already
been foreclosed and auctioned off prior to the issuance of a Stay Order must file a case to
annul the foreclosure sale of the properties. Without any properties, a corporations
petition for rehabilitation will ultimately fail.
The judge is then tasked to decide whether to approve the rehabilitation plan. While the
Interim Rules provide broad guidelines or standards, the judge is largely left on his own
to assess the financial analysis, ratios, figures submitted before him. A judge with an
accounting or business background may be able to sort the figures out, but one who does
not will just be utterly lost. It has taken financial and accounting experts years to master
the art and skill of assessing the financial viability of a corporation and of knowing which
figures, ratios and trends to look for in such assessment. A judge is expected to master it
immediately.
As if that were not enough, the creditors will all be clamoring to be paid. The creditors
with secured loans will, of course, claim privileged or preferred status. The Supreme
Court has also clarified this issue in the case of Alemars Sibal & Sons, Inc. vs Elbinias
where it ruled that 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. As between
creditors, the key phrase is equality is equity.

Assuming the parties want to question or appeal the approval or denial of a rehabilitation
plan, there is also an issue on what case to file. Some have filed a Rule 65 Petition for
Certiorari. Others have filed a Notice of Appeal or a Record on Appeal pursuant to Rule
41. To end the confusion, the Supreme Court passed A.M. No. 04-9-07-SC which
clarified that the proper mode of appeal is a petition for review under Rule 43 of the
Rules of Court within 15 days from notice of the decision or final order of the RTC.
Given the complexities of corporate rehabilitation, it is not a surprise then that many
corporate rehabilitation cases are languishing in the courts. This lamentable situation
gives wrong signals to distressed corporations that need immediate relief. Perceiving
corporate rehabilitation as a cumbersome procedure, some corporations would rather
close down than have their financial woes drag on. The spirit behind corporate
rehabilitation is defeated, not just by the creditors who are hell-bent on collecting their
loans, but also by the lackluster performance of unprepared judges who are overwhelmed
by the complexities of corporate rehabilitation.
The recommendation is to properly screen judges who will be appointed to preside over
Commercial Courts. They must have a background in finance or accounting. They must
have extensive experience in corporations or in commercial law. They must also show an
avid interest, not just a passing interest, in Financial Analysis and in Corporate Affairs.
While specialization is not a common practice in the Philippines, a specialist is needed to
properly preside over a commercial court.