III.
Special Proceedings Relating to Financial Rehabilitation
and Insolvency
RA 10142 The FRIA of 2010
REPUBLIC ACT No. 10142
AN ACT PROVIDING FOR THE REHABILITATION OR
LIQUIDATION OF FINANCIALLY DISTRESSED
ENTERPRISES AND INDIVIDUALS
Be it enacted by the Senate and House of
Representatives of the Philippines in Congress
assembled:
CHAPTER I
GENERAL PROVISIONS
Section 1. Title. - This Act shall be known as
the "Financial Rehabilitation and Insolvency Act
(FRIA) of 2010".
Section 2. Declaration of Policy. - It is the policy of the
State to encourage debtors, both juridical and natural
persons, and their creditors to collectively and realistically
resolve and adjust competing claims and property rights.
In furtherance thereof, the State shall ensure a timely, fair,
transparent, effective and efficient rehabilitation or
liquidation of debtors. The rehabilitation or liquidation shall
be made with a view to ensure or maintain certainly and
predictability in commercial affairs, preserve and maximize
the value of the assets of these debtors, recognize creditor
rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated. When
rehabilitation is not feasible, it is in the interest of the State
to facilities a speedy and orderly liquidation of these
debtor's assets and the settlement of their obligations.
Section 3. Nature of Proceedings. - The proceedings
under this Act shall be in rem. Jurisdiction over all persons
affected by the proceedings shall be considered as
acquired upon publication of the notice of the
commencement of the proceedings in any newspaper of
general circulation in the Philippines in the manner
prescribed by the rules of procedure to be promulgated by
the Supreme Court.
The proceedings shall be conducted in a summary and
non-adversarial manner consistent with the declared
policies of this Act and in accordance with the rules of
procedure that the Supreme Court may promulgate.
Section 4. Definition of Terms. - As used in this Act, the
term:
(a) Administrative expenses shall refer to those
reasonable and necessary expenses:
(1) incurred or arising from the filing of a
petition under the provisions of this Act;
(2) arising from, or in connection with,
the conduct of the proceedings under
this Act, including those incurred for the
rehabilitation or liquidation of the debtor;
(3) incurred in the ordinary course of
business of the debtor after the
commencement date;
(4) for the payment of new obligations
obtained after the commencement date
to finance the rehabilitation of the
debtor;
(5) incurred for the fees of the
rehabilitation receiver or liquidator and
of the professionals engaged by them;
and
(6) that are otherwise authorized or
mandated under this Act or such other
expenses as may be allowed by the
Supreme Court in its rules.
(b) Affiliate shall refer to a corporation that
directly or indirectly, through one or more
intermediaries, is controlled by, or is under the
common control of another corporation.
(c) Claim shall refer to all claims or demands of
whatever nature or character against the debtor
or its property, whether for money or otherwise,
liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed,
including, but not limited to; (1) all claims of the
government, whether national or local, including
taxes, tariffs and customs duties; and (2) claims
against directors and officers of the debtor arising
from acts done in the discharge of their functions
falling within the scope of their
authority: Provided, That, this inclusion does not
prohibit the creditors or third parties from filing
cases against the directors and officers acting in
their personal capacities.
(d) Commencement date shall refer to the date
on which the court issues the Commencement
Order, which shall be retroactive to the date of
filing of the petition for voluntary or involuntary
proceedings.
(e) Commencement Order shall refer to the order
issued by the court under Section 16 of this Act.
(f) Control shall refer to the power of a parent
corporation to direct or govern the financial and
operating policies of an enterprise so as to obtain
benefits from its activities. Control is presumed to
exist when the parent owns, directly or indirectly
through subsidiaries or affiliates, more than one-
half (1/2) of the voting power of an enterprise
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unless, in exceptional circumstances, it can
clearly be demonstrated that such ownership
does not constitute control. Control also exists
even when the parent owns one-half (1/2) or less
of the voting power of an enterprise when there is
power:
(1) over more than one-half (1/2) of the
voting rights by virtue of an agreement
with investors;
(2) to direct or govern the financial and
operating policies of the enterprise
under a statute or an agreement;
(3) to appoint or remove the majority of
the members of the board of directors or
equivalent governing body; or
(4) to cast the majority votes at
meetings of the board of directors or
equivalent governing body.
(g) Court shall refer to the court designated by
the Supreme Court to hear and determine, at the
first instance, the cases brought under this Act.
(h) Creditor shall refer to a natural or juridical
person which has a claim against the debtor that
arose on or before the commencement date.
(i) Date of liquidation shall refer to the date on
which the court issues the Liquidation Order.
(j) Days shall refer to calendar days unless
otherwise specifically stated in this Act.
(k) Debtor shall refer to, unless specifically
excluded by a provision of this Act, a sole
proprietorship duly registered with the
Department of Trade and Industry (DTI), a
partnership duly registered with the Securities
and Exchange Commission (SEC), a corporation
duly organized and existing under Philippine
laws, or an individual debtor who has become
insolvent as defined herein.
(l) Encumbered property shall refer to real or
personal property of the debtor upon which a lien
attaches.
(m) General unsecured creditor shall refer to a
creditor whose claim or a portion thereof its
neither secured, preferred nor subordinated
under this Act.
(n) Group of debtors shall refer to and can cover
only: (1) corporations that are financially related
to one another as parent corporations,
subsidiaries or affiliates; (2) partnerships that are
owned more than fifty percent (50%) by the same
person; and (3) single proprietorships that are
owned by the same person. When the petition
covers a group of debtors, all reference under
these rules to debtor shall include and apply to
the group of debtors.
(o) Individual debtor shall refer to a natural
person who is a resident and citizen of the
Philippines that has become insolvent as defined
herein.
(p) Insolvent shall refer to 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.
(q) Insolvent debtor's estate shall refer to the
estate of the insolvent debtor, which includes all
the property and assets of the debtor as of
commencement date, plus the property and
assets acquired by the rehabilitation receiver or
liquidator after that date, as well as all other
property and assets in which the debtor has an
ownership interest, whether or not these property
and assets are in the debtor's possession as of
commencement date: Provided, That trust assets
and bailment, and other property and assets of a
third party that are in the possession of the
debtor as of commencement date, are excluded
therefrom.
(r) Involuntary proceedings shall refer to
proceedings initiated by creditors.
(s) Liabilities shall refer to monetary claims
against the debtor, including stockholder's
advances that have been recorded in the debtor's
audited financial statements as advances for
future subscriptions.
(t) Lien shall refer to a statutory or contractual
claim or judicial charge on real or personal
property that legality entities a creditor to resort to
said property for payment of the claim or debt
secured by such lien.
(u) Liquidation shall refer to the proceedings
under Chapter V of this Act.
(v) Liquidation Order shall refer to the Order
issued by the court under Section 112 of this Act.
(w) Liquidator shall refer to the natural person or
juridical entity appointed as such by the court and
entrusted with such powers and duties as set
forth in this Act: Provided, That, if the liquidator is
a juridical entity, it must designated a natural
person who possesses all the qualifications and
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none of the disqualifications as its representative,
it being understood that the juridical entity and
the representative are solidarity liable for all
obligations and responsibilities of the liquidator.
(x) Officer shall refer to a natural person holding
a management position described in or
contemplated by a juridical entity's articles of
incorporation, bylaws or equivalent documents,
except for the corporate secretary, the assistant
corporate secretary and the external auditor.
(y) Ordinary course of business shall refer to
transactions in the pursuit of the individual
debtor's or debtor's business operations prior to
rehabilitation or insolvency proceedings and on
ordinary business terms.
(z) Ownership interest shall refer to the
ownership interest of third parties in property held
by the debtor, including those covered by trust
receipts or assignments of receivables.
(aa) Parent shall refer to a corporation which has
control over another corporation either directly or
indirectly through one or more intermediaries.
(bb) Party to the proceedings shall refer to the
debtor, a creditor, the unsecured creditors'
committee, a stakeholder, a party with an
ownership interest in property held by the debtor,
a secured creditor, the rehabilitation receiver,
liquidator or any other juridical or natural person
who stands to be benefited or injured by the
outcome of the proceedings and whose notice of
appearance is accepted by the court.
(cc) Possessory lien shall refer to a lien on
property, the possession of which has been
transferred to a creditor or a representative or
agent thereof.
(dd) Proceedings shall refer to judicial
proceedings commenced by the court's
acceptance of a petition filed under this Act.
(ee) Property of others shall refer to property held
by the debtor in which other persons have an
ownership interest.
(ff) Publication notice shall refer to notice through
publication in a newspaper of general circulation
in the Philippines on a business day for two (2)
consecutive weeks.
(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 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.
(hh) Rehabilitation receiver shall refer to the
person or persons, natural or juridical, appointed
as such by the court pursuant to this Act and
which shall be entrusted with such powers and
duties as set forth herein.
(ii) Rehabilitation Plan shall refer to a plan by
which the financial well-being and viability of an
insolvent debtor can be restored using various
means including, but not limited to, debt
forgiveness, debt rescheduling, reorganization or
quasi-reorganization, dacion en pago, debt-equity
conversion and sale of the business (or parts of
it) as a going concern, or setting-up of new
business entity as prescribed in Section 62
hereof, or other similar arrangements as may be
approved by the court or creditors.
(jj) Secured claim shall refer to a claim that is
secured by a lien.
(kk) Secured creditor shall refer to a creditor with
a secured claim.
(ll) Secured party shall refer to a secured creditor
or the agent or representative of such secured
creditor.
(mm) Securities market participant shall refer to a
broker dealer, underwriter, transfer agent or other
juridical persons transacting securities in the
capital market.
(nn) Stakeholder shall refer, in addition to a
holder of shares of a corporation, to a member of
a nonstock corporation or association or a
partner in a partnership.
(oo) Subsidiary shall refer to a corporation more
than fifty percent (50%) of the voting stock of
which is owned or controlled directly or indirectly
through one or more intermediaries by another
corporation, which thereby becomes its parent
corporation.
(pp) Unsecured claim shall refer to a claim that is
not secured by a lien.
(qq) Unsecured creditor shall refer to a creditor
with an unsecured claim.
(rr) Voluntary proceedings shall refer to
proceedings initiated by the debtor.
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 (ss) Voting creditor shall refer to a creditor that is
a member of a class of creditors, the consent of
which is necessary for the approval of a
Rehabilitation Plan under this Act.
Section 5. Exclusions. - The term debtor does not include
banks, insurance companies, pre-need companies, and
national and local government agencies or units.
For purposes of this section:
(a) Bank shall refer to any duly licensed bank or
quasi-bank that is potentially or actually subject
to conservatorship, receivership or liquidation
proceedings under the New Central Bank Act
(Republic Act No. 7653) or successor legislation;
(b) Insurance company shall refer to those
companies that are potentially or actually subject
to insolvency proceedings under the Insurance
Code (Presidential Decree No. 1460) or
successor legislation; and
(c) Pre-need company shall refer to any
corporation authorized/licensed to sell or offer to
sell pre-need plans.
Provided, That government financial institutions other than
banks and government-owned or controlled corporations
shall be covered by this Act, unless their specific charter
provides otherwise.
Section 6. Designation of Courts and Promulgation of
Procedural Rules. - The Supreme Court shall designate
the court or courts that will hear and resolve cases brought
under this Act and shall promulgate the rules of pleading,
practice and procedure to govern the proceedings brought
under this Act.
Section 7. Substantive and Procedural Consolidation. -
Each juridical entity shall be considered as a separate
entity under the proceedings in this Act. Under these
proceedings, the assets and liabilities of a debtor may not
be commingled or aggregated with those of another,
unless the latter is a related enterprise that is owned or
controlled directly or indirectly by the same
interests: Provided, however, That the commingling or
aggregation of assets and liabilities of the debtor with
those of a related enterprise may only be allowed where:
(a) there was commingling in fact of assets and
liabilities of the debtor and the related enterprise
prior to the commencement of the proceedings;
(b) the debtor and the related enterprise have
common creditors and it will be more convenient
to treat them together rather than separately;
(c) the related enterprise voluntarily accedes to
join the debtor as party petitioner and to
commingle its assets and liabilities with the
debtor's; and
(d) The consolidation of assets and liabilities of
the debtor and the related enterprise is beneficial
to all concerned and promotes the objectives of
rehabilitation.
Provided, finally, That nothing in this section shall prevent
the court from joining other entities affiliated with the
debtor as parties pursuant to the rules of procedure as
may be promulgated by the Supreme Court.
Section 8. Decisions of Creditors. - Decisions of creditors
shall be made according to the relevant provisions of the
Corporation Code in the case of stock or nonstock
corporations or the Civil Code in the case of partnerships
that are not inconsistent with this Act.
Section 9. Creditors Representatives. - Creditors may
designate representatives to vote or otherwise act on their
behalf by filing notice of such representation with the court
and serving a copy on the rehabilitation receiver or
liquidator.
Section 10. Liability of Individual Debtor, Owner of a Sole
Proprietorship, Partners in a Partnership, or Directors and
Officers. - Individual debtor, owner of a sole proprietorship,
partners in a partnership, or directors and officers of a
debtor shall be liable for double the value of the property
sold, embezzled or disposed of or double the amount of
the transaction involved, whichever is higher to be
recovered for benefit of the debtor and the creditors, if
they, having notice of the commencement of the
proceedings, or having reason to believe that proceedings
are about to be commenced, or in contemplation of the
proceedings, willfully commit the following acts:
(a) Dispose or cause to be disposed of any
property of the debtor other than in the ordinary
course of business or authorize or approve any
transaction in fraud of creditors or in a manner
grossly disadvantageous to the debtor and/or
creditors; or
(b) Conceal or authorize or approve the
concealment, from the creditors, or embezzles or
misappropriates, any property of the debtor.
The court shall determine the extent of the liability of an
owner, partner, director or officer under this section. In this
connection, in case of partnerships and corporations, the
court shall consider the amount of the shareholding or
partnership or equity interest of such partner, director or
officer, the degree of control of such partner, director or
officer over the debtor, and the extent of the involvement
of such partner, director or debtor in the actual
management of the operations of the debtor.
Section 11. Authorization to Exchange Debt for Equity. -
Notwithstanding applicable banking legislation to the
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contrary, any bank, whether universal or not, may acquire
and hold an equity interest or investment in a debtor or its
subsidiaries when conveyed to such bank in satisfaction of
debts pursuant to a Rehabilitation or Liquidation Plan
approved by the court: Provided, That such ownership
shall be subject to the ownership limits applicable to
universal banks for equity investments and: Provided,
further, That any equity investment or interest acquired or
held pursuant to this section shall be disposed by the bank
within a period of five (5) years or as may be prescribed by
the Monetary Board.
CHAPTER II
COURT-SUPERVISED REHABILITATION
(A) Initiation Proceedings.
(1) Voluntary Proceedings.
Section 12. Petition to Initiate Voluntary Proceedings by
Debtor. - When approved by the owner in case of a sole
proprietorship, or by a majority of the partners in case of a
partnership, or in case of a corporation, by a majority vote
of the board of directors or trustees and authorized by the
vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of
nonstock corporation, by the vote of at least two-thirds
(2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose, an insolvent debtor
may initiate voluntary proceedings under this Act by filing a
petition for rehabilitation with the court and on the grounds
hereinafter specifically provided. The petition shall be
verified to establish the insolvency of the debtor and the
viability of its rehabilitation, and include, whether as an
attachment or as part of the body of the petition, as a
minimum the following:
(a) Identification of the debtor, its principal
activities and its addresses;
(b) Statement of the fact of and the cause of the
debtor's insolvency or inability to pay its
obligations as they become due;
(c) The specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under
this Act depending on the form of relief
requested;
(f) Schedule of the debtor's debts and liabilities
including a list of creditors with their addresses,
amounts of claims and collaterals, or securities, if
any;
(g) An inventory of all its assets including
receivables and claims against third parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to
the position of rehabilitation receiver; and
(j) Other documents required to be filed with the
petition pursuant to this Act and the rules of
procedure as may be promulgated by the
Supreme Court.
A group of debtors may jointly file a petition for
rehabilitation under this Act when one or more of its
members foresee the impossibility of meeting debts when
they respectively fall due, and the financial distress would
likely adversely affect the financial condition and/or
operations of the other members of the group and/or the
participation of the other members of the group is
essential under the terms and conditions of the proposed
Rehabilitation Plan.
(2) Involuntary Proceedings.
Section 13. Circumstances Necessary to Initiate
Involuntary Proceedings. - Any creditor or group of
creditors with a claim of, or the aggregate of whose claims
is, at least One Million Pesos (Php1,000,000.00) or at
least twenty-five percent (25%) of the subscribed capital
stock or partners' contributions, whichever is higher, may
initiate involuntary proceedings against the debtor by filing
a petition for rehabilitation with the court if:
(a) there is no genuine issue of fact on law on the
claim/s of the petitioner/s, and that the due and
demandable payments thereon have not been
made for at least sixty (60) days or that the
debtor has failed generally to meet its liabilities
as they fall due; or
(b) a creditor, other than the petitioner/s, has
initiated foreclosure proceedings against the
debtor that will prevent the debtor from paying its
debts as they become due or will render it
insolvent.
Section 14. Petition to Initiate Involuntary Proceedings. -
The creditor/s' petition for rehabilitation shall be verified to
establish the substantial likelihood that the debtor may be
rehabilitated, and include:
(a) identification of the debtor its principal
activities and its address;
(b) the circumstances sufficient to support a
petition to initiate involuntary rehabilitation
proceedings under Section 13 of this Act;
(c) the specific relief sought under this Act;
(d) a Rehabilitation Plan;
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 (e) the names of at least three (3) nominees to
the position of rehabilitation receiver;
(f) other information that may be required under
this Act depending on the form of relief
requested; and
(g) other documents required to be filed with the
petition pursuant to this Act and the rules of
procedure as may be promulgated by the
Supreme Court.
(B) Action on the Petition and Commencement of
Proceedings.
Section 15. Action on the Petition. - If the court finds the
petition for rehabilitation to be sufficient in form and
substance, it shall, within five (5) working days from the
filing of the petition, issue a Commencement Order. If,
within the same period, the court finds the petition
deficient in form or substance, the court may, in its
discretion, give the petitioner/s a reasonable period of time
within which to amend or supplement the petition, or to
submit such documents as may be necessary or proper to
put the petition in proper order. In such case, the five (5)
working days provided above for the issuance of the
Commencement Order shall be reckoned from the date of
the filing of the amended or supplemental petition or the
submission of such documents.
Section 16. Commencement of Proceedings and
Issuance of a Commencement Order. - The rehabilitation
proceedings shall commence upon the issuance of the
Commencement Order, which shall:
(a) identify the debtor, its principal business or
activity/ies and its principal place of business;
(b) summarize the ground/s for initiating the
proceedings;
(c) state the relief sought under this Act and any
requirement or procedure particular to the relief
sought;
(d) state the legal effects of the Commencement
Order, including those mentioned in Section 17
hereof;
(e) declare that the debtor is under rehabilitation;
(f) direct the publication of the Commencement
Order in a newspaper of general circulation in the
Philippines once a week for at least two (2)
consecutive weeks, with the first publication to be
made within seven (7) days from the time of its
issuance;
(g) If the petitioner is the debtor direct the service
by personal delivery of a copy of the petition on
each creditor holding at least ten percent (10%)
of the total liabilities of the debtor as determined
from the schedule attached to the petition within
five (5) days; if the petitioner/s is/are creditor/s,
direct the service by personal delivery of a copy
of the petition on the debtor within five (5) days;
(h) appoint a rehabilitation receiver who may or
not be from among the nominees of the
petitioner/s and who shall exercise such powers
and duties defined in this Act as well as the
procedural rules that the Supreme Court will
promulgate;
(i) summarize the requirements and deadlines for
creditors to establish their claims against the
debtor and direct all creditors to their claims with
the court at least five (5) days before the initial
hearing;
(j) direct Bureau of internal Revenue (BIR) to file
and serve on the debtor its comment on or
opposition to the petition or its claim/s against the
debtor under such procedures as the Supreme
Court provide;
(k) prohibit the debtor's suppliers of goods or
services from withholding the supply of goods
and services in the ordinary course of business
for as long as the debtor makes payments for the
services or goods supplied after the issuance of
the Commencement Order;
(l) authorize the payment of administrative
expenses as they become due;
(m) set the case for initial hearing, which shall not
be more than forty (40) days from the date of
filing of the petition for the purpose of determining
whether there is substantial likelihood for the
debtor to be rehabilitated;
(n) make available copies of the petition and
rehabilitation plan for examination and copying by
any interested party;
(o) indicate the location or locations at which
documents regarding the debtor and the
proceedings under Act may be reviewed and
copied;
(p) state that any creditor or debtor who is not the
petitioner, may submit the name or nominate any
other qualified person to the position of
rehabilitation receiver at least five (5) days before
the initial hearing;
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 (q) include s Stay or Suspension Order which
shall:
(1) suspend all actions or proceedings,
in court or otherwise, for the
enforcement of claims against the
debtor;
(2) suspend all actions to enforce any
judgment, attachment or other
provisional remedies against the debtor;
(3) prohibit the debtor from selling,
encumbering, transferring or disposing
in any manner any of its properties
except in the ordinary course of
business; and
(4) prohibit the debtor from making any
payment of its liabilities outstanding as
of the commencement date except as
may be provided herein.
Section 17. Effects of the Commencement Order. -
Unless otherwise provided for in this Act, the court's
issuance of a Commencement Order shall, in addition to
the effects of a Stay or Suspension Order described in
Section 16 hereof:
(a) vest the rehabilitation with all the powers and
functions provided for this Act, such as the right
to review and obtain records to which the debtor's
management and directors have access,
including bank accounts or whatever nature of
the debtor subject to the approval by the court of
the performance bond filed by the rehabilitation
receiver;
(b) prohibit or otherwise serve as the legal basis
rendering null and void the results of any
extrajudicial activity or process to seize property,
sell encumbered property, or otherwise attempt to
collection or enforce a claim against the debtor
after commencement date unless otherwise
allowed in this Act, subject to the provisions of
Section 50 hereof;
(c) serve as the legal basis for rendering null and
void any setoff after the commencement date of
any debt owed to the debtor by any of the
debtor's creditors;
(d) serve as the legal basis for rendering null and
void the perfection of any lien against the debtor's
property after the commencement date; and
(e) consolidate the resolution of all legal
proceedings by and against the debtor to the
court Provided. However, That the court may
allow the continuation of cases on other courts
where the debtor had initiated the suit.
Attempts to seek legal of other resource against the debtor
outside these proceedings shall be sufficient to support a
finding of indirect contempt of court.
Section 18. Exceptions to the Stay or Suspension Order. -
The Stay or Suspension Order shall not apply:
(a) to cases already pending appeal in the
Supreme Court as of commencement
date Provided, That any final and executory
judgment arising from such appeal shall be
referred to the court for appropriate action;
(b) subject to the discretion of the court, to cases
pending or filed at a specialized court or quasi-
judicial agency which, upon determination by the
court is capable of resolving the claim more
quickly, fairly and efficiently than the
court: Provided, That any final and executory
judgment of such court or agency shall be
referred to the court and shall be treated as a
non-disputed claim;
(c) to the enforcement of claims against sureties
and other persons solidarily liable with the debtor,
and third party or accommodation mortgagors as
well as issuers of letters of credit, unless the
property subject of the third party or
accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by the
court upon recommendation by the rehabilitation
receiver;
(d) to any form of action of customers or clients of
a securities market participant to recover or
otherwise claim moneys and securities entrusted
to the latter in the ordinary course of the latter's
business as well as any action of such securities
market participant or the appropriate regulatory
agency or self-regulatory organization to pay or
settle such claims or liabilities;
(e) to the actions of a licensed broker or dealer to
sell pledged securities of a debtor pursuant to a
securities pledge or margin agreement for the
settlement of securities transactions in
accordance with the provisions of the Securities
Regulation Code and its implementing rules and
regulations;
(f) the clearing and settlement of financial
transactions through the facilities of a clearing
agency or similar entities duly authorized,
registered and/or recognized by the appropriate
regulatory agency like the Bangko Sentral ng
Pilipinas (BSP) and the SEC as well as any form
of actions of such agencies or entities to
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 reimburse themselves for any transactions
settled for the debtor; and
(g) any criminal action against individual debtor
or owner, partner, director or officer of a debtor
shall not be affected by any proceeding
commend under this Act.
Section 19. Waiver of taxes and Fees Due to the National
Government and to Local Government Units (LGUs). -
Upon issuance of the Commencement Order by the court,
and until the approval of the Rehabilitation Plan or
dismissal of the petition, whichever is earlier, the
imposition of all taxes and fees including penalties,
interests and charges thereof due to the national
government or to LGUs shall be considered waived, in
furtherance of the objectives of rehabilitation.
Section 20. Application of Stay or Suspension Order to
Government Financial Institutions. - The provisions of this
Act concerning the effects of the Commencement Order
and the Stay or Suspension Order on the suspension of
rights to foreclose or otherwise pursue legal remedies
shall apply to government financial institutions,
notwithstanding provisions in their charters or other laws
to the contrary.
Section 21. Effectivity and Duration of Commencement
Order. - Unless lifted by the court, the Commencement
Order shall be for the effective for the duration of the
rehabilitation proceedings for as long as there is a
substantial likelihood that the debtor will be successfully
rehabilitated. In determining whether there is substantial
likelihood for the debtor to be successfully rehabilitated,
the court shall ensure that the following minimum
requirements are met:
(a) The proposed Rehabilitation Plan submitted
complies with the minimum contents prescribed
by this Act;
(b) There is sufficient monitoring by the
rehabilitation receiver of the debtor's business for
the protection of creditors;
(c) The debtor has met with its creditors to the
extent reasonably possible in attempts to reach
consensus on the proposed Rehabilitation Plan;
(d) The rehabilitation receiver submits a report,
based on preliminary evaluation, stating that the
underlying assumptions and the goals stated in
the petitioner's Rehabilitation Plan are realistic
reasonable and reasonable or if not, there is, in
any case, a substantial likelihood for the debtor to
be successfully rehabilitated because, among
others:
(1) there are sufficient assets with/which
to rehabilitate the debtor;
(2) there is sufficient cash flow to
maintain the operations of the debtor;
(3) the debtor's, partners, stockholders,
directors and officers have been acting
in good faith and which due diligence;
(4) the petition is not s sham filing
intended only to delay the enforcement
of the rights of the creditor's or of any
group of creditors; and
(5) the debtor would likely be able to
pursue a viable Rehabilitation Plan;
(e) The petition, the Rehabilitation Plan and the
attachments thereto do not contain any materially
false or misleading statement;
(f) If the petitioner is the debtor, that the debtor
has met with its creditor/s representing at least
three-fourths (3/4) of its total obligations to the
extent reasonably possible and made a good
faith effort to reach a consensus on the proposed
Rehabilitation Plan if the petitioner/s is/are a
creditor or group of creditors, that/ the petitioner/s
has/have met with the debtor and made a good
faith effort to reach a consensus on the proposed
Rehabilitation Plan; and
(g) The debtor has not committed acts
misrepresentation or in fraud of its creditor/s or a
group of creditors.
Section 22. Action at the Initial Hearing. - At the initial
hearing, the court shall:
(a) determine the creditors who have made timely
and proper filing of their notice of claims;
(b) hear and determine any objection to the
qualifications of the appointment of the
rehabilitation receiver and, if necessary appoint a
new one in accordance with this Act;
(c) direct the creditors to comment on the petition
and the Rehabilitation Plan, and to submit the
same to the court and to the rehabilitation
receiver within a period of not more than twenty
(20) days; and
(d) direct the rehabilitation receiver to evaluate
the financial condition of the debtor and to
prepare and submit to the court within forty (40)
days from initial hearing the report provided in
Section 24 hereof.
Section 23. Effect of Failure to File Notice of Claim. - A
creditor whose claim is not listed in the schedule of debts
9
and liabilities and who fails to file a notice of claim in
accordance with the Commencement Order but
subsequently files a belated claim shall not be entitled to
participate in the rehabilitation proceedings but shall be
entitled to receive distributions arising therefrom.
Section 24. Report of the Rehabilitation Receiver. - Within
forty (40) days from the initial hearing and with or without
the comments of the creditors or any of them, the
rehabilitation receiver shall submit a report to the court
stating his preliminary findings and recommendations on
whether:
(a) the debtor is insolvent and if so, the causes
thereof and any unlawful or irregular act or acts
committed by the owner/s of a sole proprietorship
partners of a partnership or directors or officers of
a corporation in contemplation of the insolvency
of the debtor or which may have contributed to
the insolvency of the debtor;
(b) the underlying assumptions, the financial
goals and the procedures to accomplish such
goals as stated in the petitioner's Rehabilitation
Plan are realistic, feasible and reasonable;
(c) there is a substantial likelihood for the debtor
to be successfully rehabilitated;
(d) the petition should be dismissed; and
(e) the debtor should be dissolved and/or
liquidated.
Section 25. Giving Due Course to or Dismissal of Petition,
or Conversion of Proceedings. - Within ten (10) days from
receipt of the report of the rehabilitation receiver
mentioned in Section 24 hereof the court may:
(a) give due course to the petition upon a finding
that:
(1) the debtor is insolvent; and
(2) there is a substantial likelihood for
the debtor to be successfully
rehabilitated;
(b) dismiss the petition upon a finding that:
(1)debtor is not insolvent;
(2) the petition i8 a sham filing intended
only to delay the enforcement of the
rights of the creditor/s or of any group of
creditors;
(3)the petition, the Rehabilitation Plan
and the attachments thereto contain any
materially false or misleading
statements; or
(4)the debtor has committed acts of
misrepresentation or in fraud of its
creditor/s or a group of creditors;
(c)convert the proceedings into one for the
liquidation of the debtor upon a finding that:
(1)the debtor is insolvent; and
(2)there is no substantial likelihood for
the debtor to be successfully
rehabilitated as determined in
accordance with the rules to be
promulgated by the Supreme Court.
Section 26.Petition Given Due Course. - If the petition is
given due course, the court shall direct the rehabilitation
receiver to review, revise and/or recommend action on the
Rehabilitation Plan and submit the same or a new one to
the court within a period of not more than ninety (90) days.
The court may refer any dispute relating to the
Rehabilitation Plan or the rehabilitation proceedings
pending before it to arbitration or other modes of dispute
resolution, as provided for under Republic Act No. 9285,
Or the Alternative Dispute Resolution Act of 2004, should it
determine that such mode will resolve the dispute more
quickly, fairly and efficiently than the court.
Section 27.Dismissal of Petition. - If the petition is
dismissed pursuant to paragraph (b) of Section 25 hereof,
then the court may, in its discretion, order the petitioner to
pay damages to any creditor or to the debtor, as the case
may be, who may have been injured by the filing of the
petition, to the extent of any such injury.
(C) The Rehabilitation Receiver, Management
Committee and Creditors' Committee.
Section 28.Who May Serve as a Rehabilitation Receiver. -
Any qualified natural or juridical person may serve as a
rehabilitation receiver: Provided, That if the rehabilitation
receiver is a juridical entity, it must designate a natural
person/s who possess/es all the qualifications and none of
the disqualifications as its representative, it being
understood that the juridical entity and the representative/s
are solidarily liable for all obligations and responsibilities of
the rehabilitation receiver.
Section 29.Qualifications of a Rehabilitation Receiver. -
The rehabilitation receiver shall have the following
minimum qualifications:
(a)A citizen of the Philippines or a resident of the
Philippines in the six (6) months immediately
preceding his nomination;
10
 (b)Of good moral character and with
acknowledged integrity, impartiality and
independence;
(c)Has the requisite knowledge of insolvency and
other relevant commercial laws, rules and
procedures, as well as the relevant training
and/or experience that may be necessary to
enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and
(d)Has no conflict of interest: Provided, That such
conflict of interest may be waived, expressly or
impliedly, by a party who may be prejudiced
thereby.
Other qualifications and disqualifications of the
rehabilitation receiver shall be set forth in procedural rules,
taking into consideration the nature of the business of the
debtor and the need to protect the interest of all
stakeholders concerned.
Section 30.Initial Appointment of the Rehabilitation
Receiver. - The court shall initially appoint the
rehabilitation receiver, who mayor may not be from among
the nominees of the petitioner, However, at the initial
hearing of the petition, the creditors and the debtor who
are not petitioners may nominate other persons to the
position. The court may retain the rehabilitation receiver
initially appointed or appoint another who mayor may not
be from among those nominated.
In case the debtor is a securities market participant, the
court shall give priority to the nominee of the appropriate
securities or investor protection fund.
If a qualified natural person or entity is nominated by more
than fifty percent (50%) of the secured creditors and the
general unsecured creditors, and satisfactory evidence is
submitted, the court shall appoint the creditors' nominee
as rehabilitation receiver.
Section 31.Powers, Duties and Responsibilities of the
Rehabilitation Receiver. - The rehabilitation receiver shall
be deemed an officer of the court with the principal duty of
preserving and maximizing the value of the assets of the
debtor during the rehabilitation proceedings, determining
the viability of the rehabilitation of the debtor, preparing
and recommending a Rehabilitation Plan to the court, and
implementing the approved Rehabilitation Plan, To this
end, and without limiting the generality of the foregoing,
the rehabilitation receiver shall have the following powers,
duties and responsibilities:
(a)To verify the accuracy of the factual allegations
in the petition and its annexes;
(b)To verify and correct, if necessary, the
inventory of all of the assets of the debtor, and
their valuation;
(c)To verify and correct, if necessary, the
schedule of debts and liabilities of the debtor;
(d)To evaluate the validity, genuineness and true
amount of all the claims against the debtor;
(e)To take possession, custody and control, and
to preserve the value of all the property of the
debtor;
(f)To sue and recover, with the approval of the
court, all amounts owed to, and all properties
pertaining to the debtor;
(g)To have access to all information necessary,
proper or relevant to the operations and business
of the debtor and for its rehabilitation;
(h) To sue and recover, with the. approval of the
court, all property or money of the debtor paid,
transferred or disbursed in fraud of the debtor or
its creditors, or which constitute undue
preference of creditor/s;
(i) To monitor the operations and the business of
the debtor to ensure that no payments or
transfers of property are made other than in the
ordinary course of business;
(j) With the court's approval, to engage the
services of or to employ persons or entities to
assist him in the discharge of his functions;
(k) To determine the manner by which the debtor
may be best rehabilitated, to review) revise
and/or recommend action on the Rehabilitation
Plan and submit the same or a new one to the
court for approval;
(1) To implement the Rehabilitation Plan as
approved by the court, if 80 provided under the
Rehabilitation Plan;
(m) To assume and exercise the powers of
management of the debtor, if directed by the
court pursuant to Section 36 hereof;
(n) To exercise such other powers as may, from
time to time, be conferred upon him by the court;
and
To submit a status report on the rehabilitation
proceedings every quarter or as may be required
by the court motu proprio. or upon motion of any
creditor. or as may be provided, in the
Rehabilitation Plan.
Unless appointed by the court, pursuant to
Section 36 hereof, the rehabilitation receiver shall
11
 not take over the management and control of the
debtor but may recommend the appointment of a
management committee over the debtor in the
cases provided by this Act.
Section 32.Removal of the Rehabilitation Receiver. The
rehabilitation receiver may be removed at any time by the
court either motu proprio or upon motion by any creditor/s
holding more than fifty percent (50%) of the total
obligations of the debtor, on such grounds as the rules of
procedure may provide which shall include, but are not
limited to, the following:
(a) Incompetence, gross negligence, failure to
perform or failure to exercise the proper degree
of care in the performance of his duties and
powers;
(b) Lack of a particular or specialized
competency required by the specific case;
(c) Illegal acts or conduct in the performance of
his duties and powers;
(d) Lack of qualification or presence of any
disqualification;
(e) Conflict of interest that arises after his
appointment; and
(f) Manifest lack of independence that is
detrimental to the general body of the
stakeholders.
Section 33.Compensation and Terms of Service. The
rehabilitation receiver and his direct employees or
independent contractors shall be entitled to compensation
for reasonable fees and expenses from the debtor
according to the terms approved by the court after notice
and hearing. Prior to such hearing, the rehabilitation
receiver and his direct employees shall be entitled to
reasonable compensation based on quantum meruit. Such
costs shall be considered administrative expenses.
Section 34.Oath and Bond of the Rehabilitation
Receiver. Prior to entering upon his powers, duties and
responsibilities, the rehabilitation receiver shall take an
oath and file a bond, in such amount to be fixed by the
court, conditioned upon the faithful and proper discharge
of his powers, duties and responsibilities.
Section 35.Vacancy. - Incase the position of rehabilitation
receiver is vacated for any reason whatsoever. the court
shall direct the debtor and the creditors to submit the
name/s of their nominee/s to the position. The court may
appoint any of the qualified nominees. or any other person
qualified for the position.
Section 36.Displacement of Existing Management by the
Rehabilitation Receiver or Management Committee.
Upon motion of any interested party, the court may appoint
and direct the rehabilitation receiver to assume the powers
of management of the debtor, or appoint a management
committee that will undertake the management of the
debtor. upon clear and convincing evidence of any of the
following circumstances:
(a) Actual or imminent danger of dissipation, loss,
wastage or destruction of the debtors assets or
other properties;
(b) Paralyzation of the business operations of the
debtor; or
(c) Gross mismanagement of the debtor. or fraud
or other wrongful conduct on the part of, or gross
or willful violation of this Act by. existing
management of the debtor Or the owner, partner,
director, officer or representative/s in
management of the debtor.
In case the court appoints the rehabilitation receiver to
assume the powers of management of the debtor. the
court may:
(1) require the rehabilitation receiver to post an
additional bond;
(2) authorize him to engage the services or to
employ persona or entities to assist him in the
discharge of his managerial functions; and
(3) authorize a commensurate increase in his
compensation.
Section 37.Role of the Management Committee. When
appointed pursuant to the foregoing section, the
management committee shall take the place of the
management and the governing body of the debtor and
assume their rights and responsibilities.
The specific powers and duties of the management
committee, whose members shall be considered as
officers of the court, shall be prescribed by the procedural
rules.
Section 38.Qualifications of Members of the Management
Committee. - The qualifications and disqualifications of
the members of the management committee shall be set
forth in the procedural rules, taking into consideration the
nature of the business of the debtor and the need to
protect the interest of all stakeholders concerned.
Section 39.Employment of Professionals. - Upon approval
of the court, and after notice and hearing, the rehabilitation
receiver or the management committee may employ
specialized professionals and other experts to assist each
in the performance of their duties. Such professionals and
other experts shall be considered either employees or
independent contractors of the rehabilitation receiver or
12
the management committee, as the case may be. The
qualifications and disqualifications of the professionals
and experts may be set forth in procedural rules, taking
into consideration the nature of the business of the debtor
and the need to protect the interest of all stakeholders
concerned.
Section 40.Conflict of Interest. - No person may be
appointed as a rehabilitation receiver, member of a_
management committee, or be employed by the
rehabilitation receiver or the management committee if he
has a conflict of interest.
An individual shall be deemed to have a conflict of interest
if he is so situated as to be materially influenced in the
exercise of his judgment for or against any party to the
proceedings. Without limiting the generality of the
foregoing, an individual shall be deemed to have a conflict
of interest if:
(a) he is a creditor, owner, partner or stockholder
of the debtor;
(b) he is engaged in a line of business which
competes with that of the debtor;
(c) he is, or was, within five (5) years from the
filing of the petition, a director, officer, owner,
partner or employee of the debtor or any of the
creditors, or the auditor or accountant of the
debtor;
(d) he is, or was, within two (2) years from the
filing of the petition, an underwriter of the
outstanding securities of the debtor;
(e) he is related by consanguinity or affinity within
the fourth civil degree to any individual creditor,
owners of a sale proprietorship-debtor, partners
of a partnership- debtor or to any stockholder,
director, officer, employee or underwriter of a
corporation-debtor; or
(f) he has any other direct or indirect material
interest in the debtor or any of the creditors.
Any rehabilitation receiver, member of the management
committee or persons employed or contracted by them
possessing any conflict of interest shall make the
appropriate disclosure either to the court or to the creditors
in case of out-of-court rehabilitation proceedings. Any
party to the proceeding adversely affected by the
appointment of any person with a conflict of interest to any
of the positions enumerated above may however waive his
right to object to such appointment and, if the waiver is
unreasonably withheld, the court may disregard the
conflict of interest, taking into account the general interest
of the stakeholders.
Section 41.Immunity. - The rehabilitation receiver and all
persons employed by him, and the members of the
management committee and all persons employed by it,
shall not be subject to any action. claim or demand in
connection with any act done or omitted to be done by
them in good faith in connection with the exercise of their
powers and functions under this Act or other actions duly
approved by the court.1awp++il
Section 42.Creditors' Committee. - After the creditors'
meeting called pursuant to Section 63 hereof, the creditors
belonging to a class may formally organize a committee
among
themselves. In addition, the creditors may, as a body,
agree to form a creditors' committee composed of a
representative from each class of creditors, such as the
following:
(a) Secured creditors;
(b) Unsecured creditors;
(c) Trade creditors and suppliers; and
(d) Employees of the debtor.
In the . election of the creditors' representatives, the
rehabilitation receiver or his representative shall attend
such meeting and extend the appropriate assistance as
may be defined in the procedural rules.
Section 43.Role of Creditors' Committee. - The creditors'
committee when constituted pursuant to Section 42 of this
Act shall assist the rehabilitation receiver in
communicating with the creditors and shall be the primary
liaison between the rehabilitation receiver and the
creditors. The creditors' committee cannot exercise or
waive any right or give any consent on behalf of any
creditor unless specifically authorized in writing by such
creditor. The creditors' committee may be authorized by
the court or by the rehabilitation receiver to perform such
other tasks and functions as may be defined by the
procedural rules in order to facilitate the rehabilitation
process.
(D) Determination of Claims.
Section 44.Registry of Claims. - Within twenty (20) days
from his assumption into office, the rehabilitation receiver
shall establish a preliminary registry of claims. The
rehabilitation receiver shall make the registry available for
public inspection and provide
publication notice to the debtor, creditors and stakeholders
on where and when they may inspect it. All claims
included in the registry of claims must be duly supported
by sufficient evidence.
13
Section 45.Opposition or Challenge of Claims. Within
thirty (30) days from the expiration of the period stated in
the immediately preceding section, the debtor, creditors,
stakeholders and other interested parties may submit a
challenge to claim/s to the court, serving a certified copy
on the rehabilitation receiver and the creditor holding the
challenged claim/so Upon the expiration of the thirty (30)-
day period, the rehabilitation receiver shall submit to the
court the registry of claims which shall include undisputed
claims that have not been subject to challenge.
Section 46.Appeal. - Any decision of the rehabilitation
receiver regarding a claim may be appealed to the court.
(E) Governance.
Section 47.Management. - Unless otherwise provided
herein, the management of the juridical debtor shall
remain with the existing management subject to the
applicable law/s and agreement/s, if any, on the election or
appointment of directors, managers Or managing partner.
However, all disbursements, payments or sale, disposal,
assignment, transfer or encumbrance of property , or any
other act affecting title or interest in property, shall be
subject to the approval of the rehabilitation receiver and/or
the court, as provided in the following subchapter.
(F) Use, Preservation and Disposal of Assets and
Treatment of Assets and Claims after Commencement
Date.
Section 48.Use or Disposition of Assets. - Except as
otherwise provided herein, no funds or property of the
debtor shall he used or disposed of except in the ordinary
course of business of the debtor, or unless necessary to
finance the administrative expenses of the rehabilitation
proceedings.
Section 49.Sale of Assets. - The court, upon application of
the rehabilitation receiver, may authorize the sale of
unencumbered property of the debtor outside the ordinary
course of business upon a showing that the property, by its
nature or because of other circumstance, is perishable,
costly to maintain, susceptible to devaluation or otherwise
injeopardy.
Section 50.Sale or Disposal of Encumbered Property of
the Debtor and Assets of Third Parties Held by
Debtor. The court may authorize the sale, transfer,
conveyance or disposal of encumbered property of the
debtor, or property of others held by the debtor where
there is a security interest pertaining to third parties under
a financial, credit or other similar transactions if, upon
application of the rehabilitation receiver and with the
consent of the affected owners of the property, or secured
creditor/s in the case of encumbered property of the
debtor and, after notice and hearing, the court determines
that:
(a) such sale, transfer, conveyance or disposal is
necessary for the continued operation of the
debtor's business; and
(b) the debtor has made arrangements to provide
a substitute lien or ownership right that provides
an equal level of security for the counter-party's
claim or right.
Provided, That properties held by the debtor where the
debtor has authority to sell such as trust receipt or
consignment arrangements may be sold or disposed of by
the .debtor, if such sale or disposal is necessary for the
operation of the debtor's business, and the debtor has
made arrangements to provide a substitute lien or
ownership right that provides an equal level of security for
the counter-party's claim or right.
Sale or disposal of property under this section shall not
give rise to any criminal liability under applicable laws.
Section 51.Assets of Debtor Held by Third Parties. In
the case of possessory pledges, mechanic's liens or
similar claims, third parties who have in their possession
or control property of the debtor shall not transfer,
conveyor otherwise dispose of the same to persons other
than the debtor, unless upon prior approval of the
rehabilitation receiver. The rehabilitation receiver may
also:
(a) demand the surrender or the transfer of the
possession or control of such property to the
rehabilitation receiver or any other person,
subject to payment of the claims secured by any
possessory Iien/s thereon;
(b) allow said third parties to retain possession or
control, if such an arrangement would more likely
preserve or increase the value of the property in
question or the total value of the assets of the
debtor; or
(c) undertake any otI1er disposition of the said
property as may be beneficial for the
rehabilitation of the debtor, after notice and
hearing, and approval of the court.
Section 52.Rescission or Nullity of Sale, Payment,
Transfer or Conveyance of Assets. - The court may
rescind or declare as null and void any sale, payment,
transfer or conveyance of the debtor's unencumbered
property or any encumbering thereof by the debtor or its
agents or representatives after the commencement date
which are not in the ordinary course of the business of the
debtor: Provided, however, That the unencumbered
property may be sold, encumbered or otherwise disposed
of upon order of the court after notice and hearing:
(a) if such are in the interest of administering the
debtor and facilitating the preparation and
implementation of a Rehabilitation Plan;
14
 (b) in order to provide a substitute lien, mortgage
or pledge of property under this Act;
(c) for payments made to meet administrative
expenses as they arise;
(d) for payments to victims of quasi delicts upon a
showing that the claim is valid and the debtor has
insurance to reimburse the debtor for the
payments made;
(e) for payments made to repurchase property of
the debtor that is auctioned off in a judicial or
extrajudicial sale under. This Act; or
(f) for payments made to reclaim property of the
debtor held pursuant to a possessory lien.
Section 53.Assets Subject to Rapid Obsolescence,
Depreciation and Diminution of Value. - Upon the
application of a secured creditor holding a lien against or
holder of an ownership interest in property held by the
debtor that is subject to potentially rapid obsolescence,
depreciation or diminution in value, the court shall, after
notice and hearing, order the debtor or rehabilitation
receiver to take reasonable steps necessary to prevent the
depreciation. If depreciation cannot be avoided and such
depreciation is jeopardizing the security or property
interest of the secured creditor or owner, the court shall:
(a) allow the encumbered property to be
foreclosed upon by the secured creditor
according to the relevant agreement between the
debtor and the secured creditor, applicable rules
of procedure and relevant
legislation: Provided. That the proceeds of the
sale will be distributed in accordance with the
order prescribed under the rules of concurrence
and preference of credits; or
(b) upon motion of, or with the consent of the
affected secured creditor or interest owner. order
the conveyance of a lien against or ownership
interest in substitute property of the debtor to the
secured creditor: Provided. That other creditors
holding liens on such property, if any, do not
object thereto, or, if such property is not
available;
(c) order the conveyance to the secured creditor
or holder . of an ownership interest of a lien on
the residual funds from the sale of encumbered
property during the proceedings; or
(d) allow the sale or disposition of the
property: Provided. That the sale or disposition
will maximize the value of the property for the
benefit of the secured creditor and the debtor,
and the proceeds of the sale will be distributed in
accordance with the order prescribed under the
rules of concurrence and preference of credits.
Section 54.Post-commencement Interest. - The rate and
term of interest, if any, on secured and unsecured claims
shall be determined and provided for in the approved
Rehabilitation Plan.
Section 55.Post-commencement Loans and Obligations. -
With the approval of the court upon the recommendation
of the rehabilitation receiver, the debtor, in order to
enhance its
rehabilitation. may:
(a) enter into credit arrangements; or
(b) enter into credit arrangements, secured by
mortgages of its unencumbered property or
secondary mortgages of encumbered property
with the approval of senior secured parties with
regard to the encumbered property; or
(c) incur other obligations as may be essential for
its rehabilitation.
The payment of the foregoing obligations shall be
considered administrative expenses under this Act.
Section 56.Treatment of Employees,
Claims. Compensation of employees required to carry on
the business shall be considered an administrative
expense. Claims of separation pay for months worked
prior to the commencement date shall be considered a
pre- ommencement claim. Claims for salary and
separation pay for work performed after the
commencement date shall be an administrative expense.
Section 57.Treatment of Contracts. - Unless cancelled by
virtue of a final judgment of a court of competent
jurisdiction issued prior to the issuance of the
Commencement Order, or at anytime thereafter by the
court before which the rehabilitation proceedings are
pending, all valid and subbsisting contracts of the debtor
with creditors and other third parties as at the
commencement date shall continue in
force: Provided, That within ninety (90) days following the
commencement of proceedings, the debtor, with the
consent of the rehabilitation receiver, shall notify each
contractual counter-party of whether it is confirming the
particular contract. Contractual obligations of the debtor
arising or performed during this period, and afterwards for
confirmed contracts, shall be considered administrative
expenses. Contracts not confirmed within the required
deadline shall be considered terminated. Claims for actual
damages, if any, arising as a result of the election to
terminate a contract shall be considered a pre-
commencement claim against the debtor. Nothing
contained herein shall prevent the cancellation or
termination of any contract of the debtor for any ground
provided by law.
(G) Avoidance Proceedings.
15
Section 58.Rescission or Nullity of Certain Pre-
commencement Transactions. Any transaction occurring
prior to commencement date entered into by the debtor or
involving its funds or assets may be rescinded or declared
null and void on the ground that the same was executed
with intent to defraud a creditor or creditors or which
constitute undue preference of creditors. Without limiting
the generality of the foregoing, a disputable presumption
of such design shall arise if the transaction:
(a) provides unreasonably inadequate
consideration to the debtor and is executed within
ninety (90) days prior to the commencement
date;
(b) involves an accelerated payment of a claim to
a creditor within ninety (90) days prior to the
commencement date;
(c) provides security or additional security
executed within ninety (90) days prior to the
commencement date;
(d) involves creditors, where a creditor obtained,
or received the benefit of, more than its pro
rata share in the assets of the debtor, executed at
a time when the debtor was insolvent; or
(e) is intended to defeat, delay or hinder the
ability of the creditors to collect claims where the
effect of the transaction is to put assets of the
debtor beyond the reach of creditors or to
otherwise prejudice the interests of creditors.
Provided, however, That nothing in this section shall
prevent the court from rescinding or declaring as null and
void a transaction on other grounds provided by relevant
legislation and jurisprudence: Provided, further, That the
provisions of the Civil Code on rescission shall in any case
apply to these transactions.
Section 59.Actions for Rescission or Nullity. - (a) The
rehabilitation receiver or, with his conformity, any creditor
may initiate and prosecute any action to rescind, or
declare null and void any transaction described in Section
58 hereof. If the rehabilitation receiver does not consent to
the filing or prosecution of such action,
(b) If leave of court is granted under subsection (a), the
rehabilitation receiver shall assign and transfer to the
creditor all rights, title and interest in the chose in action or
subject matter of the proceeding, including any document
in support thereof.
(c) Any benefit derived from a proceeding taken pursuant
to subsection (a), to the extent of his claim and the costs,
belongs exclusively to the creditor instituting the
proceeding, and the surplus, if any, belongs to the estate.
(d) Where, before an order is made under subsection (a),
the rehabilitation receiver (or liquidator) signifies to the
court his readiness to institute the proceeding for the
benefit of the creditors, the order shall fix the time within
which he shall do so and, m that case, the benefit derived
from the proceeding, if instituted within the time limits so
fixed, belongs to the estate.
(H) Treatment of Secured Creditors.
Section 60.No Diminution of Secured Creditor Rights. The
issuance of the Commencement Order and the
Suspension or Stay Order, and any other provision of this
Act, shall not be
deemed in any way to diminish or impair the security or
lien of a secured creditor, or the value of his lien or
security, except that his right to enforce said security or
lien may be suspended during the term of the Stay Order.
The court, upon motion or recommendation of the
rehabilitation receiver, may allow a secured creditor to
enforce his security or lien, or foreclose upon property of
the debtor
securing his/its claim, if the said property is not necessary
for the rehabilitation of the debtor. The secured creditor
and/or the other lien holders shall be admitted to the
rehabilitation proceedings only for the balance of his claim,
if any.
Section 61.Lack of Adequate Protection. - The court, on
motion or motu proprio, may terminate, modify or set
conditions for the continuance of suspension of payment,
or relieve a claim from the coverage thereof, upon
showing that: (a) a creditor does not have adequate
protection over property securing its claim; or
(b) the value of a claim secured by a lien on property
which is not necessary for rehabilitation of the debtor
exceeds the fair market value of the said property.
For purposes of this section, a creditor shall be deemed to
lack adequate protection if it can be shown that:
(a) the debtor fails or refuses to honor a pre-
existing agreement with the creditor to keep the
property insured;
(b) the debtor fails or refuses to take
commercially reasonable steps to maintain the
property; or
(c) the property has depreciated to an extent that
the creditor is under secured.
Upon showing of a lack of protection, the court shall order
the debtor or the rehabilitation receiver to make
arrangements to provide for the insurance or maintenance
16
of the property; or to make payments or otherwise provide
additional or replacement security such that the obligation
is fully secured. If such arrangements are not feasible, the
court may modify the Stay Order to allow the secured
creditor lacking adequate protection to enforce its security
claim against the debtor: Provided, however, That the
court may deny the creditor the remedies in this paragraph
if the property subject of the enforcement is required for
the rehabilitation of the debtor.
(i) Administration of Proceedings.
Section 62.Contents of a Rehabilitation Plan. The
Rehabilitation Plan shall, as a minimum:
(a) specify the underlying assumptions, the
financial goals and the procedures proposed to
accomplish such goals;
(b) compare the amounts expected to be
received by the creditors under the Rehabilitation
Plan with those that they will receive if liquidation
ensues within the next one hundred twenty (120)
days;
(c) contain information sufficient to give the
various classes of creditors a reasonable basis
for determining whether supporting the Plan is in
their financial interest when compared to the
immediate liquidation of the debtor, including any
reduction of principal interest and penalties
payable to the creditors;
(d) establish classes of voting creditors;
(e) establish subclasses of voting creditors if prior
approval has been granted by the court;
(f) indicate how the insolvent debtor will be
rehabilitated including, but not limited to, debt
forgiveness, debt rescheduling, reorganization or
quasi-reorganization. dacion en pago, debt-equity
conversion and sale of the business (or parts of
it) as a going concern, or setting-up of a new
business entity or other similar arrangements as
may be necessary to restore the financial well-
being and visibility of the insolvent debtor;
(g) specify the treatment of each class or
subclass described in subsections (d) and (e);
(h) provide for equal treatment of all claims within
the same class or subclass, unless a particular
creditor voluntarily agrees to less favorable
treatment;
(i) ensure that the payments made under the plan
follow the priority established under the
provisions of the Civil Code on concurrence and
preference of credits and other applicable laws;
(j) maintain the security interest of secured
creditors and preserve the liquidation value of the
security unless such has been waived or
modified voluntarily;
(k) disclose all payments to creditors for pre-
commencement debts made during the
proceedings and the justifications thereof;
(1) describe the disputed claims and the
provisioning of funds to account for appropriate
payments should the claim be ruled valid or its
amount adjusted;
(m) identify the debtor's role in the
implementation of the Plan;
(n) state any rehabilitation covenants of the
debtor, the breach of which shall be considered a
material breach of the Plan;
(o) identify those responsible for the future
management of the debtor and the supervision
and implementation of the Plan, their affiliation
with the debtor and their remuneration;
(p) address the treatment of claims arising after
the confirmation of the Rehabilitation Plan;
(q) require the debtor and its counter-parties to
adhere to the terms of all contracts that the
debtor has chosen to confirm;
(r) arrange for the payment of all outstanding
administrative expenses as a condition to the
Plan's approval unless such condition has been
waived in writing by the creditors concerned;
(s) arrange for the payment" of all outstanding
taxes and assessments, or an adjusted amount
pursuant to a compromise settlement with the
BlR Or other applicable tax authorities;
(t) include a certified copy of a certificate of tax
clearance or evidence of a compromise
settlement with the BIR;
(u) include a valid and binding r(,solution of a
meeting of the debtor's stockholders to increase
the shares by the required amount in cases
where the Plan contemplates an additional
issuance of shares by the debtor;
(v) state the compensation and status, if any, of
the rehabilitation receiver after the approval of
the Plan; and
(w) contain provisions for conciliation and/or
mediation as a prerequisite to court assistance or
17
 intervention in the event of any disagreement in
the interpretation or implementation of the
Rehabilitation Plan.
Section 63.Consultation with Debtor and Creditors. if
the court gives due course to the petition, the rehabilitation
receiver shall confer with the debtor and all the classes of
creditors, and may consider their views and proposals ill
the review, revision or preparation of a new Rehabilitation
Plan.
Section 64.Creditor Approval of Rehabilitation Plan. The
rehabilitation receiver shall notify the creditors and
stakeholders that the Plan is ready for their examination.
Within twenty (2Q) days from the said notification, the
rehabilitation receiver shall convene the creditors, either
as a whole or per class, for purposes of voting on the
approval of the Plan. The Plan shall be deemed rejected
unless approved by all classes of creditors w hose rights
are adversely modified or affected by the Plan. For
purposes of this section, the Plan is deemed to have been
approved by a class of creditors if members of the said
class holding more than fifty percent (50%) of the total
claims of the said class vote in favor of the Plan. The votes
of the creditors shall be based solely on the amount of
their respective claims based on the registry of claims
submitted by the rehabilitation receiver pursuant to
Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan,
the court may confirm the Rehabilitation Plan if all of the
following circumstances are present:
(a)The Rehabilitation Plan complies with the
requirements specified in this Act.
(b) The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan; and
(d) 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.
Section 65.Submission of Rehabilitation Plan to the
Court. - 1fthe Rehabilitation Plan is approved, the
rehabilitation receiver shall submit the same to the court
for confirmation. Within five (5) days from receipt of the
Rehabilitation Plan, the court shall notify the creditors that
the Rehabilitation Plan has been submitted for
confirmation, that any creditor may obtain copies of the
Rehabilitation Plan and that any creditor may file an
objection thereto.
Section 66.Filing of Objections to Rehabilitation Plan. A
creditor may file an objection to the Rehabilitation Plan
within twenty (20) days from receipt of notice from the
court that the Rehabilitation Plan has been submitted for
confirmation. Objections to a Rehabilitation Plan shall be
limited to the following:
(a) The creditors' support was induced by fraud;
(b)The documents or data relied upon in the
Rehabilitation Plan are materially false or
misleading; or
(c)The Rehabilitation Plan is in fact not supported
by the voting creditors.
Section 67.Hearing on the Objections. - If objections have
been submitted during the relevant period, the court shall
issue an order setting the time and date for the hearing or
hearings on the objections.
If the court finds merit in the objection, it shall order the
rehabilitation receiver or other party to cure the defect,
whenever feasible. If the court determines that the debtor
acted in bad faith, or that it is not feasible to cure the
defect, the court shall convert the proceedings into one for
the liquidation of the debtor under Chapter V of this Act.
Section 68.Confirmation of the Rehabilitation Plan. If no
objections are filed within the relevant period or, if
objections are filed, the court finds them lacking in merit,
or determines that the basis for the objection has been
cured, or determines that the debtor has complied with an
order to cure the objection, the court shall issue an order
confirming the Rehabilitation Plan.
The court may confirm the Rehabilitation Plan
notwithstanding unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions for
paying such claims.
For the avoidance of doubt, the provisions of other laws to
the contrary notwithstanding, the court shall have the
power to approve or implement the Rehabilitation Plan
despite the lack of approval, or objection from the owners,
partners or stockholders of the insolvent
debtor: Provided, That the terms thereof are necessary to
restore the financial well-being and viability of the
insolvent debtor.
Section 69.Effect of Confirmation of the Rehabilitation
Plan, - The confirmation of the Rehabilitation Plan by the
court shall result in the following:
(a) The Rehabilitation Plan and its provisions
shall be binding upon the debtor and all persons
who may be affected by . it, including the
creditors, whether or not such persons have
participated in the proceedings or opposed the
Rehabilitation Plan or whether or not their claims
have been scheduled;
18
 (b) The debtor shall comply with the provisions of
the Rehabilitation Plan and shall take all actions
necessary to carry out the Plan;
(c) Payments shall be made to the creditors in
accordance with the provisions of the
Rehabilitation Plan;
(d) Contracts and other arrangements between
the debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do not
conflict with the provisions of the Rehabilitation
Plan;
(e) Any compromises on amounts or
rescheduling of timing of payments by the debtor
shall be binding on creditors regardless of
whether or not the Plan is successfully
implement; and
(f) Claims arising after approval of the Plan that
are otherwise not treated by the Plan are not
subject to any Suspension Order.
The Order confirming the Plan shall comply with Rules 36
of the Rules of Court: Provided, however, That the court
may maintain jurisdiction over the case in order to resolve
claims against the debtor that remain contested and
allegations that the debtor has breached the Plan.
Section 70. Liability of General Partners of a Partnership
for Unpaid Balances Under an Approved Plan. - The
approval of the Plan shall not affect the rights of creditors
to pursue actions against the general partners of a
partnership to the extent they are liable under relevant
legislation for the debts thereof.
Section 71. Treatment of Amounts of Indebtedness or
Obligations Forgiven or Reduced. - Amounts of any
indebtedness or obligations reduced or forgiven in
connection with a Plan's approval shall not be subject to
any tax in furtherance of the purposes of this Act.
Section 72. Period for Confirmation of the Rehabilitation
Plan. - The court shall have a maximum period of one (1)
year from the date of the filing of the petition to confirm a
Rehabilitation Plan.
If no Rehabilitation Plan is confirmed within the said
period, the proceedings may upon motion or motu propio,
be converted into one for the liquidation of the debtor .
Section 73. Accounting Discharge of Rehabilitation
Receiver. - Upon the confirmation of the Rehabilitation
Plan, the rehabilitation receiver shall provide a final report
and accounting to the court. Unless the Rehabilitation Plan
specifically requires and describes the role of the
rehabilitation receiver after the approval of the
Rehabilitation Plan, the court shall discharge the
rehabilitation receiver of his duties.
(j) Termination of Proceedings
Section 74. Termination of Proceedings. - The
rehabilitation proceedings under Chapter II shall, upon
motion by any stakeholder or the rehabilitation receiver be
terminated by order of the court either declaring a
successful implementation of the Rehabilitation Plan or a
failure of rehabilitation.
There is failure of rehabilitation in the following cases:
(a) Dismissal of the petition by the court;
(b) The debtor fails to submit a Rehabilitation
Plan;
(c) Under the Rehabilitation Plan submitted by
the debtor, there is no substantial likelihood that
the debtor can be rehabilitated within a
reasonable period;
(d) The Rehabilitation Plan or its amendment is
approved by the court but in the implementation
thereof, the debtor fails to perform its obligations
thereunder or there is a failure to realize the
objectives, targets or goals set forth therein,
including the timelines and conditions for the
settlement of the obligations due to the creditors
and other claimants;
(e) The commission of fraud in securing the
approval of the Rehabilitation Plan or its
amendment; and
(f) Other analogous circumstances as may be
defined by the rules of procedure.
Upon a breach of, or upon a failure of the Rehabilitation
Plan the court, upon motion by an affected party may:
(1) Issue an order directing that the breach be
cured within a specified period of time, falling
which the proceedings may be converted to a
liquidation;
(2) Issue an order converting the proceedings to
a liquidation;
(3) Allow the debtor or rehabilitation receiver to
submit amendments to the Rehabilitation Plan,
the approval of which shall be governed by the
same requirements for the approval of a
Rehabilitation Plan under this subchapter;
(4) Issue any other order to remedy the breach
consistent with the present regulation, other
applicable law and the best interests of the
creditors; or
19
 (5) Enforce the applicable provisions of the
Rehabilitation Plan through a writ of execution.
Section 75. Effects of Termination. - Termination of the
proceedings shall result in the following:
(a) The discharge of the rehabilitation receiver
subject to his submission of a final accounting;
and
(b) The lifting of the Stay Order and any other
court order holding in abeyance any action for the
enforcement of a claim against the debtor.
Provided, however, That if the termination of proceedings
is due to failure of rehabilitation or dismissal of the petition
for reasons other than technical grounds, the proceedings
shall be immediately converted to liquidation as provided
in Section 92 of this Act.
CHAPTER III
PRE-NEGOTIATED REHABILITATION
Section 76. Petition by Debtor. - An insolvent debtor, by
itself or jointly with any of its creditors, may file a verified
petition with the court for the approval of a pre-negotiated
Rehabilitation Plan which has been endorsed or approved
by creditors holding at least two-thirds (2/3) of the total
liabilities of the debtor, including secured creditors holding
more than fifty percent (50%) of the total secured claims of
the debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor.
The petition shall include as a minimum:
(a) a schedule of the debtor's debts and liabilities;
(b) an inventory of the debtor's assets;
(c) the pre-negotiated Rehabilitation Plan,
including the names of at least three (3) qualified
nominees for rehabilitation receiver; and
(d) a summary of disputed claims against the
debtor and a report on the provisioning of funds
to account for appropriate payments should any
such claims be ruled valid or their amounts
adjusted.
Section 77. Issuance of Order. - Within five (5) working
days, and after determination that the petition is sufficient
in form and substance, the court shall issue an Order
which shall;
(a) identify the debtor, its principal business of
activity/ies and its principal place of business;
(b) declare that the debtor is under rehabilitation;
(c) summarize the ground./s for the filling of the
petition;
(d) direct the publication of the Order in a
newspaper of general circulation in the
Philippines once a week for at least two (2)
consecutive weeks, with the first publication to be
made within seven (7) days from the time of its
issuance;
(e) direct the service by personal delivery of a
copy of the petition on each creditor who is not a
petitioner holding at least ten percent (10%) of
the total liabilities of the debtor, as determined in
the schedule attached to the petition, within three
(3) days;
(f) state that copies of the petition and the
Rehabilitation Plan are available for examination
and copying by any interested party;
(g) state that creditors and other interested
parties opposing the petition or Rehabilitation
Plan may file their objections or comments
thereto within a period of not later than twenty
(20) days from the second publication of the
Order;
(h) appoint a rehabilitation receiver, if provided for
in the Plan; and
(i) include a Suspension or Stay Order as
described in this Act.
Section 78. Approval of the Plan. - Within ten (10) days
from the date of the second publication of the Order, the
court shall approve the Rehabilitation Plan unless a
creditor or other interested party submits an objection to it
in accordance with the next succeeding section.
Section 79. Objection to the Petition or Rehabilitation
Plan. - Any creditor or other interested party may submit to
the court a verified objection to the petition or the
Rehabilitation Plan not later than eight (8) days from the
date of the second publication of the Order mentioned in
Section 77 hereof. The objections shall be limited to the
following:
(a) The allegations in the petition or the
Rehabilitation Plan or the attachments thereto
are materially false or misleading;
(b) The majority of any class of creditors do not in
fact support the Rehabilitation Plan;
(c) The Rehabilitation Plan fails to accurately
account for a claim against the debtor and the
claim in not categorically declared as a contested
claim; or
20
 (d) The support of the creditors, or any of them
was induced by fraud.
Copies of any objection to the petition of the Rehabilitation
Plan shall be served on the debtor, the rehabilitation
receiver (if applicable), the secured creditor with the
largest claim and who supports the Rehabilitation Plan,
and the unsecured creditor with the largest claim and who
supports the Rehabilitation Plan.
Section 80. Hearing on the Objections. - After receipt of
an objection, the court shall set the same for hearing. The
date of the hearing shall be no earlier than twenty (20)
days and no later than thirty (30) days from the date of the
second publication of the Order mentioned in Section 77
hereof. If the court finds merit in the objection, it shall
direct the debtor, when feasible to cure the detect within a
reasonable period. If the court determines that the debtor
or creditors supporting the Rehabilitation Plan acted in bad
faith, or that the objection is non-curable, the court may
order the conversion of the proceedings into liquidation. A
finding by the court that the objection has no substantial
merit, or that the same has been cured shall be deemed
an approval of the Rehabilitation Plan.
Section 81. Period for Approval of Rehabilitation Plan. -
The court shall have a maximum period of one hundred
twenty (120) days from the date of the filing of the petition
to approve the Rehabilitation Plan. If the court fails to act
within the said period, the Rehabilitation Plan shall be
deemed approved.
Section 82. Effect of Approval. - Approval of a Plan under
this chapter shall have the same legal effect as
confirmation of a Plan under Chapter II of this Act.
CHAPTER IV
OUT-OF-COURT OR INFORMAL RESTRUCTURING
AGREEMENTS OR REHABILITATION PLANS
Section 83. Out-of-Court or Informal Restructuring
Agreements and Rehabilitation Plans. - An out-of-curt or
informal restructuring agreement or Rehabilitation Plan
that meets the minimum requirements prescribed in this
chapter is hereby recognized as consistent with the
objectives of this Act.
Section 84. Minimum Requirements of Out-of-Court or
Informal Restructuring Agreements and Rehabilitation
Plans. - For an out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan to
qualify under this chapter, it must meet the following
minimum requirements:
(a) The debtor must agree to the out-of-court or
informal restructuring/workout agreement or
Rehabilitation Plan;
(b) It must be approved by creditors representing
at least sixty-seven (67%) of the secured
obligations of the debtor;
(c) It must be approved by creditors representing
at least seventy-five percent (75%) of the
unsecured obligations of the debtor; and
(d) It must be approved by creditors holding at
least eighty-five percent (85%) of the total
liabilities, secured and unsecured, of the debtor.
Section 85. Standstill Period. - A standstill period that may
be agreed upon by the parties pending negotiation and
finalization of the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan
contemplated herein shall be effective and enforceable not
only against the contracting parties but also against the
other creditors: Provided, That (a) such agreement is
approved by creditors representing more than fifty percent
(50%) of the total liabilities of the debtor; (b) notice thereof
is publishing in a newspaper of general circulation in the
Philippines once a week for two (2) consecutive weeks;
and (c) the standstill period does not exceed one hundred
twenty (120) days from the date of effectivity. The notice
must invite creditors to participate in the negotiation for
out-of-court rehabilitation or restructuring agreement and
notify them that said agreement will be binding on all
creditors if the required majority votes prescribed in
Section 84 of this Act are met.
Section 86. Cram Down Effect. - A restructuring/workout
agreement or Rehabilitation Plan that is approved
pursuant to an informal workout framework referred to in
this chapter shall have the same legal effect as
confirmation of a Plan under Section 69 hereof. The notice
of the Rehabilitation Plan or restructuring agreement or
Plan shall be published once a week for at least three (3)
consecutive weeks in a newspaper of general circulation
in the Philippines. The Rehabilitation Plan or restructuring
agreement shall take effect upon the lapse of fifteen (15)
days from the date of the last publication of the notice
thereof.
Section 87. Amendment or Modification. - Any
amendment of an out-of-court restructuring/workout
agreement or Rehabilitation Plan must be made in
accordance with the terms of the agreement and with due
notice on all creditors.
Section 88. Effect of Court Action or Other Proceedings. -
Any court action or other proceedings arising from, or
relating to, the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan
shall not stay its implementation, unless the relevant party
is able to secure a temporary restraining order or
injunctive relief from the Court of Appeals.
Section 89. Court Assistance. - The insolvent debtor
and/or creditor may seek court assistance for the
execution or implementation of a Rehabilitation Plan under
this Chapter, under such rules of procedure as may be
promulgated by the Supreme Court.
21
 CHAPTER V
LIQUIDATION OF INSOLVENT JURIDICAL DEBTORS
Section 90. Voluntary Liquidation. - An insolvent debtor
may apply for liquidation by filing a petition for liquidation
with the court. The petition shall be verified, shall establish
the insolvency of the debtor and shall contain, whether as
an attachment or as part of the body of the petition;
(a) a schedule of the debtor's debts and liabilities
including a list of creditors with their addresses,
amounts of claims and collaterals, or securities, if
any;
(b) an inventory of all its assets including
receivables and claims against third parties; and
(c) the names of at least three (3) nominees to
the position of liquidator.
At any time during the pendency of court-supervised or
pre-negotiated rehabilitation proceedings, the debtor may
also initiate liquidation proceedings by filing a motion in
the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into
liquidation proceedings. The motion shall be verified, shall
contain or set forth the same matters required in the
preceding paragraph, and state that the debtor is seeking
immediate dissolution and termination of its corporate
existence.
If the petition or the motion, as the case may be, is
sufficient in form and substance, the court shall issue a
Liquidation Order mentioned in Section 112 hereof.
Section 91. Involuntary Liquidation. - Three (3) or more
creditors the aggregate of whose claims is at least either
One million pesos (Php1,000,000,00) or at least twenty-
five percent (25%0 of the subscribed capital stock or
partner's contributions of the debtor, whichever is higher,
may apply for and seek the liquidation of an insolvent
debtor by filing a petition for liquidation of the debtor with
the court. The petition shall show that:
(a) there is no genuine issue of fact or law on the
claims/s of the petitioner/s, and that the due and
demandable payments thereon have not been
made for at least one hundred eighty (180) days
or that the debtor has failed generally to meet its
liabilities as they fall due; and
(b) there is no substantial likelihood that the
debtor may be rehabilitated.
At any time during the pendency of or after a rehabilitation
court-supervised or pre-negotiated rehabilitation
proceedings, three (3) or more creditors whose claims is
at least either One million pesos (Php1,000,000.00) or at
least twenty-five percent (25%) of the subscribed capital or
partner's contributions of the debtor, whichever is higher,
may also initiate liquidation proceedings by filing a motion
in the same court where the rehabilitation proceedings are
pending to convert the rehabilitation proceedings into
liquidation proceedings. The motion shall be verified, shall
contain or set forth the same matters required in the
preceding paragraph, and state that the movants are
seeking the immediate liquidation of the debtor.
If the petition or motion is sufficient in form and substance,
the court shall issue an Order:
(1) directing the publication of the petition or
motion in a newspaper of general circulation
once a week for two (2) consecutive weeks; and
(2) directing the debtor and all creditors who are
not the petitioners to file their comment on the
petition or motion within fifteen (15) days from the
date of last publication.
If, after considering the comments filed, the court
determines that the petition or motion is meritorious, it
shall issue the Liquidation Order mentioned in Section 112
hereof.
Section 92. Conversion by the Court into Liquidation
Proceedings. - During the pendency of court-supervised or
pre-negotiated rehabilitation proceedings, the court may
order the conversion of rehabilitation proceedings to
liquidation proceedings pursuant to (a) Section 25(c) of
this Act; or (b) Section 72 of this Act; or (c) Section 75 of
this Act; or (d) Section 90 of this Act; or at any other time
upon the recommendation of the rehabilitation receiver
that the rehabilitation of the debtor is not feasible.
Thereupon, the court shall issue the Liquidation Order
mentioned in Section 112 hereof.
Section 93. Powers of the Securities and Exchange
Commission (SEC). - The provisions of this chapter shall
not affect the regulatory powers of the SEC under Section
6 of Presidential Decree No. 902-A, as amended, with
respect to any dissolution and liquidation proceeding
initiated and heard before it.
CHAPTER VI
INSOLVENCY OF INDIVIDUAL DEBTORS
(A) Suspension of Payments.
Section 94. Petition. - An individual debtor who,
possessing sufficient property to cover all his debts but
foreseeing the impossibility of meeting them when they
respectively fall due, may file a verified petition that he be
declared in the state of suspension of payments by the
court of the province or city in which he has resides for six
(6) months prior to the filing of his petition. He shall attach
to his petition, as a minimum: (a) a schedule of debts and
liabilities; (b) an inventory of assess; and (c) a proposed
agreement with his creditors.
22
Section 95. Action on the Petition. - If the court finds the
petition sufficient in form and substance, it shall, within five
(5) working days from the filing of the petition, issue an
Order:
(a) calling a meeting of all the creditors named in
the schedule of debts and liabilities at such time
not less than fifteen (15) days nor more than forty
(40) days from the date of such Order and
designating the date, time and place of the
meeting;
(b) directing such creditors to prepare and
present written evidence of their claims before
the scheduled creditors' meeting;
(c) directing the publication of the said order in a
newspaper of general circulation published in the
province or city in which the petition is filed once
a week for two (2) consecutive weeks, with the
first publication to be made within seven (7) days
from the time of the issuance of the Order;
(d) directing the clerk of court to cause the
sending of a copy of the Order by registered mail,
postage prepaid, to all creditors named in the
schedule of debts and liabilities;
(e) forbidding the individual debtor from selling,
transferring, encumbering or disposing in any
manner of his property, except those used in the
ordinary operations of commerce or of industry in
which the petitioning individual debtor is engaged
so long as the proceedings relative to the
suspension of payments are pending;
(f) prohibiting the individual debtor from making
any payment outside of the necessary or
legitimate expenses of his business or industry,
so long as the proceedings relative to the
suspension of payments are pending; and
(g) appointing a commissioner to preside over the
creditors' meeting.
Section 96. Actions Suspended. - Upon motion filed by
the individual debtor, the court may issue an order
suspending any pending execution against the individual
debtor. Provide, That properties held as security by
secured creditors shall not be the subject of such
suspension order. The suspension order shall lapse when
three (3) months shall have passed without the proposed
agreement being accepted by the creditors or as soon as
such agreement is denied.
No creditor shall sue or institute proceedings to collect his
claim from the debtor from the time of the filing of the
petition for suspension of payments and for as long as
proceedings remain pending except:
(a) those creditors having claims for personal
labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor
incurred in the sixty (60) days immediately prior
to the filing of the petition; and
(b) secured creditors.
Section 97. Creditors' Meeting. - The presence of
creditors holding claims amounting to at least three-fifths
(3/5) of the liabilities shall be necessary for holding a
meeting. The commissioner appointed by the court shall
preside over the meeting and the clerk of court shall act as
the secretary thereof, subject to the following rules:
(a) The clerk shall record the creditors present
and amount of their respective claims;
(b) The commissioner shall examine the written
evidence of the claims. If the creditors present
hold at least three-fifths (3/5) of the liabilities of
the individual debtor, the commissioner shall
declare the meeting open for business;
(c) The creditors and individual debtor shall
discuss the propositions in the proposed
agreement and put them to a vote;
(d) To form a majority, it is necessary:
(1) that two-thirds (2/3) of the creditors
voting unite upon the same proposition;
and
(2) that the claims represented by said
majority vote amount to at least three-
fifths (3/5) of the total liabilities of the
debtor mentioned in the petition; and
(e) After the result of the voting has been
announced, all protests made against the
majority vote shall be drawn up, and the
commissioner and the individual debtor together
with all creditors taking part in the voting shall
sign the affirmed propositions.
No creditor who incurred his credit within ninety (90) days
prior to the filing of the petition shall be entitled to vote.
Section 98. Persons Who May Refrain From Voting. -
Creditors who are unaffected by the Suspension Order
may refrain from attending the meeting and from voting
therein. Such persons shall not be bound by any
agreement determined upon at such meeting, but if they
should join in the voting they shall be bound in the same
manner as are the other creditors.
Section 99. Rejection of the Proposed Agreement. - The
proposed agreement shall be deemed rejected if the
23
number of creditors required for holding a meeting do not
attend thereat, or if the two (2) majorities mentioned in
Section 97 hereof are not in favor thereof. In such
instances, the proceeding shall be terminated without
recourse and the parties concerned shall be at liberty to
enforce the rights which may correspond to them.
Section 100. Objections. - If the proposal of the individual
debtor, or any amendment thereof made during the
creditors' meeting, is approved by the majority of creditors
in accordance with Section 97 hereof, any creditor who
attended the meeting and who dissented from and
protested against the vote of the majority may file an
objection with the court within ten (10) days from the date
of the last creditors' meeting. The causes for which
objection may be made to the decision made by the
majority during the meeting shall be: (a) defects in the call
for the meeting, in the holding thereof and in the
deliberations had thereat which prejudice the rights of the
creditors; (b) fraudulent connivance between one or more
creditors and the individual debtor to vote in favor of the
proposed agreement; or (c) fraudulent conveyance of
claims for the purpose of obtaining a majority. The court
shall hear and pass upon such objection as soon as
possible and in a summary manner.
In case the decision of the majority of creditors to approve
the individual debtor's proposal or any amendment thereof
made during the creditors' meeting is annulled by the
court, the court shall declare the proceedings terminated
and the creditors shall be at liberty to exercise the rights
which may correspond to them.
Section 101. Effects of Approval of Proposed
Agreement. - If the decision of the majority of the creditors
to approve the proposed agreement or any amendment
thereof made during the creditors' meeting is uphold by
the court, or when no opposition or objection to said
decision has been presented, the court shall order that the
agreement be carried out and all parties bound thereby to
comply with its terms.
The court may also issue all orders which may be
necessary or proper to enforce the agreement on motion
of any affected party. The Order confirming the approval of
the proposed agreement or any amendment thereof made
during the creditors' meeting shall be binding upon all
creditors whose claims are included in the schedule of
debts and liabilities submitted by the individual debtor and
who were properly summoned, but not upon: (a) those
creditors having claims for personal labor, maintenance,
expenses of last illness and funeral of the wife or children
of the debtor incurred in the sixty (60) days immediately
prior to the filing of the petition; and (b) secured creditors
who failed to attend the meeting or refrained from voting
therein.
Section 102. Failure of Individual Debtor to Perform
Agreement. - If the individual debtor fails, wholly or in part,
to perform the agreement decided upon at the meeting of
the creditors, all the rights which the creditors had against
the individual debtor before the agreement shall revest in
them. In such case the individual debtor may be made
subject to the insolvency proceedings in the manner
established by this Act.
(B) Voluntary Liquidation.
Section 103. Application. - An individual debtor whose
properties are not sufficient to cover his liabilities, and
owing debts exceeding Five hundred thousand pesos
(Php500,000.00), may apply to be discharged from his
debts and liabilities by filing a verified petition with the
court of the province or city in which he has resided for six
(6) months prior to the filing of such petition. He shall
attach to his petition a schedule of debts and liabilities and
an inventory of assets. The filing of such petition shall be
an act of insolvency.
Section 104. Liquidation Order. - If the court finds the
petition sufficient in form and substance it shall, within five
(5) working days issue the Liquidation Order mentioned in
Section 112 hereof.
(C) In voluntary Liquidation.
Section 105. Petition; Acts of Insolvency. - Any creditor or
group of creditors with a claim of, or with claims
aggregating at least Five hundred thousand pesos
(Php500, 000.00) may file a verified petition for liquidation
with the court of the province or city in which the individual
debtor resides.
The following shall be considered acts of insolvency, and
the petition for liquidation shall set forth or allege at least
one of such acts:
(a) That such person is about to depart or has
departed from the Republic of the Philippines,
with intent to defraud his creditors;
(b) That being absent from the Republic of the
Philippines, with intent to defraud his creditors,
he remains absent;
(c) That he conceals himself to avoid the service
of legal process for the purpose of hindering or
delaying the liquidation or of defrauding his
creditors;
(d) That he conceals, or is removing, any of his
property to avoid its being attached or taken on
legal process;
(e) That he has suffered his property to remain
under attachment or legal process for three (3)
days for the purpose of hindering or delaying the
liquidation or of defrauding his creditors;
(f) That he has confessed or offered to allow
judgment in favor of any creditor or claimant for
24
 the purpose of hindering or delaying the
liquidation or of defrauding any creditors or
claimant;
(g) That he has willfully suffered judgment to be
taken against him by default for the purpose of
hindering or delaying the liquidation or of
defrauding his creditors;
(h) That he has suffered or procured his property
to be taken on legal process with intent to give a
preference to one or more of his creditors and
thereby hinder or delay the liquidation or defraud
any one of his creditors;
(i) That he has made any assignment, gift, sale,
conveyance or transfer of his estate, property,
rights or credits with intent to hinder or delay the
liquidation or defraud his creditors;
(j) That he has, in contemplation of insolvency,
made any payment, gift, grant, sale, conveyance
or transfer of his estate, property, rights or
credits;
(k) That being a merchant or tradesman, he has
generally defaulted in the payment of his current
obligations for a period of thirty (30) days;
(l) That for a period of thirty (30) days, he has
failed, after demand, to pay any moneys
deposited with him or received by him in a
fiduciary; and
(m) That an execution having been issued
against him on final judgment for money, he shall
have been found to be without sufficient property
subject to execution to satisfy the judgment.
The petitioning creditor/s shall post a bond in such as the
court shall direct, conditioned that if the petition for
liquidation is dismissed by the court, or withdrawn by the
petitioner, or if the debtor shall not be declared an
insolvent the petitioners will pay to the debtor all costs,
expenses, damages occasioned by the proceedings and
attorney's fees.
Section 106. Order to Individual Debtor to Show Cause. -
Upon the filing of such creditors' petition, the court shall
issue an Order requiring the individual debtor to show
cause, at a time and place to be fixed by the said court,
why he should not be adjudged an insolvent. Upon good
cause shown, the court may issue an Order forbidding the
individual debtor from making payments of any of his
debts, and transferring any property belonging to him.
However, nothing contained herein shall affect or impair
the rights of a secured creditor to enforce his lien in
accordance with its terms.
Section 107. Default. - If the individual debtor shall default
or if, after trial, the issues are found in favor of the
petitioning creditors the court shall issue the Liquidation
Order mentioned in Section 112 hereof.
Section 108. Absent Individual Debtor. - In all cases
where the individual debtor resides out of the Republic of
the Philippines; or has departed therefrom; or cannot, after
due diligence, be found therein; or conceals himself to
avoid service of the Order to show cause, or any other
preliminary process or orders in the matter, then the
petitioning creditors, upon submitting the affidavits
requisite to procedure an Order of publication, and
presenting a bond in double the amount of the aggregate
sum of their claims against the individual debtor, shall be
entitled to an Order of the court directing the sheriff of the
province or city in which the matter is pending to take into
his custody a sufficient amount of property of the individual
debtor to satisfy the demands of the petitioning creditors
and the costs of the proceedings. Upon receiving such
Order of the court to take into custody of the property of
the individual debtor, it shall be the duty of the sheriff to
take possession of the property and effects of the
individual debtor, not exempt from execution, to an extent
sufficient to cover the amount provided for and to prepare
within three (3) days from the time of taking such
possession, a complete inventory of all the property so
taken, and to return it to the court as soon as completed.
The time for taking the inventory and making return
thereof may be extended for good cause shown to the
court. The sheriff shall also prepare a schedule of the
names and residences of the creditors, and the amount
due each, from the books of the debtor, or from such other
papers or data of the individual debtor available as may
come to his possession, and shall file such schedule or list
of creditors and inventory with the clerk of court.
Section 109. All Property Taken to be Held for All
Creditors; Appeal Bonds; Exemptions to Sureties. - In all
cases where property is taken into custody by the sheriff, if
it does not embrace all the property and effects of the
debtor not exempt from execution, any other creditor or
creditors of the individual debtor, upon giving bond to be
approved by the court in double the amount of their
claims, singly or jointly, shall be entitled to similar orders
and to like action, by the sheriff; until all claims be
provided for, if there be sufficient property or effects. All
property taken into custody by the sheriff by virtue of the
giving of any such bonds shall be held by him for the
benefit of all creditors of the individual debtor whose
claims shall be duly proved as provided in this Act. The
bonds provided for in this section and the preceding
section to procure the order for custody of the property
and effects of the individual debtor shall be conditioned
that if, upon final hearing of the petition in insolvency, the
court shall find in favor of the petitioners, such bonds and
all of them shall be void; if the decision be in favor of the
individual debtor, the proceedings shall be dismissed, and
the individual debtor, his heirs, administrators, executors
or assigns shall be entitled to recover such sum of money
as shall be sufficient to cover the damages sustained by
him, not to exceed the amount of the respective bonds.
Such damages shall be fixed and allowed by the court. If
25
either the petitioners or the debtor shall appeal from the
decision of the court, upon final hearing of the petition, the
appellant shall be required to give bond to the successful
party in a sum double the amount of the value of the
property in controversy, and for the costs of the
proceedings.
Any person interested in the estate may take exception to
the sufficiency of the sureties on such bond or bonds.
When excepted to the petitioner's sureties, upon notice to
the person excepting of not less than two (2) nor more
than five (5) days, must justify as to their sufficiency; and
upon failure to justify, or of others in their place fail to
justify at the time and place appointed the judge shall
issue an Order vacating the order to take the property of
the individual debtor into the custody of the sheriff, or
denying the appeal, as the case may be.
Section 110. Sale Under Execution. - If, in any case,
proper affidavits and bonds are presented to the court or a
judge thereof, asking for and obtaining an Order of
publication and an Order for the custody of the property of
the individual debtor and thereafter the petitioners shall
make it appear satisfactorily to the court or a judge thereof
that the interest of the parties to the proceedings will be
subserved by a sale thereof, the court may order such
property to be sold in the same manner as property is sold
under execution, the proceeds to de deposited in the court
to abide by the result of the proceedings.
CHAPTER VII
PROVISIONS COMMON TO LIQUIDATION IN
INSOLVENCY OF INDIVIDUAL AND JURIDICAL
DEBTORS
Section 111. Use of Term Debtor. - For purposes of this
chapter, the term debtor shall include both individual
debtor as defined in Section 4(o) and debtor as defined in
Section 4(k) of this Act.
(A) The Liquidation Order.
Section 112. Liquidation Order. - The Liquidation Order
shall:
(a) declare the debtor insolvent;
(b) order the liquidation of the debtor and, in the
case of a juridical debtor, declare it as dissolved;
(c) order the sheriff to take possession and
control of all the property of the debtor, except
those that may be exempt from execution;
(d) order the publication of the petition or motion
in a newspaper of general circulation once a
week for two (2) consecutive weeks;
(e) direct payments of any claims and
conveyance of any property due the debtor to the
liquidator;
(f) prohibit payments by the debtor and the
transfer of any property by the debtor;
(g) direct all creditors to file their claims with the
liquidator within the period set by the rules of
procedure;
(h) authorize the payment of administrative
expenses as they become due;
(i) state that the debtor and creditors who are not
petitioner/s may submit the names of other
nominees to the position of liquidator; and
(j) set the case for hearing for the election and
appointment of the liquidator, which date shall not
be less than thirty (30) days nor more than forty-
five (45) days from the date of the last
publication.
Section 113. Effects of the Liquidation Order. - Upon the
issuance of the Liquidation Order:
(a) the juridical debtor shall be deemed dissolved
and its corporate or juridical existence
terminated;
(b) legal title to and control of all the assets of the
debtor, except those that may be exempt from
execution, shall be deemed vested in the
liquidator or, pending his election or appointment,
with the court;
(c) all contracts of the debtor shall be deemed
terminated and/or breached, unless the liquidator,
within ninety (90) days from the date of his
assumption of office, declares otherwise and the
contracting party agrees;
(d) no separate action for the collection of an
unsecured claim shall be allowed. Such actions
already pending will be transferred to the
Liquidator for him to accept and settle or contest.
If the liquidator contests or disputes the claim, the
court shall allow, hear and resolve such contest
except when the case is already on appeal. In
such a case, the suit may proceed to judgment,
and any final and executor judgment therein for a
claim against the debtor shall be filed and
allowed in court; and
(e) no foreclosure proceeding shall be allowed for
a period of one hundred eighty (180) days.
26
Section 114. Rights of Secured Creditors. - The
Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the
applicable contract or law. A secured creditor may:
(a) waive his right under the security or lien,
prove his claim in the liquidation proceedings and
share in the distribution of the assets of the
debtor; or
(b) maintain his rights under the security or lien:
If the secured creditor maintains his rights under the
security or lien:
(1) the value of the property may be fixed in a
manner agreed upon by the creditor and the
liquidator. When the value of the property is less
than the claim it secures, the liquidator may
convey the property to the secured creditor and
the latter will be admitted in the liquidation
proceedings as a creditor for the balance. If its
value exceeds the claim secured, the liquidator
may convey the property to the creditor and
waive the debtor's right of redemption upon
receiving the excess from the creditor;
(2) the liquidator may sell the property and satisfy
the secured creditor's entire claim from the
proceeds of the sale; or
(3) the secure creditor may enforce the lien or
foreclose on the property pursuant to applicable
laws.
(B) The Liquidator.
Section 115. Election of Liquidator. - Only creditors who
have filed their claims within the period set by the court,
and whose claims are not barred by the statute of
limitations, will be allowed to vote in the election of the
liquidator. A secured creditor will not be allowed to vote,
unless: (a) he waives his security or lien; or (b) has the
value of the property subject of his security or lien fixed by
agreement with the liquidator, and is admitted for the
balance of his claim.
The creditors entitled to vote will elect the liquidator in
open court. The nominee receiving the highest number of
votes cast in terms of amount of claims, ad who is
qualified pursuant to Section 118 hereof, shall be
appointed as the liquidator.
Section 116. Court-Appointed Liquidator. - The court may
appoint the liquidator if:
(a) on the date set for the election of the
liquidator, the creditors do not attend;
(b) the creditors who attend, fail or refuse to elect
a liquidator;
(c) after being elected, the liquidator fails to
qualify; or
(d) a vacancy occurs for any reason whatsoever,
In any of the cases provided herein, the court
may instead set another hearing of the election of
the liquidator.
Provided further, That nothing in this section shall be
construed to prevent a rehabilitation receiver, who was
administering the debtor prior to the commencement of the
liquidation, from being appointed as a liquidator.
Section 117. Oath and Bond of the Liquidator. -Prior to
entering upon his powers, duties and responsibilities, the
liquidator shall take an oath and file a bond, In such
amount to be fixed by the court, conditioned upon the
proper and faithful discharge of his powers, duties and
responsibilities.
Section 118. Qualifications of the Liquidator. - The
liquidator shall have the qualifications enumerated in
Section 29 hereof. He may be removed at any time by the
court for cause, either motu propio or upon motion of any
creditor entitled to vote for the election of the liquidator.
Section 119. Powers, Duties and Responsibilities of the
Liquidator. - The liquidator shall be deemed an officer of
the court with the principal duly of preserving and
maximizing the value and recovering the assets of the
debtor, with the end of liquidating them and discharging to
the extent possible all the claims against the debtor. The
powers, duties and responsibilities of the liquidator shall
include, but not limited to:
(a) to sue and recover all the assets, debts and
claims, belonging or due to the debtor;
(b) to take possession of all the property of the
debtor except property exempt by law from
execution;
(c) to sell, with the approval of the court, any
property of the debtor which has come into his
possession or control;
(d) to redeem all mortgages and pledges, and so
satisfy any judgement which may be an
encumbrance on any property sold by him;
(e) to settle all accounts between the debtor and
his creditors, subject to the approval of the court;
(f) to recover any property or its value,
fraudulently conveyed by the debtor;
27
 (g) to recommend to the court the creation of a
creditors' committee which will assist him in the
discharge of the functions and which shall have
powers as the court deems just, reasonable and
necessary; and
(h) upon approval of the court, to engage such
professional as may be necessary and
reasonable to assist him in the discharge of his
duties.
In addition to the rights and duties of a rehabilitation
receiver, the liquidator, shall have the right and duty to
take all reasonable steps to manage and dispose of the
debtor's assets with a view towards maximizing the
proceedings therefrom, to pay creditors and stockholders,
and to terminate the debtor's legal existence. Other duties
of the liquidator in accordance with this section may be
established by procedural rules.
A liquidator shall be subject to removal pursuant to
procedures for removing a rehabilitation receiver.
Section 120. Compensation of the Liquidator. - The
liquidator and the persons and entities engaged or
employed by him to assist in the discharge of his powers
and duties shall be entitled to such reasonable
compensation as may determined by the liquidation court,
which shall not exceed the maximum amount as may be
prescribed by the Supreme Court.
Section 121. Reporting Requiremen5ts. - The liquidator
shall make and keep a record of all moneys received and
all disbursements mad by him or under his authority as
liquidator. He shall render a quarterly report thereof to the
court , which report shall be made available to all
interested parties. The liquidator shall also submit such
reports as may be required by the court from time to time
as well as a final report at the end of the liquidation
proceedings.
Section 122. Discharge of Liquidator. - In preparation for
the final settlement of all the claims against the debtor ,
the liquidator will notify all the creditors, either by
publication in a newspaper of general circulation or such
other mode as the court may direct or allow, that will apply
with the court for the settlement of his account and his
discharge from liability as liquidator. The liquidator will file
a final accounting with the court, with proof of notice to all
creditors. The accounting will be set for hearing. If the
court finds the same in order, the court will discharge the
liquidator.
(C) Determination of Claims
Section 123. Registry of Claims. - Within twenty (20) days
from his assumption into office the liquidator shall prepare
a preliminary registry of claims of secured and unsecured
creditors. Secured creditors who have waived their
security or lien, or have fixed the value of the property
subject of their security or lien by agreement with the
liquidator and is admitted as a creditor for the balance ,
shall be considered as unsecured creditors. The liquidator
shall make the registry available for public inspection and
provide publication notice to creditors, individual debtors
owner/s of the sole proprietorship-debtor, the partners of
the partnership-debtor and shareholders or members of
the corporation-debtor, on where and when they may
inspect it. All claims must be duly proven before being
paid.
Section 124. Right of Set-off. - If the debtor and creditor
are mutually debtor and creditor of each other one debt
shall be set off against the other, and only the balance, if
any shall be allowed in the liquidation proceedings.
Section 125. - Opposition or Challenge to Claims. - Within
thirty (30 ) days from the expiration of the period for filing
of applications for recognition of claims, creditors,
individual debtors, owner/s of the sole proprietorship-
debtor, partners of the partnership-debtor and
shareholders or members of the corporation -debtor and
other interested parties may submit a challenge to claim or
claims to the court, serving a certified copy on the
liquidator and the creditor holding the challenged claim.
Upon the expiration of the (30) day period, the
rehabilitation receiver shall submit to the court the registry
of claims containing the undisputed claims that have not
been subject to challenge. Such claims shall become final
upon the filling of the register and may be subsequently
set aside only on grounds or fraud, accident, mistake or
inexcusable neglect.
Section 126. Submission of Disputed to the Court. - The
liquidator shall resolve disputed claims and submit his
findings thereon to the court for final approval. The
liquidator may disallow claims.
(D) Avoidance Proceedings.
Section 127. Rescission or Nullity of Certain
Transactions. - Any transaction occurring prior to the
issuance of the Liquidation Order or, in case of the
conversion of the rehabilitation proceedings prior to the
commencement date, entered into by the debtor or
involving its assets, may be rescinded or declared null and
void on the ground that the same was executed with intent
to defraud a creditor or creditors or which constitute undue
preference of creditors. The presumptions set forth in
Section 58 hereof shall apply.
Section 128. Actions for Rescission or Nullity. - (a) The
liquidator or, with his conformity, a creditor may initiate and
prosecute any action to rescind, or declare null and void
any transaction described in the immediately preceding
paragraph. If the liquidator does not consent to the filling
or prosecution of such action, any creditor may seek leave
of the court to commence said action.
(b) if leave of court is granted under subsection
(a) hereof, the liquidator shall assign and transfer
to the creditor all rights, title and interest in the
28
 chose in action or subject matter of the
proceeding, including any document in support
thereof.
(c) Any benefit derived from a proceeding taken
pursuant to subsection (a) hereof, to the extent of
his claim and the costs, belongs exclusively to
the creditor instituting the proceeding, and the
surplus, if any, belongs to the estate.
(d) Where, before an orders is made under
subsection (a) hereof, the liquidator signifies to
the court his readiness to the institute the
proceeding for the benefit of the creditors, the
order shall fix the time within which he shall do so
and, in that case the benefit derived from the
proceedings, if instituted within the time limits so
fixed, belongs to the estate.
(E) The Liquidation Plan.
Section 129. The Liquidation Plan. - Within three (3)
months from his assumption into office, the Liquidator
shall submit a Liquidation Plan to the court. The
Liquidation Plan shall, as a minimum enumerate all the
assets of the debtor and a schedule of liquidation of the
assets and payment of the claims.
Section 130. Exempt Property to be Set Apart. - It shall be
the duty of the court, upon petition and after hearing, to
exempt and set apart, for the use and benefit of the said
insolvent, such real and personal property as is by law
exempt from execution, and also a homestead; but no
such petition shall be heard as aforesaid until it is first
proved that notice of the hearing of the application therefor
has been duly given by the clerk, by causing such notice
to be posted it at least three (3) public places in the
province or city at least ten (10) days prior to the time of
such hearing, which notice shall set forth the name of the
said insolvent debtor, and the time and place appointed for
the hearing of such application, and shall briefly indicate
the homestead sought to be exempted or the property
sought to be set aside; and the decree must show that
such proof was made to the satisfaction of the court, and
shall be conclusive evidence of that fact.
Section 131. Sale of Assets in Liquidation. - The liquidator
may sell the unencumbered assets of the debtor and
convert the same into money. The sale shall be made at
public auction. However, a private sale may be allowed
with the approval of the court if; (a) the goods to be sold
are of a perishable nature, or are liable to quickly
deteriorate in value, or are disproportionately expensive to
keep or maintain; or (b) the private sale is for the best
interest of the debtor and his creditors.
With the approval of the court, unencumbered property of
the debtor may also be conveyed to a creditor in
satisfaction of his claim or part thereof.
Section 132. manner of Implementing the Liquidation
Plan. - The Liquidator shall implement the Liquidation Plan
as approved by the court. Payments shall be made to the
creditors only in accordance with the provisions of the
Plan.
Section 133. Concurrence and Preference of Credits. -
The Liquidation Plan and its Implementation shall ensure
that the concurrence and preference of credits as
enumerated in the Civil Code of the Philippines and other
relevant laws shall be observed, unless a preferred
creditor voluntarily waives his preferred right. For
purposes of this chapter, credits for services rendered by
employees or laborers to the debtor shall enjoy first
preference under Article 2244 of the Civil Code, unless the
claims constitute legal liens under Article 2241 and 2242
thereof.
Section 134. Order Removing the Debtor from the List of
Registered Entitles at the Securities and Exchange
Commission. - Upon determining that the liquidation has
been completed according to this Act and applicable law,
the court shall issue an Order approving the report and
ordering the SEC to remove the debtor from the registry of
legal entities.
Section 135. Termination of Proceedings. - Upon receipt
of evidence showing that the debtor has been removed
from the registry of legal entities at the SEC. The court
shall issue an Order terminating the proceedings.
(F) Liquidation of a Securities Market Participant.
Section 136. Liquidation of a Securities Market
Participant. - The foregoing provisions of this chapter shall
be without prejudice to the power of a regulatory agency
or self- regulatory organization to liquidate trade-related
claims of clients or customers of a securities market
participant which, for purposes of investor protection, are
hereby deemed to have absolute priority over other claims
of whatever nature or kind insofar as trade-related assets
are concerned.
For purposes of this section, trade -related assets include
cash, securities, trading right and other owned and used
by the securities market participant in the ordinary course
of this business.
CHAPTER VIII
PROCEEDINGS ANCILLARY TO OTHER INSOLVENCY
OR REHABILITAION PROCEEDINGS
(A) Banks and Other Financial Institutions Under
Rehabilitation Receivership Pursuant to a State-
funded or State-mandated Insurance System.
Section 137. Provision of Assistance. - The court shall
issue orders, adjudicate claims and provide other relief
necessary to assist in the liquidation of a financial under
rehabilitation receivership established by a state-funded or
state-mandated insurance system.
29
Section 138. Application of Relevant Legislation. - The
liquidation of bank, financial institutions, insurance
companies and pre-need companies shall be determined
by relevant legislation. The provisions in this Act shall
apply in a suppletory manner.
(B) Cross-Border Insolvency Proceedings.
Section 139. Adoption of Uncitral Model Law on Cross-
Border Insolvency. - Subject to the provision of Section
136 hereof and the rules of procedure that may be
adopted by the Supreme Court, the Model Law on Cross-
Border Insolvency of the United Nations Center for
International Trade and Development is hereby adopted
as part of this Act.
Section 140. Initiation of Proceedings. - The court shall
set a hearing in connection with an insolvency or
rehabilitation proceeding taking place in a foreign
jurisdiction, upon the submission of a petition by the
representative of the foreign entity that is the subject of the
foreign proceeding.
Section 141. Provision of Relief. - The court may issue
orders:
(a) suspending any action to enforce claims
against the entity or otherwise seize or foreclose
on property of the foreign entity located in the
Philippines;
(b) requiring the surrender property of the foreign
entity to the foreign representative; or
(c) providing other necessary relief.
Section 142. Factors in Granting Relief. - In determining
whether to grant relief under this subchapter, the court
shall consider;
(a) the protection of creditors in the Philippines
and the inconvenience in pursuing their claim in a
foreign proceeding;
(b) the just treatment of all creditors through
resort to a unified insolvency or rehabilitation
proceedings;
(c) whether other jurisdictions have given
recognition to the foreign proceeding;
(d) the extent that the foreign proceeding
recognizes the rights of creditors and other
interested parties in a manner substantially in
accordance with the manner prescribed in this
Act; and
(e) the extent that the foreign proceeding has
recognized and shown deference to proceedings
under this Act and previous legislation.
CHAPTER IX
FUNDS FOR REHABILITATION OF GOVERNMENT-
OWNED AND CONTROLLED CORPORATIONS
Section 143. Funds for Rehabilitation of Government
-owned and Controlled Corporations. - Public funds for the
rehabilitation of government-owned and controlled
corporations shall be released only pursuant to an
appropriation by Congress and shall be supported by
funds actually available as certified by the National
Treasurer.
The Department of Finance, in collaboration with the
Department of Budget and Management, shall promulgate
the rules for the use and release of said funds.
CHAPTER X
MISCELLANEOUS PROVISIOS
Section 144. Applicability of Provisions. - The provisions
in Chapter II, insofar as they are applicable, shall likewise
apply to proceedings in Chapters II and IV.
Section 145. Penalties. - An owner, partner, director,
officer or other employee of the debtor who commits any
one of the following acts shall, upon conviction thereof, be
punished by a fine of not more than One million pesos
(Php 1, 000,000.00) and imprisonment for not less than
three(3) months nor more than five (5) years for each
offense;
(a) if he shall, having notice of the
commencement of the proceedings, or having
reason to believe that proceedings are about to
be commented, or in contemplation of the
proceedings hide or conceal, or destroy or cause
to be destroyed or hidden any property belonging
to the debtor or if he shall hide, destroy, after
mutilate or falsify, or cause to be hidden,
destroyed, altered, mutilated or falsified, any
book, deed, document or writing relating thereto;
if he shall, with intent to defraud the creditors of
the debtor, make any payment sale, assignment,
transfer or conveyance of any property
belongings to the debtor
(b) if he shall, having knowledge belief of any
person having proved a false or fictitious claim
against the debtor, fail to disclose the same to the
rehabilitation receiver of liquidator within one (1)
month after coming to said knowledge or belief;
or if he shall attempt to account for any of the
debtors property by fictitious losses or expense;
or
30
 (c) if he shall knowingly violate a prohibition or
knowingly fail to undertake an obligation
established by this Act.
Section 146. Application to Pending Insolvency,
Suspension of Payments and Rehabilitation Cases. - This
Act shall govern all petitions filed after it has taken effect.
All further proceedings in insolvency, suspension of
payments and rehabilitation cases then pending, except to
the extent that in opinion of the court their application
would not be feasible or would work injustice, in which
event the procedures set forth in prior laws and
regulations shall apply.
Section 147. Application to Pending Contracts. - This Act
shall apply to all contracts of the debtor regardless of the
date of perfection.
Section 148. Repeating Clause. - The Insolvency Law
(Act No. 1956). As amended is hereby repealed. All other
laws, orders, rules and regulations or parts thereof
inconsistent with any provision of this Act are hereby
repealed or modified accordingly.
Section 149. Separability Clause. - If any provision of this
Act shall be held invalid, the remainder of this Act not
otherwise affected shall remain in full force effect
Section 150. Effectivity Clause. - This Act shall take effect
fifteen (15) days after its complete publication in the
Official Gazette or in at least two (2) national newspaper of
general circulation.
AM 15-04-06-SC Financial Liquidation and Suspension of
Payments Rules of Procedure for Insolvent Debtors (2015)
AM 03-03-03-SC Amendment, June 16, 2015
AM 12-12-11-SC Financial Rehabilitation Rules of
Procedure (2013)
AM No. 03-03-03-SC June 17, 2003
A. Corporation Rehabilitation
1. General Considerations
Chapter 1 of FRIA
Veterans Bank Employees Union v. Vega June 28, 2001
2. Rehabilitation
Chapter II to IV of FRIA
San Jose Timber v. SEC Feb 27, 2012
ThisisapetitionforreviewoncertiorariunderRule
45seekingtosetasidetheSeptember22,2003Decision[1]ofthe
CourtofAppeals(CA)inCAG.R.SPNo.70898,entitledSan
Jose Timber Corporation, et al. v. Securities and Exchange
Commission, et al.,which affirmed the May 6, 2002
Decision[2]of the Securities and Exchange
Commission(SEC),in SEC Case No. 3843, dismissing the
petition for appointment of a rehabilitation receiver and
suspension of payments filed by San Jose Timber
Corporation(SJTC)and Casilayan Softwood Development
Corporation (CSDC)and ordering the dissolution and
liquidationofSJTC.
The Facts
Petitioner CSDC is a corporation duly organized and
existing under and by virtue of the laws of the Republic of
the Philippines and the controlling stockholder and creditor of
petitioner SJTC, being the owner of more than 99% of its
outstanding capital stock.
Petitioner SJTC is primarily engaged in the operation
of a logging concession with a base camp in Pabanog, Wright,
Western Samar, under and by virtue of a Timber License
Agreement (TLA) No. 118 issued by the Department of
Environment and Natural Resources (DENR). The TLA was to
expire in 2007.
On February 8, 1989, the DENR issued a Moratorium
Order (MO) suspending all logging operations in
the island of Samar effective February 1989 up to May 30, 1989.
As a consequence, SJTC was constrained to cease
operations effective February 8, 1989, despite the fact that the
expiration of the period set forth in the MO was still up to May
30, 1989.
The cessation of its operations caused SJTC to lose all
its income. Thus, on August 7, 1990, SJTC and CSDC filed with
the SEC a petition for the appointment of a rehabilitation
receiver and for suspension of payments entitled, In Re: Petition
for the Appointment of a Rehabilitation Receiver for SJTC
Timber Corporation and For Suspension of Payments, which
was docketed as SEC Case No. 3843.
After due hearing, the SEC Hearing Panel, in its Order
dated March 14, 1991, granted the appointment of a
rehabilitation receiver and suspension of payments with the
condition that SJTC would resuscitate its operations and
properly service its liabilities in accordance with the duly
approved schedule to be submitted by the Rehabilitation
Receiver[3] within a one (1) year period.
31
 where the timber
On February 26, 1992, the petitioners submitted concession is located
either by the enactment of
their Motion to Approve Revised Rehabilitation Plan and Urgent
a selective logging law or
Motion to Extend Waiting Period for Commencement of the administrative
cessation of the
Rehabilitation dated February 24, 1992 to allow the proper moratorium, does not
appear to be close to
government authorities to deliberate on and approve the lifting fulfillment soon.
of the existing logging moratorium in Samar. The petitioners
1.2 The claimants
prayed that the waiting period be extended by one (1) year and thus face the uninviting
prospect of seeing
five (5) months from March 15, 1992. petitioner San
Jose being dissolved and
its few remaining assets,
worth no more than P15
The SEC Hearing Panel extended the waiting period up Million, being fought
to August 15, 1992 but held in abeyance its approval of the over by supposed
creditors whose
revised rehabilitation plan. combined claim exceeds
P54 Million. Even if
Upon subsequent motions of petitioners, SJTC and these assets are prorated
among the creditors,
CSDC, the SEC Hearing Panel extended the waiting period each one of them will get
several times. less than 25% of his
claim.[4]

Meanwhile, on March 4, 1996, prior to the expiration

of the waiting period to commence rehabilitation, the petitioners In its Order[5] dated July 30, 1996, the SEC granted the

filed their Motion For Settlement of Claims Against Petitioner motion for settlement of claims subject to certain conditions

San Jose dated February 21, 1996. Considering that the lifting of specifically stated in the dispositive portion of the said order,

the logging moratorium in Samar did not appear to be close to which reads:

fulfillment at that juncture, the petitioners offered to either (1) WHEREFORE, it appearing
that the approval of the proposal of
pay the claims of the creditor in full provided they await the petitioner is to the best interest of all the
creditors of SJTC, and considering that
rehabilitation of SJTC; or (2) immediately settle the claims of the same is not contrary to law, morals
the creditors by paying them 30% of their substantiated claims. or public policy the proposal that SJTC
shall pay the interested claimants 30%
They alleged that: of the principal claims is hereby
APPROVED, and shall be binding upon
1. The Honorable all those interested claimants subject to
Hearing Panels Order of 6 March the following conditions:
1995 extended the waiting period for the
commencement of the rehabilitation of 1. That the claims of
petitioner San Jose Timber Corporation the interested claimants are sufficiently
(San Jose) for one year, or up to 6 substantiated and the same are
March 1996. confirmed by the Rehabilitation
Receiver;
However, with
barely a week before the 2. That the funding
lapse of this deadline, the for the settlement will be sourced from
precondition for the the advances to be made by corporate
commencement of the creditors Jaka Equities Corporation,
rehabilitation as set forth Royal Match, Inc., Eurasia Carriers
in the proposed Company, Inc. and Casilayan Softwood
rehabilitation plan, i.e., the Development Corporation, which
lifting of the logging corporate creditors will be reimbursed
moratorium in the place the full amount of their advances plus

32
 interests at the same rates applicable to
the remaining creditors upon the
rehabilitation of SJTC;
3. That those who
objected to the 30% settlement offer and
those who while failing to object, deem it
appropriate not to accept the offer now,
still have the option to wait for the
eventual rehabilitation of SJTC and be
paid in the manner and to the extent set
forth in the rehabilitation plan that will
be approved by this Hearing Panel; and
4. That the
rehabilitation of SJTC will commence
upon the lifting of the logging
moratorium in its logging concession
either by the enactment of a statute
allowing selective logging or the lifting
of the said moratorium.
Petitioners are hereby directed
to furnish the creditors of this Order at
their own expense.
SO ORDERED.
by the CA in its September 22, 2003 Decision stating, among
others, that:
Subsequently, the petitioners filed their Motion to
Dispose of Personal Propertiesdated May 7, 1997 which was
granted by the SEC in its Order dated November 26, 1997. The
SEC ordered the proceeds of the sale be deposited in an escrow
account to be withdrawn only for the settlement of petitioners
obligation.[6]
On May 6, 2002, however, the SEC En Banc motu
proprio handed down its decision terminating the rehabilitation
proceedings and dismissing the petition for rehabilitation. The
SEC opined that SJTC could no longer be rehabilitated because
the logging moratorium/ban, which was crucial for its
rehabilitation, had not been lifted. The SEC decision, in its
pertinent parts, reads:
Based on the foregoing, it is
evident that the instant petition should
have been dismissed long ago. It is quite
obvious that San Jose can no longer be
rehabilitated. In fact, the prospect for its
rehabilitation has been dim from the
very beginning in the light of the
uncertainty surrounding the lifting of
the logging moratorium. If the previous
Hearing Panel had been lenient and
accommodating, it could only have been
because of its honest belief that it would
be in the best interest of all parties,
particularly the creditors who would not
be able to collect fully on their claims, to
attempt to rehabilitate San Jose. But
even the best of intentions cannot prop
an unachievable aspiration ad
infinitum. It has been more than
thirteen years since the DENR imposed
the logging moratorium and the same is
still effective. Xx x.
The hopelessness and futility of
petitioners cause is further made
manifest in the petitioners and the
rehabilitation receivers silence and
inaction for almost five years. The only
thing that keeps petitioners interested in
the instant petition is San Joses Timber
Licensing Agreement (TLA) that is set to
expire in 2007, the preservation of
which appears to still be of some value
to petitioners. X x x.[7]
The May 6, 2002 Decision of the SEC was affirmed
. . . Adequately clear from the
records is that the proposed
rehabilitation plan submitted by the
petitioners depends entirely on the
lifting of the logging ban either because
of the lifting of the moratorium on
logging activities in Samar issued by the
DENR, or by the enactment of a law on
selective logging. Needless to say, the
lifting of the logging ban is
indispensable to the rehabilitation of
petitioners logging company. However,
other than the petitioners bare assertion
that the lifting of the logging
moratorium or the enactment of a law
on selective logging is foreseeable and is
likely to happen in the near future, there
is simply no evidence on record to show,
with certainty that it is indeed, going to
take place in the immediate
future. Verily, to sustain petitioners
assertions could result to an unjust
situation wherein the corporate
rehabilitation will continually be held in
abeyance pending the approval of the
law on selective logging or the lifting of
logging moratorium, the happening of
which is uncertain considering the
absence of evidence to prove that there
is an imminent likelihood of its
occurrence. Such a situation is definitely
prejudicial to the interests of the
creditors and the investors whose rights
33
 the law is precisely designed to protect.
[8] On July 9, 2008, the Court resolved to dispense with

The petitioners filed a motion for reconsideration of the comments of the other respondent creditors, gave due course

the aforesaid decision but it was denied in the CA Resolution to the petition and directed the parties to submit their respective

dated January 29, 2004. memoranda within thirty (30) days from notice.[11]

On March 8, 2004, the petitioners filed this petition Records disclose that on October 6, 2008, SJTC and

for review before this Court on the ground that the CA erred in CSDC filed their Memorandum.Thereafter, the SEC and the SSS

affirming the dissolution of SJTC when the vast majority of the filed their respective memoranda. On January 29, 2009,

creditors had agreed to await the rehabilitation of SJTC. They petitioners SJTC and CSDC filed their Reply Memorandum.

believe that the rehabilitation was still feasible considering that

the TLA was still valid up to 2007 and under the proposed In its Resolution dated March 30, 2009, the Court

revised rehabilitation plan of SJTC, the latter would only need resolved to note the filing of the Reply Memorandum and to

24 months after the lifting of the logging moratorium to fully await the memoranda of the other respondent creditors.

settle the claims of the creditors, except those of the affiliates. To date, no other memorandum has been filed.

Significantly, except for the Social Security In their Memorandum, the petitioners advanced the

System (SSS), which incidentally had no more claims against following

SJTC, none of the creditors filed an opposition to or comment

on the petition. ARGUMENTS

Meanwhile, during the pendency of the petition before

A. THE COURT OF APPEALS
the Court, the DENR issued an Order dated August 15, 2005, GRAVELY ERRED AND ACTED
CONTRARY TO LAW WHEN IT
allowing SJTC to resume operations and extending the term of UPHELD THE DECISION DATED 6
MAY 2002 OF THE SECURITIES AND
the TLA up to 2021. The dispositive portion of the Order reads:
EXCHANGE COMMISSION WHICH
ORDERED THE IMMEDIATE
WHEREFORE, in light of the DISSOLUTION OF PETITIONER SAN
foregoing, the Moratorium Order JOSE, CONSIDERING THAT:
dated 8 February 1998 is hereby
recognized as having lapsed on 30 May 1. THE MANDATE OF THE
1989. San Jose Timber Corporation is SEC IS NOT TO IMMEDIATELY
hereby allowed to pursue its rights and LIQUIDATE ANY DISTRESSED
activities under its TLA No. 118 until 30 CORPORATION; RATHER, IT IS TO
June 2007, with an extension of the PROMOTE A WIDER AND MORE
period of said TLA equivalent to the EQUITABLE DISTRIBUTION OF
time that elapsed from 31 May WEALTH.
1989 until promulgation of this Order.
2. THE
SO ORDERED.[9] REHABILITATION OF
PETITIONER SAN JOSE IS STILL
Consequently, on October 14, 2005, the petitioners FEASIBLE.
filed their Supplemental Petition[10] with the Court citing the
3. THE SEC
August 15, 2005 DENR Order praying for the reversal of the CA ILLEGALLY SUBSTITUTED ITS WILL
OVER THAT OF THE CREDITORS,
decision and the remand of the case to the SEC for the THE VAST MAJORITY OF WHOM
HAVE AGREED TO WAIT FOR THE
immediate approval and implementation of the rehabilitation LIFTING OF THE LOGGING
plan. MORATORIUM SO THAT
PETITIONER SAN JOSE CAN
COMMENCE REHABILITATION.

34
 4. LIQUIDATION liabilities of SJTC. These corporate creditors have agreed to
WILL NOT SERVE ANY USEFUL
extend the waiting period for the commencement of the
PURPOSE. IT IS DISADVANTAGEOUS
TO BOTH CREDITORS AND rehabilitation of SJTC until such time that the logging
PETITIONERS. MOREOVER, THE
PURPOSE OF THE LIQUIDATION moratorium is lifted.
HAS BEEN SERVED IN THE
REHABILITATION PROCEEDINGS.[12] It is likewise averred that liquidation will not have any

In advocacy of their position, the petitioners argue that useful purpose. It is disadvantageous to both creditors and

the SEC acted illegally and beyond its statutory mandate when it petitioners. Moreover, the purpose of the liquidation has been

ordered the termination of the rehabilitation proceedings. The served in the rehabilitation proceedings. If SJTC is liquidated,

CA, in turn, acted contrary to law when it upheld the SECs its assets, divided by its existing liabilities, will give each

decision. creditor only 27% of their respective claims. Indeed, as found by

The petitioners posit that while the SEC is empowered the SEC Hearing Panel in its July 30, 1996 Order,[15]

to motu propio terminate rehabilitation when, in its opinion, it is

[It] is clear from the
no longer feasible, Presidential Decree (P.D.) No. 902-A uncontested figures relative to the total
assets and liabilities of SJTC that each
qualifies that such power must be exercised taking into creditor will get less than 30% of the
value of its claim.The reason for this is
consideration the best interest of the stockholders, parties- that dividing SJTCs total assets in the
litigants, creditors, or the general public. Clearly, the SEC is amount of 14,405,868.00 by its total
liabilities in the amount
mandated to protect not only the creditors but the distressed of 53,519,650.00 will yield a factor of
only .27, which corresponds to 27%.
corporation as well. This is because the rehabilitation of a

financially distressed corporation benefits its employees,

Position of the SEC
creditors, stockholders and, in a larger sense, the general public.
The SEC agrees that its primary basis in dismissing
[13]

the petition for the appointment of a rehabilitation receiver and

It is further argued that when the decision of the SEC
suspension of payment has been lost because of the DENRs
to terminate the rehabilitation of a corporation and order its
Order dated August 15, 2005 lifting the logging moratorium and
dissolution will not lead to a meaningful and equitable
allowing SJTC to continue its logging operations under TLA No.
distribution of wealth among the creditors, stockholders and
118.
employees, such decision can be struck down as illegal for being
Despite the same, it is of the position that SJTCs
violative of the statutory mandate of the SEC. The SEC illegally
rehabilitation is no longer feasible and viable because it has
ordered the dissolution of SJTC because (1) the rehabilitation is
already disposed of its properties such as various machineries
still feasible; and (2) the immediate dissolution is actually
and equipment and other valuable assets which are indispensable
detrimental to the interests of the creditors. [14]
to its logging operations. In other words, SJTC can no longer
The petitioners believe that the rehabilitation of SJTC
continue its logging operations because it now lacks the
is feasible because its major corporate creditors, namely: Jaka
necessary tools and equipment to pursue its business operations.
Investment Corporation, Jaka Equities Corporation, Royal
[16]

Match, Inc., Eurasia Carriers Company, Inc. and Casilayan

Moreover, SJTCs failure to report to the SEC what
Softwood Development Corporation, have a combined credit
happened to the disposition of its personal properties and the
of P36 million. This amount constitutes more than 66% of the
status of the settlement of 30% claims as enumerated in its May
35
6, 2002 Decision justifies the dismissal of its petition pursuant to The sole impediment to the rehabilitation of SJTC has,

Section 4-26, Rule IV of the SEC Rules of Procedure on thus, been removed.

Corporate Rehabilitation.[17] After the DENR issued its Order allowing SJTC to

In sum, notwithstanding the lifting of the logging immediately resume operations, it adjusted its revised

moratorium, the SEC avers that SJTC can no longer be revived rehabilitation plan (1992) taking into account the present

and restored to its former successful operation and solvency requirement to operate the logging concessions. Based on the

given the foregoing considerations. Adjusted Rehabilitation Plan (ARP), SJTC will need P70 million

The SEC also avers that as to the inaction of the pesos to fully operate the logging operations in 1989. There is

creditors of STJC, it cannot be construed as an acquiescence to more than sufficient quantity of commercial timber to support

await its full rehabilitation. What appears on record is that some the intended operations of SJTC.

of SJTCs creditors manifested their desire that SJTC be Under the ARP, SJTC would be able to complete the

liquidated now so that their claims against it may be finally set-up for its commercial operations within nine (9) months

settled.[18] from resumption. During that period, SJTC would hire

Finally, the SEC posits that liquidating SJTC would personnel, purchase new equipment, rehabilitate the roads,

work to its advantage because the accrued interest on all its buildings and other infrastructure necessary for the commercial

debts would no longer accumulate. Its creditors would get a operations.

higher percentage for the settlement of their claims. Likewise, Commercial operations would begin on the second

the early liquidation of SJTC could result in a big turnout of year of operation at an annual production of 56,000 cubic

proceeds of the sale of its assets that could satisfy all the claims meters, which was only about 75% of the companys allowable
[19]
of its creditors. harvest of 75,000 cubic meters.

Under the 2009 prevailing market, the average selling

SJTCs Reply to SEC price for the first grade logs was estimated at P7,200.00 per

SJTC replies that notwithstanding the sale of its cubic meter and P5,100.00 per cubic meter for the second grade

machineries and equipment, the rehabilitation of SJTC remains logs.

viable and feasible. As stated in its petition for certiorari in the Based on these projections, SJTC would be able to
CA, SJTCs corporate affiliates have undertaken to infuse the generate gross revenue in the amount of at least P342 million on

necessary capital to jump-start its operations as soon as the the first year of commercial production, or within eighteen

logging ban would be lifted. months from the date of the resumption of operation.

Conditions have dramatically changed with the August The remaining unpaid liabilities to the creditors,

15, 2005 Order of DENR categorically holding that the logging excluding corporate affiliates who agreed to be paid last, was

moratorium had already lapsed and that, accordingly, SJTC estimated to be no more than P11 million. As of December

could resume operations immediately. The DENR extended the 1991, the unpaid claims of creditors excluding that of the

TLA by the period equivalent to the time that elapsed from May petitioners corporate affiliates amounted

31, 1989 until the promulgation of the said order. The TLA will, to P14,369,531.27. Subsequently, the petitioners settled the

thus, subsist for another fourteen (14) years, or up to 2021. claims of 22 creditors who opted to be paid 30% of their claims

36
instead of waiting for the rehabilitation of SJTC. The aggregate On May 23, 1997, SJTC submitted a proposal to avail

value of the settled claims was P3,110,885.00. itself of the SSS condonation program for its contribution

Under the proposed ARP, SJTC would be able to pay delinquency in the amount of P1,394,672.00. In a letter

its creditors, except its corporate affiliates, in full within 18 dated April 6, 1998, the Employer Accounts Collection

months from the time it would resume operation. This is an Department of the SSS favorably endorsed its proposal for

improvement from the old rehabilitation plan which provided approval, provided payment was made on or before May 23,

payment to the creditors, excluding the affiliates, within 24 1998.

months from resumption of operations. On May 22, 1998, SJTC paid its SSS obligations in

By contrast, if SJTC would be dissolved and full.

liquidated, each creditor would receive no more than 14% of SSS did not question the fact of payment. By its

their principal claims. silence, SSS has acknowledged that SJTC is no longer indebted

SJTC argues that this has been the reason why the to it,

remaining creditors have not opposed the move to rehabilitate

SJTC. The records will show that although there were initially The Courts Ruling

four (4) out of 144 creditors who opposed the petition for Rehabilitation contemplates a continuance of

rehabilitation at the SEC level, none of the creditors opposed the corporate life and activities in an effort to restore and reinstate

petition at the CA level. Before this Court, only the SSS, which the corporation to its former position of successful operation and
[20]
is no longer a creditor, filed an opposition. solvency. The purpose of rehabilitation proceedings is to enable

the company to gain a new lease on life and thereby

Position of SSS allow creditors to be paid their claims from its earnings. The

SSS agrees with the decision of the SEC and the CA in rehabilitation of a financially distressed corporation benefits its

dismissing the petition for rehabilitation quoting the CAs employees, creditors,stockholders and, in a larger sense, the

decision that: Rehabilitation of a corporation must be based on a general public.[22]

viable and feasible plan; otherwise, the rehabilitation sought Under the Rules of Procedure on Corporate

cannot be granted.[21] Rehabilitation, rehabilitation is defined as the restoration of the

The liability of the petitioners to SSS consists of the debtor to a position of successful operation and solvency, if it is

delinquent contribution for the SSS and ECC contributions of its shown that its continuance of operation is economically feasible

employees, almost 50% of which represents deduction from the and its creditors can recover by way of the present value of

employees salaries and, therefore, do not form part of the assets payments projected in the plan, more if the corporation

of the corporation. Hence, said liabilities should be settled ahead continues as a going concern than if it is immediately liquidated.
[23]
of the creditors. The 3% penalty imposed on the delayed

remittance of contributions is enforced by law while the loan An indispensable requirement in the rehabilitation of a

amortizations were deducted from the salary of its employees distressed corporation is the rehabilitation plan. Section 5 of the

for remittance to the SSS. Interim Rules of Procedure on Corporate Rehabilitation provides

the requisites thereof:

SJTCS Reply to SSS Memorandum

37
 SEC. 5. Rehabilitation Plan. -- the debtor could successfully be rehabilitated include the
The rehabilitation plan shall include (a)
following:
the desired business targets or goals and
the duration and coverage of a) the business fortunes of the debtor
the rehabilitation;(b) the terms and have actually improved since the
petition was filed;
conditions of such rehabilitation which
shall include the manner of its b) the general circumstances and
implementation, giving due regard to forecast for the sector in which the
debtor is operating supports the
the interests of secured creditors; (c) the likelihood that the debtor's
material financial commitments to business will revive;
support the rehabilitation plan; (d) the c) the debtor has taken concrete steps to
means for the execution of improve its operating efficiency;
the rehabilitation plan, which may include
d) the debtor has obtained legally
conversion of the debts or any portion binding investment commitments
from parties contingent on the
thereof to equity, restructuring of the
approval of a rehabilitation plan;
debts, dacion en pago, or sale of assets
or of the controlling interest; (e) a e) the debtor has successfully addressed
other factors that would increase
liquidation analysis that estimates the the risk that the debtor's
proportion of the claims that the rehabilitation plan would fail;
creditors and shareholders would f) the majority of the secured and
receive if the debtor's properties were unsecured creditors have expressly
demonstrated a preference that the
liquidated; and (f) such other relevant
debtor be rehabilitated rather than
information to enable a reasonable liquidated and are willing to
investor to make an informed decision compromise on their claims to
reach that result;
on the feasibility of the
rehabilitation plan. g) the debtor's shareholders have
expressed a willingness to dilute
A successful rehabilitation usually depends on two their equity in connection with a
debt equity swap.[25]
factors: (1) a positive change in the business fortunes of the

debtor, and (2) the willingness of the creditors and shareholders

to arrive at a compromise agreement on repayment burdens,
extent of dilution, etc. The debtor must demonstrate by
convincing and compelling evidence that these circumstances
exist or are likely to exist by the time the debtor submits his
revised or substitute rehabilitation plan for the final approval of
[24]
the court."
Given the high standards that the Rules require, mere
unsupported assertions by the debtor that "the parties are close
to an agreement" or that "business is expected to pick up in the
next several quarters" are not sufficient. Circumstances that
might demonstrate in a convincing and compelling manner that
Both the SEC and the CA had reasonable basis in
deciding to terminate the rehabilitation proceedings of SJTC
because of the lack of certainty that the logging ban would, in
fact, be lifted. It is clear from the records that the proposed
rehabilitation plan of the petitioners would depend entirely on
the lifting of the logging ban either by the lifting of the
moratorium on logging activities in Samar issued by the DENR,
or by the enactment of a law on selective logging. Such lifting of
the logging ban is indispensable to the rehabilitation of SJTC. If
it would not be lifted, the company would have no source of
income or revenues and no investor or creditor would come in to

lend a hand in its resuscitation.

38
 At the time of the promulgation of the CA decision, between P5,000.00 and P6,000.00 in 2004,[31] there is no doubt

there was no certainty that the moratorium on logging activities that the price has again risen.

in Samar would be lifted or a law on selective logging was The Court is not unaware of the issuance of Executive

forthcoming. There being no assurance, the CA was correct in Order (E.O.) No. 23 on February 1, 2011. E.O. No. 23 declares a

sustaining the decision of the SEC to terminate the rehabilitation Moratorium on the Cutting and Harvesting of Timber in the

proceedings to protect the interest of all concerned, particularly Natural and Residual Forests and Creates the Anti-Illegal

the investors and the creditors. To have resolved otherwise Logging Task Force that will enforce the moratorium. It aims

would have been prejudicial to these entities as they would be mainly at the promotion of intergeneration responsibility to

made to wait indefinitely for something the likelihood of which protect the environment. As pronounced in the DENR website,

was quite remote. however, it does not impose a total log ban in the country. What

On August 15, 2005, however, an event supervened. is being protected by the executive order is simply the

With the lifting of the logging moratorium in Samar, an natural forests and residual forests. [32] Section 2 thereof provides

indispensable element for the possible rehabilitation of SJTC has for a moratorium on the cutting and harvesting of timber in the

been made a reality. Considering the extension granted by the natural and residual forests of the entire country. Timber

DENR, the TLA of SJTC will expire on 2021, or nine (9) years companies, such as petitioner SJTC, may still be allowed to cut

from now. It appears from the proposed Adjusted Rehabilitation trees subject to the provisions thereof.

Plan,[26] that SJTC would only need a period of 24 months from Thus, SJTCs rehabilitation appears highly feasible and

the lifting of the logging moratorium within which to liquidate the proceedings thereon should be revived. It should, therefore,

all of its liabilities, except those of its affiliates. be given an opportunity to be heard by the SEC to determine if it

The petitioners have claimed that as of December 31, could maintain its corporate existence. For said reason, the case

1988, the concessions virgin forest cover was 37,800 hectares, should be remanded to the SEC so that it could factor in the

with commercial timber estimated at 2.25 million cubic meters. aforecited figures and claims of SJTC and assess whether or not
[27]
Since the logging operations of SJTC had been stopped in SJTC could still recover. It appears from the figures that SJTC

1989, the petitioners believe that the quantity of commercial can generate sufficient income to pay all its obligations to all its

timber has grown considerably. Thus, there is more than creditors except, as the petitioners pledged, its corporate
sufficient quantity of commercial timber to pay the obligations affiliates who allegedly represent more than 66% of the

of SJTC to the creditors and to realize a reasonable return of liabilities.

investment. WHEREFORE, the September 22, 2003 Decision of

The Court is of the considered view that SJTC should the Court of Appeals and its January 29, 2004 Resolution

be given a second chance to recover and pay off its are REVERSED and SET ASIDE. The case is

creditors. The only practical way of doing it is to resume the hereby REMANDED to the SEC for further evaluation and

rehabilitation of SJTC which estimated its first year production appropriate action.

upon resumption of operations at 29,000 cubic meters.

[28]
Thereafter, production is projected to rise to 60,000 cubic SO ORDERED.

meters per year.[29] If the estimated selling price per cubic meter
Advent Capital and Finance Corporation v. Alcantara Jan
as of December 31, 1991 was P3,500.00[30] and 25, 2012

39
This case is about the validity of a rehabilitation courts order these in trust for the Alcantaras, the trustors-beneficiaries. For

that compelled a third party, in possession of money allegedly this reason, Atty. Concepcion had no right to compel the

belonging to the debtor of a company under rehabilitation, to delivery of the dividends to him as receiver. The Alcantaras

deliver such money to its court-appointed receiver over the concluded that, under the circumstances, the rehabilitation court

debtors objection. had no jurisdiction over the subject dividends.

On February 5, 2007 the rehabilitation court granted

The Facts and the Case Atty. Concepcions motion.[9] It held that, under Rule 59, Section

On July 16, 2001 petitioner Advent Capital and 6 of the Rules of Court, a receiver has the duty to immediately

Finance Corporation (Advent Capital) filed a petition for take possession of all of the corporations assets and administer
[1]
rehabilitation with the Regional Trial Court (RTC) the same for the benefit of corporate creditors. He has the duty

of Makati City.[2]Subsequently, the RTC named Atty. Danilo L. to collect debts owing to the corporation, which debts form part
[3]
Concepcion as rehabilitation receiver. Upon audit of Advent of its assets. Complying with the rehabilitation courts order and

Capitals books, Atty. Concepcion found that respondents Atty. Concepcions demand letter, Belson turned over the subject

Nicasio and Editha Alcantara (collectively, the Alcantaras) owed dividends to him.

Advent Capital P27,398,026.59, representing trust fees that it Meanwhile, the Alcantaras filed a special civil action
[4]
supposedly earned for managing their several trust accounts. of certiorari before the Court of Appeals (CA), seeking to annul

Prompted by this finding, Atty. Concepcion requested the rehabilitation courts order. On January 30, 2008 the CA

Belson Securities, Inc. (Belson) to deliver to him, as Advent rendered a decision,[10] granting the petition and directing Atty.

Capitals rehabilitation receiver, the P7,635,597.50 in cash Concepcion to account for the dividends and deliver them to the

dividends that Belson held under the Alcantaras Trust Account Alcantaras. The CA ruled that the Alcantaras owned those

95-013. Atty. Concepcion claimed that the dividends, as trust dividends. They did not form part of Advent Capitals assets as

fees, formed part of Advent Capitals assets. Belson refused, contemplated under the Interim Rules of Procedure on Corporate

however, citing the Alcantaras objections as well as the absence Rehabilitation (Interim Rules).
[5]
of an appropriate order from the rehabilitation court. The CA pointed out that the rehabilitation proceedings

Thus, Atty. Concepcion filed a motion before the in this case referred only to the assets and liabilities of the
rehabilitation court to direct Belson to release the money to company proper, not to those of its Trust Department which held

him. He said that, as rehabilitation receiver, he had the duty to assets belonging to other people. Moreover, even if the Trust

take custody and control of Advent Capitals assets, such as the Agreement provided that Advent Capital, as trustee, shall have

sum of money that Belson held on behalf of Advent Capitals first lien on the Alcantaras financial portfolio for the payment of
[6]
Trust Department. its trust fees, the cash dividends in Belsons care cannot be

The Alcantaras made a special appearance before the summarily applied to the payment of such charges. To enforce
[7]
rehabilitation court to oppose Atty. Concepcions motion. They its lien, Advent Capital has to file a collection suit.The

claimed that the money in the trust account belonged to them rehabilitation court cannot simply enforce the latters claim by
[8]
under their Trust Agreement with Advent Capital. The latter, ordering Belson to deliver the money to it.[11]

they said, could not claim any right or interest in the dividends

generated by their investments since Advent Capital merely held

40
 The CA denied Atty. Concepcion and Advent Capitals But the problem is that the trust fees that Advent
[12]
motion for reconsideration, prompting the filing of the present Capitals receiver was claiming were for past quarters. Based on

petition for review under Rule 45. the stipulation, these should have been deducted as they became

due. As it happened, at the time Advent Capital made its move

The Issue Presented to collect its supposed management fees, it neither had

The sole issue in this case is whether or not the cash possession nor control of the money it wanted to apply to its

dividends held by Belson and claimed by both the Alcantaras claim. Belson, a third party, held the money in the Alcantaras

and Advent Capital constitute corporate assets of the latter that names. Whether it should deliver the same to Advent Capital or

the rehabilitation court may, upon motion, require to be to the Alcantaras is not clear. What is clear is that the issue as to

conveyed to the rehabilitation receiver for his disposition. who should get the same has been seriously contested.

The practice in the case of banks is that they

Ruling of the Court automatically collect their management fees from the funds that

Advent Capital asserts that the cash dividends in their clients entrust to them for investment or lending to

Belsons possession formed part of its assets based on paragraph others. But the banks can freely do this since it holds or has

9 of its Trust Agreement with the Alcantaras, which states: control of their clients money and since their trust agreement

authorized the automatic collection. If the depositor contests the

9. Trust Fee: Other Expenses As
compensation for its services hereunder, deduction, his remedy is to bring an action to recover the
the TRUSTEE shall be entitled to a trust
amount he claims to have been illegally deducted from his
or management fee of 1 (one) % per
annum based on the quarterly average account.
market value of the Portfolio or a
minimum annual fee of P5,000.00, Here, Advent Capital does not allege that Belson had
whichever is higher. The said trust or
management fee shall automatically be already deducted the management fees owing to it from the
deducted from the Portfolio at the end of Alcantaras portfolio at the end of each calendar quarter. Had this
each calendar quarter. The TRUSTEE
shall likewise be reimbursed for all been done, it may be said that the money in Belsons possession
reasonable and necessary expenses
incurred by it in the discharge of its would technically be that of Advent Capital. Belson would be
powers and duties under this Agreement,
and in all cases, the TRUSTEE shall have holding such amount in trust for the latter. And it would be for
a first lien on the Portfolio for the the Alcantaras to institute an action in the proper court against
payment of the trust fees and other
reimbursable expenses. Advent Capital and Belson for misuse of its funds.

But the above did not happen. Advent Capital did not
According to Advent Capital, it could automatically
exercise its right to cause the automatic deduction at the end of
deduct its management fees from the Alcantaras portfolio that
every quarter of its supposed management fee when it had full
they entrusted to it. Paragraph 9 of the Trust Agreement provides
control of the dividends. That was its fault. For their part, the
that Advent Capital could automatically deduct its trust fees
Alcantaras had the right to presume that Advent Capital had
from the Alcantaras portfolio, at the end of each calendar
deducted its fees in the manner stated in the contract. The
quarter, with the corresponding duty to submit to the Alcantaras
burden of proving that the fees were not in fact collected lies
a quarterly accounting report within 20 days after.[13]
with Advent Capital.

41
 Further, Advent Capital or its rehabilitation receiver money belonging to the Alcantaras but in the possession of a

cannot unilaterally decide to apply the entire amount of cash third party.

dividends retroactively to cover the accumulated trust Rehabilitation proceedings are summary and non-

fees. Advent Capital merely managed in trust for the benefit of adversarial in nature, and do not contemplate adjudication of

the Alcantaras the latters portfolio, which under Paragraph claims that must be threshed out in ordinary court
[14]
2 of the Trust Agreement, includes not only the principal but proceedings. Adversarial proceedings similar to that in ordinary

also its income or proceeds. The trust property is only courts are inconsistent with the commercial nature of a

fictitiously attributed by law to the trustee to the extent that the rehabilitation case. The latter must be resolved quickly and

rights and powers vested in a nominal owner shall be used by expeditiously for the sake of the corporate debtor, its creditors
[15]
him on behalf of the real owner. and other interested parties. Thus, the Interim Rules incorporate

The real owner of the trust property is the trustor- the concept of prohibited pleadings, affidavit evidence in lieu of

beneficiary. In this case, the trustors-beneficiaries are the oral testimony, clarificatory hearings instead of the traditional

Alcantaras. Thus, Advent Capital could not dispose of the approach of receiving evidence, and the grant of authority to the

Alcantaras portfolio on its own. The income and principal of the court to decide the case, or any incident, on the basis of

portfolio could only be withdrawn upon the Alcantaras written affidavits and documentary evidence.[18]

instruction or order to Advent Capital. [16] The latter could not Here, Advent Capitals claim is disputed and requires a

also assign or encumber the portfolio or its income without the full trial on the merits. It must be resolved in a separate action
[17]
written consent of the Alcantaras. All these are stipulated in where the Alcantaras claim and defenses may also be presented

the Trust Agreement. and heard. Advent Capital cannot say that the filing of a separate

Ultimately, the issue is what court has jurisdiction to action would defeat the purpose of corporate rehabilitation. In

hear and adjudicate the conflicting claims of the parties over the the first place, the Interim Rules do not exempt a company under

dividends that Belson held in trust for their owners.Certainly, rehabilitation from availing of proper legal procedure for

not the rehabilitation court which has not been given the power collecting debt that may be due it. Secondly, Court records show

to resolve ownership disputes between Advent Capital and third that Advent Capital had in fact sought to recover one of its assets

parties. Neither Belson nor the Alcantaras are its debtors or by filing a separate action for replevin involving a car that was
creditors with interest in the rehabilitation. registered in its name.[19]

Advent Capital must file a separate action for

collection to recover the trust fees that it allegedly earned and, WHEREFORE, the petition is DENIED for lack of merit and

with the trial courts authorization if warranted, put the money in the assailed decision and resolution of the Court of Appeals in

escrow for payment to whoever it rightly belongs. Having failed CA-G.R. SP 98692 are AFFIRMED, without prejudice to any

to collect the trust fees at the end of each calendar quarter as action that petitioner Advent Capital and Finance Corp. or its

stated in the contract, all it had against the Alcantaras was a rehabilitation receiver might institute regarding the trust fees

claim for payment which is a proper subject for an ordinary subject of this case.

action for collection. It cannot enforce its money claim by SO ORDERED.

simply filing a motion in the rehabilitation case for delivery of

Advent Capital and Finance Corporation v. Young Aug 3,
2011

42
 The Case
This petition for review1 assails the 28 December 2007
Decision2 and 15 May 2008 Resolution3of the Court of Appeals
in CA-G.R. SP No. 96266. The Court of Appeals set aside the 24
March 2006 and 5 July 2006 Orders4 of the Regional Trial Court
of Makati City, Branch 147, and directed petitioner Advent
Capital and Finance Corporation to return the seized vehicle to
respondent Roland Young. The Court of Appeals denied the
motion for reconsideration.
The Antecedents
The present controversy stemmed from a replevin suit instituted
by petitioner Advent Capital and Finance Corporation (Advent)
against respondent Roland Young (Young) to recover the
possession of a 1996 Mercedes Benz E230 with plate number
UMN-168, which is registered in Advents name.5
Prior to the replevin case, or on 16 July 2001, Advent filed for
corporate rehabilitation with the Regional Trial Court of Makati
City, Branch 142 (rehabilitation court).6
On 27 August 2001, the rehabilitation court issued an Order
(stay order) which states that the enforcement of all claims
whether for money or otherwise, and whether such enforcement
is by court action or otherwise, against the petitioner (Advent),
its guarantors and sureties not solidarily liable with it, is stayed.7
On 5 November 2001, Young filed his Comment to the Petition
for Rehabilitation, claiming, among others, several employee
benefits allegedly due him as Advents former president and
chief executive officer.
On 6 November 2002, the rehabilitation court approved the
rehabilitation plan submitted by Advent. Included in the
inventory of Advents assets was the subject car which remained
in Youngs possession at the time.
Youngs obstinate refusal to return the subject car, after repeated
demands, prompted Advent to file the replevin case on 8 July
2003. The complaint, docketed as Civil Case No. 03-776, was
raffled to the Regional Trial Court of Makati City, Branch 147
(trial court).
After Advents posting of P3,000,000 replevin bond, which was
double the value of the subject car at the time, through
Stronghold Insurance Company, Incorporated (Stronghold), the
trial court issued a Writ of Seizure8 directing the Sheriff to seize
the subject car from Young. Upon receipt of the Writ of Seizure,
Young turned over the car to Advent,9 which delivered the same
to the rehabilitation receiver.10
Thereafter, Young filed an Answer alleging that as a former
employee of Advent, he had the option to purchase the subject
car at book value pursuant to the company car plan and to offset
the value of the car with the proceeds of his retirement pay and
stock option plan. Young sought the (1) execution of a deed of
sale over the subject car; and (2) determination and payment of
the net amount due him as retirement benefits under the stock
option plan.
Advent filed a Reply with a motion to dismiss Youngs
counterclaim, alleging that the counterclaim did not arise
from or has no logical relationship with the issue of ownership
of the subject car.
After issues have been joined, the parties entered into pre-trial
on 2 April 2004, which resulted in the issuance of a pre-trial
order of even date reciting the facts and the issues to be resolved
during the trial.
On 28 April 2005, the trial court issued an Order dismissing
the replevin case without prejudice for Advents failure to
prosecute. In the same order, the trial court dismissed Youngs
counterclaim against Advent for lack of jurisdiction. The order
pertinently reads:
It appears that as of July 28, 2003, subject motor
vehicle has been turned over to the plaintiff, thru its
authorized representative, and adknowledged by the
parties respective counsels in separate Manifestations
filed. To date, no action had been taken by the plaintiff
in the further prosecution of this case. Accordingly,
this case is ordered dismissed without prejudice on the
ground of failure to prosecute.
Anent plaintiffs Motion to Dismiss defendant Youngs
counterclaim for benefits under the retirement and
stock purchase plan, the Court rules as follows: The
only issue in this case is who is entitled to the
possession of the subject motor vehicle. This issue
may have a connection, but not a necessary connection
with defendants rights under the retirement plan and
stock purchase plan as to be considered a compulsory
counterclaim.
xxx
Notably, defendants claim is basically one for benefits
under and by virtue of his employment with the
plaintiff, and the subject vehicle is merely an incident
in that claim. Said claim is properly ventilated, as it is
resolvable by, the Rehabilitation Court which has
jurisdiction and has acquired jurisdiction, to the
exclusion of this Court. Accordingly, plaintiffs
Motion To Dismiss defendant Youngs counterclaim is
granted.11
On 10 June 2005, Young filed a motion for partial
reconsideration of the dismissal order with respect to his
counterclaim.
On 8 July 2005, Young filed an omnibus motion, praying that
Advent return the subject car and pay him P1.2 million in
damages (f)or the improper and irregular seizure of the subject
car, to be charged against the replevin bond posted by Advent
through Stronghold.
43
On 24 March 2006, the trial court issued an Order denying
Youngs motion for partial reconsideration, viz:
In the instant case, defendant, in his counterclaim
anchored her [sic] right of possession to the subject
vehicle on his alleged right to purchase the same under
the company car plan. However, considering that the
Court has already declared that it no longer has
jurisdiction to try defendants counterclaim as it is now
part of the rehabilitation proceedings before the
corporate court concerned, the assertions in the
Motion for Reconsiderations (sic) will no longer stand.
On the other hand, the plaintiff did not file a Motion
for Reconsideration of the same Order, dismissing the
complaint for failure to prosecute, within
the reglementary period. Hence, the same has attained
finality.
Defendant alleged that the dismissal of the case
resulted in the dissolution of the writ. Nonetheless, the
Court deems it proper to suspend the resolution of the
return of the subject vehicle. In this case, the subject
vehicle was turned over to plaintiff by virtue of a writ
of replevin validly issued, the latter having sufficiently
shown that it is the absolute/registered owner thereof.
This was not denied by the defendant. Plaintiffs
ownership includes its right of possession. The case
has been dismissed without a decision on the merits
having been rendered. Thus, to order the return of the
vehicle to one who is yet to prove his right of
possession would not be proper.
Accordingly, the Motion for Partial Reconsideration is
denied.12
On 8 June 2006, Young filed a motion to resolve his omnibus
motion.
In an Order dated 5 July 2006, the trial court denied the motion
to resolve, to wit:
In the instant case, the Court suspended the resolution
of the return of the vehicle to defendant Roland
Young. It should be noted that the writ of replevin was
validly issued in favor of the plaintiff and that it has
sufficiently established ownership over the subject
vehicle which includes its right to possess. On the
other hand, the case (Olympia International vs. Court
of Appeals) cited by defendant finds no application to
this case, inasmuch as in the former the Court has not
rendered judgment affirming plaintiffs (Olympia) right
of possession on the property seized. Moreover, the
Court, in the Order dated April 28, 2005, has already
denied defendants counterclaim upon which he based
his right of possession on the ground of lack of
jurisdiction. Accordingly, the Court reiterates its
previous ruling that to order the return of the subject
vehicle to defendant Young, who is yet to prove his
right of possession before the Rehabilitation Court
would not be proper.
WHEREFORE, there being no new and substantial
arguments raised, the Motion to Resolve is denied.13
Young filed a petition for certiorari and mandamus with the
Court of Appeals seeking to annul the trial courts Orders of 24
March 2006 and 5 July 2006.
The Court of Appeals Ruling
In his petition before the Court of Appeals, Young argued mainly
that the trial court committed grave abuse of discretion
amounting to lack or excess of jurisdiction in (1) not directing
the return of the subject vehicle to him; (2) refusing to hold a
hearing to determine the damages to be recovered against
the replevin bond; and (3) dismissing his counterclaim.
The Court of Appeals ruled in favor of Young and annulled the
assailed rulings of the trial court. The Court of Appeals held:
It is noteworthy that the case was dismissed by the
court a quo for failure of Advent to prosecute the
same. Upon dismissal of the case, the writ of seizure
issued as an incident of the main action (for replevin)
became functus officio and should have been recalled
or lifted. Since there was no adjudication on the merits
of the case, the issue of who between Advent and
petitioner has the better right to possess the subject car
was not determined. As such, the parties should be
restored to their status immediately before the
institution of the case.
The Supreme Courts ruling in Olympia International,
Inc. vs. Court of Appeals (supra) squarely applies to
the present controversy, to wit:
Indeed, logic and equity demand that the writ
of replevin be cancelled. Being provisional and
ancillary in character, its existence and efficacy
depended on the outcome of the case. The case having
been dismissed, so must the writs existence and
efficacy be dissolved. To let the writ stand even after
the dismissal of the case would be adjudging Olympia
as the prevailing party, when precisely, no decision on
the merits had been rendered. The case having been
dismissed, it is as if no case was filed at all and the
parties must revert to their status before the litigation.
Indeed, as an eminent commentator on Remedial Law
expounds:
The plaintiff who obtains possession of the personal
property by a writ of replevin does not acquire
absolute title thereto, nor does the defendant acquire
such title by rebonding the property, as they only hold
the property subject to the final judgment in the action.
(I Regalado, Remedial Law Compendium, Eighth
Revised Edition, p. 686)
44
 Reversion of the parties to the status quo ante is the
consequence ex proprio vigore of the dismissal of the
case. Thus, in Laureano vs. Court of Appeals (324
SCRA 414), it was held:
(A)lthough the commencement of a civil action stops
the running of the statute of prescription or limitations,
its dismissal or voluntary abandonment by plaintiff
leaves the parties in exactly the same position as
though no action had been commenced at all.
By the same token, return of the subject car to
petitioner pending rehabilitation of Advent does not
constitute enforcement of claims against it, much more
adjudication on the merits of petitioners counterclaim.
In other words, an order for such return is not a
violation of the stay order, which was issued by the
rehabilitation court on August 27, 2001. x x
Corollarily, petitioners claim against the replevin bond
has no connection at all with the rehabilitation
proceedings. The claim is not against the insolvent
debtor (Advent) but against bondsman, Stronghold.
Such claim is expressly authorized by Sec. 10, Rule
60, in relation to Sec. 20, Rule 57, id., x x x14
The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, premises considered, the instant
petition is PARTLY GRANTED. The orders of the
Regional Trial Court dated March 24, 2006 and July 5,
2006 are ANNULLED and SET ASIDE in so far as
they suspended resolution of petitioners motion for,
and/or disallowed, the return of the subject car to
petitioner. Accordingly, respondent Advent Capital
and Finance Corporation is directed to return the
subject car to petitioner.
The Regional Trial Court of Makati City (Branch 147)
is directed to conduct a hearing on, and determine,
petitioners claim for damages against
the replevin bond posted by Stronghold Insurance Co.
SO ORDERED.15
Advent filed a motion for reconsideration, which was denied by
the Court of Appeals in a Resolution dated 15 May 2008.
The Issue
The main issue in this case is whether the Court of Appeals
committed reversible error in (1) directing the return of the
seized car to Young; and (2) ordering the trial court to set a
hearing for the determination of damages against
the replevin bond.
The Courts Ruling
The petition is partially meritorious.
On returning the seized vehicle to Young
We agree with the Court of Appeals in directing the trial court
to return the seized car to Young since this is the necessary
consequence of the dismissal of the replevin case for failure to
prosecute without prejudice. Upon the dismissal of
the replevin case for failure to prosecute, the writ of seizure,
which is merely ancillary in nature, became functus officio and
should have been lifted. There was no adjudication on the
merits, which means that there was no determination of the issue
who has the better right to possess the subject car. Advent cannot
therefore retain possession of the subject car considering that it
was not adjudged as the prevailing party entitled to the remedy
of replevin.
Contrary to Advents view, Olympia International Inc. v. Court
of Appeals16 applies to this case. The dismissal of
the replevin case for failure to prosecute results in the restoration
of the parties status prior to litigation, as if no complaint was
filed at all. To let the writ of seizure stand after the dismissal of
the complaint would be adjudging Advent as the prevailing
party, when precisely no decision on the merits had been
rendered. Accordingly, the parties must be reverted to
their status quo ante. Since Young possessed the subject car
before the filing of the replevincase, the same must be returned
to him, as if no complaint was filed at all.
Advents contention that returning the subject car to Young
would constitute a violation of the stay order issued by the
rehabilitation court is untenable. As the Court of Appeals
correctly concluded, returning the seized vehicle to Young is not
an enforcement of a claim against Advent which must be
suspended by virtue of the stay order issued by the rehabilitation
court pursuant to Section 6 of the Interim Rules on Corporate
Rehabilitation (Interim Rules).17 The issue in the replevin case is
who has better right to possession of the car, and it was Advent
that claimed a better right in filing the replevin case against
Young. In defense, Young claimed a better right to possession of
the car arising from Advents car plan to its executives, which he
asserts entitles him to offset the value of the car against the
proceeds of his retirement pay and stock option plan.
Young cannot collect a money claim against Advent within the
contemplation of the Interim Rules. The term claim has been
construed to refer to debts or demands of a pecuniary nature, or
the assertion to have money paid by the company under
rehabilitation to its creditors.18 In the replevin case, Young
cannot demand that Advent pay him money because such
payment, even if valid, has been stayed by order of the
rehabilitation court. However, in the replevin case, Young can
raise Advents car plan, coupled with his retirement pay and
stock option plan, as giving him a better right to possession of
the car. To repeat, Young is entitled to recover the subject car as
a necessary consequence of the dismissal of the replevin case for
failure to prosecute without prejudice.
On the damages against the replevin bond
Section 10, Rule 60 of the Rules of Court19 governs claims for
damages on account of improper or irregular seizure
in replevin cases. It provides that in replevin cases, as in
45
receivership and injunction cases, the damages to be awarded
upon the bond shall be claimed, ascertained, and granted in
accordance with Section 20 of Rule 57 which reads:
Sec. 20. Claim for damages on account of improper,
irregular or excessive attachment. - An application for
damages on account of improper, irregular or
excessive attachment must be filed before the trial or
before appeal is perfected or before the judgment
becomes executory, with due notice to the
attaching obligee or his surety or sureties, setting forth
the facts showing his right to damages and the amount
thereof. Such damages may be awarded only after
proper hearing and shall be included in the judgment
on the main case. e
If the judgment of the appellate court be favorable to
the party against whom the attachment was issued, he
must claim damages sustained during the pendency of
the appeal by filing an application in the appellate
court with notice to the party in whose favor the
attachment was issued or his surety or sureties, before
the judgment of the appellate court
becomes executory. The appellate court may allow the
application to be heard and decided by the trial court.
Nothing herein contained shall prevent the party
against whom the attachment was issued from
recovering in the same action the damages awarded to
him from any property of the attaching obligeenot
exempt from execution should the bond or deposit
given by the latter be insufficient or fail to fully satisfy
the award.
The above provision essentially allows the application to be
filed at any time before the judgment becomes executory.20 It
should be filed in the same case that is the main action,21 and
with the court having jurisdiction over the case at the time of the
application.22
In this case, there was no application for damages against
Stronghold resulting from the issuance of the writ of seizure
before the finality of the dismissal of the complaint for failure to
prosecute. It appears that Young filed his omnibus motion
claiming damages against Stronghold after the dismissal order
issued by the trial court on 28 April 2005 had attained finality.
While Young filed a motion for partial reconsideration on 10
June 2005, it only concerned the dismissal of his counterclaim,
without any claim for damages against the replevin bond. It was
only on 8 July 2005 that Young filed an omnibus motion seeking
damages against the replevin bond, after the dismissal order had
already become final for Advents non-appeal of such order. In
fact, in his omnibus motion, Young stressed the finality of the
dismissal order.23 Thus, Young is barred from claiming damages
against the replevin bond.
24
In Jao v. Royal Financing Corporation, the Court held that
defendant therein was precluded from claiming damages against
the surety bond since defendant failed to file the application for
damages before the termination of the case, thus:
The dismissal of the case filed by the plaintiffs-
appellees on July 11, 1959, had become final
and executory before the defendant-
appellee corporation filed its motion for judgment on
the bond on September 7, 1959. In the order of the
trial court, dismissing the complaint, there appears no
pronouncement whatsoever against the surety bond.
The appellee-corporation failed to file its proper
application for damages prior to the termination of the
case against it. It is barred to do so now. The
prevailing party, if such would be the proper term for
the appellee-corporation, having failed to file its
application for damages against the bond prior to the
entry of final judgment, the bondsman-appellant is
relieved of further liability thereunder.
Since Young is time-barred from claiming damages against
the replevin bond, the dismissal order having attained finality
after the application for damages, the Court of Appeals erred in
ordering the trial court to set a hearing for the determination of
damages against the replevin bond.
WHEREFORE, the Court GRANTS the petition IN PART.
The Court SETS ASIDE the portion in the assailed decision of
the Court of Appeals in CA-G.R. SP No. 96266 ordering the trial
court to set a hearing for the determination of damages against
the replevin bond.
SO ORDERED.
Umale v. ASB Realty Corporation June 15, 2011
Being placed under corporate rehabilitation and having a receiver
appointed to carry out the rehabilitation plan do not ipso facto deprive a
corporation and its corporate officers of the power to recover its
unlawfully detained property.
Petitioners filed this Petition for Review on Certiorari[1] assailing the
October 15, 2007 Decision[2]of the Court of Appeals (CA) in CA-G.R.
SP No. 91096, as well as its January 2, 2008 Resolution. [3] The
dispositive portion of the assailed Decision reads:
WHEREFORE, the Decision dated March 28,
2005 of the trial court is affirmed in toto.
SO ORDERED.[4]
Factual Antecedents
This case involves a parcel of land identified as Lot 7, Block 5,
Amethyst Street, Ortigas Center, Pasig City which was originally owned
46
by Amethyst Pearl Corporation (Amethyst Pearl), a company that is, in Umale admitted occupying the property since 1999 by virtue of a verbal

turn, wholly-owned by respondent ASB Realty Corporation (ASB lease contract but vehemently denied that ASB Realty was his lessor. He

Realty). was adamant that his lessor was the original owner, Amethyst

Pearl. Since there was no contract between himself and ASB Realty, the

In 1996, Amethyst Pearl executed a Deed of Assignment in Liquidation latter had no cause of action to file the unlawful detainer complaint

of the subject premises in favor of ASB Realty in consideration of the against him.

full redemption of Amethyst Pearls outstanding capital stock from ASB

Realty.[5] Thus, ASB Realty became the owner of the subject premises In asserting his right to remain on the property based on the oral lease

and obtained in its name Transfer Certificate of Title No. PT-105797, contract with Amethyst Pearl, Umale interposed that the lease period
[6]
which was registered in 1997 with the Registry of Deeds of Pasig agreed upon was for a long period of time.[11] He then allegedly

City. paid P1.2 million in 1999 as one year advance rentals to Amethyst

Pearl.[12]

Sometime in 2003, ASB Realty commenced an action in the Umale further claimed that when his oral lease contract with Amethyst
[7]
Metropolitan Trial Court (MTC) of Pasig City for unlawful detainer of Pearl ended in May 2000, they both agreed on an oral contract to sell.

the subject premises against petitioner Leonardo S. Umale They agreed that Umale did not have to pay rentals until the sale over
[8]
(Umale). ASB Realty alleged that it entered into a lease contract with the subject property had been perfected between them.[13] Despite such

Umale for the period June 1, 1999-May 31, 2000. Their agreement was agreement with Amethyst Pearl regarding the waiver of rent payments,

for Umale to conduct a pay-parking business on the property and pay a Umale maintained that he continued paying the annual rent of P1.2

monthly rent of P60,720.00 to ASB Realty. million. He was thus surprised when he received the Notice of

Termination of Lease from ASB Realty.[14]

Upon the contracts expiration on May 31, 2000, Umale continued

occupying the premises and paying rentals albeit at an increased Umale also challenged ASB Realtys personality to recover the subject

monthly rent of P100,000.00. The last rental payment made by Umale premises considering that ASB Realty had been placed under

to ASB Realty was for the June 2001 to May 2002 period, as evidenced receivership by the Securities and Exchange Commission (SEC) and a

by the Official Receipt No. 56511[9] dated November 19, 2001. rehabilitation receiver had been duly appointed. Under Section 14(s),
Rule 4 of the Administrative Memorandum No. 00-8-10SC, otherwise

known as the Interim Rules of Procedure on Corporate Rehabilitation

On June 23, 2003, ASB Realty served on Umale a Notice of
(Interim Rules), it is the rehabilitation receiver that has the power to take
[10]
Termination of Lease and Demand to Vacate and Pay. ASB Realty
possession, control and custody of the debtors assets. Since ASB Realty
stated that it was terminating the lease effective midnight of June 30,
claims that it owns the subject premises, it is its duly-appointed receiver
2003; that Umale should vacate the premises, and pay to ASB Realty
that should sue to recover possession of the same.[15]
the rental arrears amounting to P1.3 million by July 15, 2003. Umale

failed to comply with ASB Realtys demands and continued in

ASB Realty replied that it was impossible for Umale to have entered
possession of the subject premises, even constructing commercial
into a Contract of Lease with Amethyst Pearl in 1999 because Amethyst
establishments thereon.
Pearl had been liquidated in 1996. ASB Realty insisted that, as

evidenced by the written lease contract, Umale contracted with ASB

47
Realty, not with Amethyst Pearl. As further proof thereof, ASB Realty was aware that his lessor, the one entitled to receive his rent payments,

cited the official receipt evidencing the rent payments made by Umale to was ASB Realty, not Amethyst Pearl.

ASB Realty.

ASB Realtys positive assertions, supported as they are by credible

Ruling of the Metropolitan Trial Court evidence, are more compelling than Umales bare negative

assertions. The RTC found Umales version of the facts incredible. It was

In its August 20, 2004 Decision,[16] the MTC dismissed ASB Realtys implausible that a businessman such as Umale would enter into several

complaint against Umale without prejudice. It held that ASB Realty had transactions with his alleged lessor a lease contract, payment of lease

no cause to seek Umales ouster from the subject property because it was rentals, acceptance of an offer to sell from his alleged lessor, and an

not Umales lessor. The trial court noted an inconsistency in the written agreement to waive rentals sans a sliver of evidence.

lease contract that was presented by ASB Realty as basis for its

complaint. Its whereas clauses cited ASB Realty, with Eden C. Lin as its With the lease contract between Umale and ASB Realty duly

representative, as Umales lessor; but its signatory page contained Eden established and Umales failure to pay the monthly rentals since June

C. Lins name under the heading Amethyst Pearl. The MTC then 2002 despite due demands from ASB Realty, the latter had the right to

concluded from such inconsistency that Amethyst Pearl was the real terminate the lease contract and seek his eviction from the leased
[17]
lessor, who can seek Umales ejectment from the subject property. premises. Thus, when the contract expired on June 30, 2003 (as stated in

the Notice of Termination of Lease), Umale lost his right to remain on

Likewise, the MTC agreed with Umale that only the rehabilitation the premises and his continued refusal to vacate the same constituted

receiver could file suit to recover ASB Realtys property.[18] Having been sufficient cause of action for his ejectment.[21]

placed under receivership, ASB Realty had no more personality to file

the complaint for unlawful detainer. With respect to ASB Realtys personality to file the unlawful detainer

suit, the RTC ruled that ASB Realty retained all its corporate powers,

Ruling of the Regional Trial Court including the power to sue, despite the appointment of a rehabilitation

receiver. Citing the Interim Rules, the RTC noted that the rehabilitation

ASB Realty appealed the adverse MTC Decision to the Regional Trial receiver was not granted therein the power to file complaints on behalf
[19] [20]
Court (RTC), which then reversed the MTC ruling. of the corporation.[22]

The RTC held that the MTC erred in dismissing ASB Realtys complaint Moreover, the retention of its corporate powers by the corporation under

for lack of cause of action.It found sufficient evidence to support the rehabilitation will advance the objective of corporate rehabilitation,

conclusion that it was indeed ASB Realty that entered into a lease which is to conserve and administer the assets of the corporation in the

contract with Umale, hence, the proper party who can assert the hope that it may eventually be able to go from financial distress to

corresponding right to seek Umales ouster from the leased premises for solvency. The suit filed by ASB Realty to recover its property and back

violations of the lease terms. In addition to the written lease contract, the rentals from Umale could only benefit ASB Realty.[23]

official receipt evidencing Umales rental payments for the period June

2001 to May 2002 to ASB Realty adequately established that Umale The dispositive portion of the RTC Decision reads as follows:

48
 WHEREFORE, premises considered, the
appealed decision is hereby reversed and set
aside.Accordingly, judgment is hereby rendered
Ruling of the Court of Appeals
in favor of the plaintiff-appellant ordering
defendant-appellee and all persons claiming rights
under him:
The CA affirmed the RTC Decision in toto.[33]
1) To immediately vacate the subject leased
premises located at Lot 7, Block 5, Amethyst St.,
Pearl Drive, Ortigas Center, Pasig City and According to the appellate court, ASB Realty fully discharged its burden
deliver possession thereof to the plaintiff-
appellant; to prove the existence of a lease contract between ASB Realty and

2) To pay plaintiff-appellant the sum Umale,[34] as well as the grounds for eviction.[35] The veracity of the
of P1,300,000.00 representing rentals in arrears
from June 2002 to June 2003; terms of the lease contract presented by ASB Realty was further

bolstered, instead of demolished, by Umales admission that he paid

3) To pay plaintiff-appellant the amount
of P100,000.00 a month starting from July 2003 monthly rents in accordance therewith.[36]
and every month thereafter until they finally
vacate the subject premises as reasonable
compensation for the continued use and
The CA found no merit in Umales claim that in light of Article 1687 of
occupancy of the same;
the Civil Code the lease should be extended until the end of the year.
4) To pay plaintiff-appellant the sum
of P200,000.00 as and by way of attorneys fees; The said provision stated that in cases where the lease period was not
and the costs of suit.
fixed by the parties, the lease period depended on the payment
[24]
SO ORDERED. periods. In the case at bar, the rent payments were made on a monthly

basis, not annually; thus, Umales failure to pay the monthly rent gave
[25]
Umale filed a Motion for Reconsideration while ASB Realty moved ASB Realty the corresponding right to terminate the lease at the end of
for the issuance of a writ of execution pursuant to Section 21 of the 1991 the month.[37]
Revised Rules on Summary Procedure.[26]

The CA then upheld ASB Realtys, as well as its corporate officers,

In its July 26, 2005 Order, the RTC denied reconsideration of its
Decision and granted ASB Realtys Motion for Issuance of a Writ of
[27]
Execution.
Umale then filed his appeal[28] with the CA insisting that the parties did
personality to recover an unlawfully withheld corporate property. As
expressly stated in Section 14 of Rule 4 of the Interim Rules, the
rehabilitation receiver does not take over the functions of the corporate
officers.[38]

not enter into a lease contract.[29] Assuming that there was a lease, it was Petitioners filed a Motion for Reconsideration,
at most an implied lease. Hence its period depended on the rent [39]
which was denied in the
payments. Since Umale paid rent annually, ASB Realty had to respect

his lease for the entire year. It cannot terminate the lease at the end of the assailed January 2, 2008 Resolution.[40]
month, as it did in its Notice of Termination of Lease.[30] Lastly, Umale

insisted that it was the rehabilitation receiver, not ASB Realty, that was Issues
[31]
the real party-in-interest.

The petitioners raise the following issues for resolution:[41]

Pending the resolution thereof, Umale died and was substituted by his

widow and legal heirs, per CA Resolution dated August 14, 2006.[32]
49
1. Can a corporate officer of ASB Realty (duly authorized by the Board
of Directors) file suit to recover an unlawfully detained corporate applicable to the instant case, do not include among the receivers powers
property despite the fact that the corporation had already been placed
the exclusive right to file suits for the corporation.[50]
under rehabilitation?

2. Whether a contract of lease exists between ASB Realty and Umale;

and The Court resolves the issue in favor of ASB Realty and its officers.

3. Whether Umale is entitled to avail of the lease periods provided in

Article 1687 of the Civil Code. There is no denying that ASB Realty, as the owner of the leased

premises, is the real party-in-interest in the unlawful detainer suit.

Our Ruling
[51]
Real party-in-interest is defined as the party who stands to be

benefited or injured by the judgment in the suit, or the party entitled to

Petitioners ask for the dismissal of the complaint for unlawful detainer
the avails of the suit.[52]
on the ground that it was not brought by the real party-in-interest.
[42]
Petitioners maintain that the appointment of a rehabilitation receiver
What petitioners argue is that the corporate officer of ASB Realty is
for ASB Realty deprived its corporate officers of the power to recover
incapacitated to file this suit to recover a corporate property because
corporate property and transferred such power to the rehabilitation
ASB Realty has a duly-appointed rehabilitation receiver.Allegedly, this
receiver. Section 6, Rule 59 of the Rules of Court states that a receiver
rehabilitation receiver is the only one that can file the instant suit.
has the power to bring actions in his own name and to collect debts due

to the corporation. Under Presidential Decree (PD) No. 902-A and the
Corporations, such as ASB Realty, are juridical entities that exist by
Interim Rules, the rehabilitation receiver has the power to take custody
operation of law.[53] As a creature of law, the powers and attributes of a
and control of the assets of the corporation. Since the receiver for ASB
corporation are those set out, expressly or impliedly, in the law. Among
Realty did not file the complaint for unlawful detainer, the trial court did
the general powers granted by law to a corporation is the power to sue in
not acquire jurisdiction over the subject property.[43]
its own name.[54] This power is granted to a duly-organized corporation,

unless specifically revoked by another law. The question becomes: Do

Petitioners cite Villanueva v. Court of Appeals,[44] Yam v. Court of
the laws on corporate rehabilitation particularly PD 902-A, as amended,
Appeals,[45] and Abacus Real Estate Development Center, Inc. v. The
[55]
and its corresponding rules of procedure forfeit the power to sue from
Manila Banking Corporation,[46] as authorities for the rule that the
the corporate officers and Board of Directors?
appointment of a receiver suspends the authority of the corporation and

its officers over its property and effects.[47]

ASB Realty counters that there is no provision in PD 902-A, the Interim
Rules, or in Rule 59 of the Rules of Court that divests corporate officers
of their power to sue upon the appointment of a rehabilitation receiver.
[48]
In fact, Section 14 , Rule 4 of the Interim Rules expressly limits the
receivers power by providing that the rehabilitation receiver does not
take over the management and control of the corporation but shall
[49]
closely oversee and monitor the operations of the debtor. Further, the
SEC Rules of Procedure on Corporate Recovery (SEC Rules), the rules
Corporate rehabilitation is defined as the restoration of 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 than if it is
immediately liquidated.[56] It was first introduced in the Philippine legal
system through PD 902-A, as amended.[57] The intention of the law is to
effect a feasible and viable rehabilitation by preserving a floundering

business as a goingconcern, because the assets of a business are often

50
more valuable when so maintained than they would be when liquidated.
[58]
This concept of preserving the corporations business as a going

concern while it is undergoing rehabilitation is called debtor-in- Indeed, PD 902-A, as amended, provides that the receiver shall have the

possession or debtor-in-place. This means that the debtor corporation powers enumerated under Rule 59 of the Rules of Court. But Rule 59 is

(the corporation undergoing rehabilitation), through its Board of a rule of general application. It applies to different kinds of receivers

Directors and corporate officers, remains in control of its business and rehabilitation receivers, receivers of entities under management,

properties, subject only to the monitoring of the appointed rehabilitation ordinary receivers, receivers in liquidation and for different kinds of

receiver.[59] The concept of debtor-in-possession, is carried out more situations. While the SEC has the discretion[65] to authorize the

particularly in the SEC Rules, the rule that is relevant to the instant case. rehabilitation receiver, as the case may warrant, to exercise the powers in

[60]
It states therein that the interim rehabilitation receiver of the debtor Rule 59, the SECs exercise of such discretion cannot simply be

corporation does not take over the control and management of the assumed. There is no allegation whatsoever in this case that the SEC

debtor corporation.[61] Likewise, the rehabilitation receiver that will gave ASB Realtys rehabilitation receiver the exclusive right to sue.

replace the interim receiver is tasked only to monitor the successful

Petitioners cite Villanueva,[66] Yam,[67] and Abacus Real Estate[68] as
implementation of the rehabilitation plan.[62] There is nothing in the
authorities for their theory that the corporate officers of a corporation
concept of corporate rehabilitation that would ipso facto deprive[63] the
under rehabilitation is incapacitated to act. In Villanueva,[69] the
Board of Directors and corporate officers of a debtor corporation, such
Court nullified the sale contract entered into by the Philippine Veterans
as ASB Realty, of control such that it can no longer enforce its right to
Bank on the ground that the banks insolvency restricted its capacity to
recover its property from an errant lessee.
act. Yam,[70] on the other hand, nullified the compromise agreement that

Manphil Investment Corporation entered into while it was under

receivership by the Central Bank. In Abacus Real Estate,[71] it was held

To be sure, corporate rehabilitation imposes several restrictions on the that Manila Banks president had no authority to execute an option to

debtor corporation. The rules enumerate the prohibited corporate actions purchase contract while the bank was under liquidation.
[64]
and transactions (most of which involve some kind of disposition or

encumbrance of the corporations assets) during the pendency of the These jurisprudence are inapplicable to the case at bar because they
rehabilitation proceedings but none of which touch on the debtor involve

corporations right to sue. The implication therefore is that our concept of banking and financial institutions that are governed by different laws.
[72]
rehabilitation does not restrict this particular power, save for the caveat In the cited cases, the applicable banking law was Section 29[73] of the

that all its actions are monitored closely by the receiver, who can seek an Central Bank Act.[74] In stark contrast to rehabilitation where the

annulment of any prohibited or anomalous transaction or agreement corporation retains control and management of its affairs, Section 29 of

entered into by the officers of the debtor corporation. the Central Bank Act, as amended, expressly forbids the bank or the

quasi-bank from doing business in the Philippines.

Moreover, the nullified transactions in the cited cases

involve dispositions of assets and claims, which are prohibited

Petitioners insist that the rehabilitation receiver has the power to bring
transactions even for corporate rehabilitation[75] because these may be
and defend actions in his own name as this power is provided in Section
prejudicial to creditors and contrary to the rehabilitation plan. The
6 of Rule 59 of the Rules of Court.

51
instant case, however, involves the recovery of assets and collection of happenstance especially when weighed against Umales incredible

receivables, for which there is no prohibition in PD 902-A. version of the facts that he entered into a verbal lease contract with

Amethyst Pearl; that the term of the lease is for a very long period of

While the Court rules that ASB Realty and its corporate officers retain time; that Amethyst Pearl offered to sell the leased premises and Umale

their power to sue to recover its property and the back rentals from had accepted the offer, with both parties not demanding any written

Umale, the necessity of keeping the receiver apprised of the proceedings documentation of the transaction and without any mention of the

and its results is not lost upon this Court. Tasked to closely monitor the purchase price; and that finally, Amethyst Pearl agreed that Umale need

assets of ASB Realty, the rehabilitation receiver has to be notified of the not pay rentals until the perfection of the sale. The Court is of the same

developments in the case, so that these assets would be managed in mind as the appellate court that it is simply inconceivable that a

accordance with the approved rehabilitation plan. businessman, such as petitioners predecessor-in-interest, would enter

into commercial transactions with and pay substantial rentals to a

Coming to the second issue, petitioners maintain that ASB Realty has corporation nary a single documentation.

no Petitioners then try to turn the table on ASB Realty with their third

cause of action against them because it is not their lessor. They insist that argument. They say that under Article 1687 of the New Civil Code, the

Umale entered into a verbal lease agreement with Amethyst Pearl period for rent payments determines the lease period. Judging by the

only. As proof of this verbal agreement, petitioners cite their possession official receipt presented by ASB Realty, which covers the 12-month

of the premises, and construction of buildings thereon, sans protest from period from June 2001 to May 2002, the lease period should be annual
[76]
Amethyst Pearl or ASB Realty. because of the annual rent payments.[79]Petitioners then conclude that

ASB Realty violated Article 1687 of the New Civil Code when it

Petitioners concede that they may have raised questions of fact but insist terminated the lease on June 30, 2003, at the beginning of the new

nevertheless on their review as the appellate courts ruling is allegedly period. They then implore the Court to extend the lease to the end of the

grounded entirely on speculations, surmises, and conjectures and its annual period, meaning until May 2004, in accordance with the annual

conclusions regarding the termination of the lease contract are rent payments.[80]

manifestly absurd, mistaken, and impossible.[77]

In arguing for an extension of lease under Article 1687, petitioners lost

Petitioners arguments have no merit. Ineluctably, the errors they raised sight of the restriction provided in Article 1675 of the Civil Code. It

involve factual findings,[78]the review of which is not within the purview states that a lessee that commits any of the grounds for ejectment cited in

of the Courts functions under Rule 45, particularly when there is Article 1673, including non-payment of lease rentals and devoting the

adequate evidentiary support on record. leased premises to uses other than those stipulated, cannot avail of the

periods established in Article 1687.[81]

While petitioners assail the authenticity of the written lease contract by

pointing out the inconsistency in the name of the lessor in two separate Moreover, the extension in Article 1687 is granted only as a matter of

pages, they fail to account for Umales actions which are consistent with equity. The law simply recognizes that there are instances when it would

the terms of the contract the payment of lease rentals to ASB Realty be unfair to abruptly end the lease contract causing the eviction of the

(instead of his alleged lessor Amethyst Pearl) for a 12-month lessee. It is only for these clearly unjust situations that Article 1687

period. These matters cannot simply be brushed off as sheer grants the court the discretion to

52
extend the lease.[82] the petition sufficient in form and substance. The pertinent

portions of the Order read:

The particular circumstances of the instant case however, do not inspire

Finding the petition, together with
granting equitable relief.Petitioners have not paid, much less offered to its annexes, sufficient in form and substance
and pursuant to Section 6, Rule 4 of the
pay, the rent for 14 months and even had the temerity to disregard the
Interim Rules on Corporate Rehabilitation,
pay-and-vacate notice served on them. An extension will only benefit the Court hereby:

the wrongdoer and punish the long-suffering property owner.[83] xxxx

2) Stays the enforcement of all

claims, whether for money or otherwise and
WHEREFORE, the petition is DENIED. The October 15, 2007
whether such enforcement is by court action
Decision and January 2, 2008 Resolution of the Court of Appeals in or otherwise, against the debtor, its
guarantors and sureties not solidarily liable
CA-G.R. SP No. 91096 are hereby AFFIRMED. ASB Realty with the debtor.[6]
Corporation is ordered to FURNISH a copy of the Decision on its

incumbent Rehabilitation Receiver and to INFORM the Court of its

At the time, however, of the filing of the petition for
compliance therewith within 10 days.
rehabilitation, there were a number of criminal

charges[7] pending against petitioners in Branch 51 of the RTC of

SO ORDERED.
Manila. These criminal charges were initiated by respondent

Jose Marcel Panlilio v. RTC Feb 2, 2011 Social Security System (SSS) and involved charges of violations

of Section 28 (h)[8] of Republic Act 8282, or the Social Security

Before this Court is a petition for review
Act of 1997 (SSS law), in relation to Article 315 (1) (b)[9] of the
[1]
on certiorari under Rule 45 of the Rules of Court, seeking to
Revised Penal Code, or Estafa. Consequently, petitioners filed
set aside the April 27, 2006 Decision [2] and August 2, 2006
with the RTC of Manila, Branch 51, a Manifestation and Motion
Resolution[3]of the Court of the Appeals (CA) in CA-G.R. SP
to Suspend Proceedings.[10] Petitioners argued that the stay order
No. 90947.
issued by Branch 24 should also apply to the criminal charges

pending in Branch 51. Petitioners, thus, prayed that Branch 51

The facts of the case are as follows:
suspend its proceedings until the petition for rehabilitation was

finally resolved.
On October 15, 2004, Jose Marcel Panlilio, Erlinda

Panlilio, Nicole Morris and Marlo Cristobal (petitioners), as

On December 13, 2004, Branch 51 issued an
corporate officers of Silahis International Hotel, Inc. (SIHI),
Order[11] denying petitioners motion to suspend the
filed with the Regional Trial Court (RTC) of Manila, Branch 24,
proceedings. It ruled that the stay order issued by Branch 24 did
a petition for Suspension of Payments and Rehabilitation [4] in
not cover criminal proceedings, to wit:
SEC Corp. Case No. 04-111180.
xxxx

Clearly then, the issue is, whether

On October 18, 2004, the RTC of Manila, Branch 24, the stay order issued by the RTC
commercial court, Branch 24 includes the
issued an Order[5] staying all claims against SIHI upon finding
above-captioned criminal cases.

53
 The Court shares the view of the IN SEC CORP. CASE NO. 04-111180
private complainants and the SSS that the COVERS ALSO VIOLATION OF SSS
said stay order does not include the LAW FOR NON-REMITTANCE OF
prosecution of criminal offenses. Precisely, PREMIUMS AND VIOLATION OF
the law criminalizes the non-remittance of [ARTICLE] [3] 515 OF THE REVISED
SSS contributions by an employer to protect PENAL CODE.[16]
the employees from unscrupulous
employers. Clearly, in these cases, public
interest requires that the said criminal acts
be immediately investigated and prosecuted
The petition is not meritorious.
for the protection of society.

From the foregoing, the

inescapable conclusion is that the stay order To begin with, corporate rehabilitation connotes the
issued by RTC Branch 24 does not include
the above-captioned cases which are restoration of the debtor to a position of successful operation and
criminal in nature.[12] solvency, if it is shown that its continued operation is

economically feasible and its creditors can recover more, by way

of the present value of payments projected in the rehabilitation

Branch 51 denied the motion for reconsideration filed
plan, if the corporation continues as a going concern than if it is
by petitioners.
immediately liquidated.[17] It contemplates a continuance of
On August 19, 2005, petitioners filed a petition
corporate life and activities in an effort to restore and reinstate
for certiorari[13] with the CA assailing the Order of Branch 51.
the corporation to its former position of successful operation and

solvency, the purpose being to enable the company to gain a new

On April 27, 2006, the CA issued a Decision denying
lease on life and allow its creditors to be paid their claims out of
the petition, the dispositive portion of which reads:
its earnings.[18]
WHEREFORE, premises
considered, the Petition is hereby DENIED
and is accordingly DISMISSED. No costs.[14] A principal feature of corporate rehabilitation is the

suspension of claims against the distressed corporation. Section

6 (c) of Presidential Decree No. 902-A, as amended, provides

The CA discussed that violation of the provisions of
for suspension of claims against corporations undergoing
the SSS law was a criminal liability and was, thus, personal to
rehabilitation, to wit:
the offender. As such, the CA held that the criminal proceedings

against the petitioners should not be considered a claim against Section 6 (c). x x x

the corporation and, consequently, not covered by the stay order

x x x Provided, finally, that upon
issued by Branch 24. appointment of a management committee,
rehabilitation receiver, board or body,
Petitioners filed a Motion for Reconsideration, pursuant to this Decree, all actions for
[15]
claims against corporations, partnerships or
which was, however, denied by the CA in a Resolution associations under management or
dated August 2, 2006. receivership pending before any court,
tribunal, board or body, shall be
Hence, herein petition, with petitioners raising a lone suspended accordingly.[19]

issue for this Courts resolution, to wit:

x x x WHETHER OR NOT THE STAY In November 21, 2000, this Court En

ORDER ISSUED BY BRANCH 24,
REGIONAL TRIAL COURT OF MANILA, Banc promulgated the Interim Rules of Procedure on Corporate

54

Rehabilitation,[20] Section 6, Rule 4 of which provides a stay
order on all claims against the corporation, thus:
Stay Order. - If the court finds the
petition to be sufficient in form and
substance, it shall, not later than five (5) days
from the filing of the petition, issue an Order
x x x; (b) staying enforcement of all
claims, whether for money or otherwise and
whether such enforcement is by court action
or otherwise, against the debtor, its
guarantors and sureties not solidarily liable
with the debtor; x x x[21]
In Finasia Investments and Finance Corporation v.
Court of Appeals,[22] the term "claim" has been construed to refer
to debts or demands of a pecuniary nature, or the assertion to
have money paid. The purpose for suspending actions for claims
against the corporation in a rehabilitation proceeding is to enable
the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or
extrajudicial interference that might unduly hinder or prevent the
rescue of the debtor company.[23]
The issue to be resolved then is: does the suspension
of all claims as an incident to a corporate rehabilitation also
contemplate the suspension of criminal charges filed against the
corporate officers of the distressed corporation?
This Court rules in the negative.
In Rosario v. Co[24] (Rosario), a case of recent vintage,
the issue resolved by this Court was whether or not during the
pendency of rehabilitation proceedings, criminal charges for
violation of Batas Pambansa Bilang 22 should be suspended,
was disposed of as follows:
x x x the gravamen of the offense punished
by B.P. Blg. 22 is the act of making and
issuing a worthless check; that is, a check
that is dishonored upon its presentation for
payment. It is designed to prevent damage to
trade, commerce, and banking caused by
worthless checks. In Lozano v. Martinez, this
Court declared that it is not the nonpayment
of an obligation which the law punishes. The
law is not intended or designed to coerce a
debtor to pay his debt. The thrust of the law
is to prohibit, under pain of penal sanctions,
the making and circulation of worthless
checks. Because of its deleterious effects on
the public interest, the practice is proscribed
by the law. The law punishes the act not as
an offense against property, but an offense
against public order. The prime purpose of
the criminal action is to punish the offender
in order to deter him and others from
committing the same or similar offense, to
isolate him from society, to reform and
rehabilitate him or, in general, to maintain
social order. Hence, the criminal prosecution
is designed to promote the public welfare by
punishing offenders and deterring others.
Consequently, the filing of the
case for violation of B.P. Blg. 22 is not a
"claim" that can be enjoined within the
purview of P.D. No. 902-A. True, although
conviction of the accused for the alleged
crime could result in the restitution,
reparation or indemnification of the
private offended party for the damage or
injury he sustained by reason of the
felonious act of the accused, nevertheless,
prosecution for violation of B.P. Blg. 22 is
a criminal action.
A criminal action has a dual
purpose, namely, the punishment of the
offender and indemnity to the offended
party. The dominant and primordial
objective of the criminal action is the
punishment of the offender. The civil action
is merely incidental to and consequent to the
conviction of the accused. The reason for
this is that criminal actions are primarily
intended to vindicate an outrage against the
sovereignty of the state and to impose the
appropriate penalty for the vindication of the
disturbance to the social order caused by the
offender. On the other hand, the action
between the private complainant and the
accused is intended solely to indemnify the
former.[25]
Rosario is at fours with the case at bar. Petitioners are charged
with violations of Section 28 (h) of the SSS law, in relation to
Article 315 (1) (b) of the Revised Penal Code, or Estafa. The
SSS law clearly criminalizes the non-remittance of SSS
contributions by an employer to protect the employees from
55
unscrupulous employers. Therefore, public interest requires that
the said criminal acts be immediately investigated and
prosecuted for the protection of society.
The rehabilitation of SIHI and the settlement of claims
against the corporation is not a legal ground for the extinction of
petitioners criminal liabilities. There is no reason why criminal
proceedings should be suspended during corporate
rehabilitation, more so, since the prime purpose of the criminal
action is to punish the offender in order to deter him and others
from committing the same or similar offense, to isolate him
from society, reform and rehabilitate him or, in general, to
maintain social order.[26] As correctly observed in Rosario,[27] it
would be absurd for one who has engaged in criminal conduct
could escape punishment by the mere filing of a petition for
rehabilitation by the corporation of which he is an officer.
The prosecution of the officers of the corporation has
no bearing on the pending rehabilitation of the corporation,
especially since they are charged in their individual capacities.
Such being the case, the purpose of the law for the issuance of
the stay order is not compromised, since the appointed
rehabilitation receiver can still fully discharge his functions as
mandated by law. It bears to stress that the rehabilitation receiver
is not charged to defend the officers of the corporation. If there
is anything that the rehabilitation receiver might be remotely
interested in is whether the court also rules that petitioners are
civilly liable. Such a scenario, however, is not a reason to
suspend the criminal proceedings, because as aptly discussed
in Rosario, should the court prosecuting the officers of the
corporation find that an award or indemnification is warranted,
such award would fall under the category of claims, the
execution of which would be subject to the stay order issued by
the rehabilitation court.[28] The penal sanctions as a consequence
of violation of the SSS law, in relation to the revised penal code
can therefore be implemented if petitioners are found guilty after
trial. However, any civil indemnity awarded as a result of their
conviction would be subject to the stay order issued by the
rehabilitation court. Only to this extent can the order of
suspension be considered obligatory upon any court, tribunal,
branch or body where there are pending actions for claims
against the distressed corporation.[29]
On a final note, this Court would like to point out that
Congress has recently enacted Republic Act No. 10142, or the
Financial Rehabilitation and Insolvency Act of 2010. [30]Section
18 thereof explicitly provides that criminal actions against the
individual officer of a corporation are not subject to the Stay or
Suspension Order in rehabilitation proceedings, to wit:
The Stay or Suspension Order shall not apply:
xxxx
(g) any criminal action against individual
debtor or owner, partner, director or officer
of a debtor shall not be affected by any
proceeding commenced under this Act.
Withal, based on the foregoing discussion, this Court rules
that there is no legal impediment for Branch 51 to proceed with
the cases filed against petitioners.
WHEREFORE, premises considered, the petition
is DENIED. The April 27, 2006 Decision and August 2,
2006 Resolution of the Court of Appeals in CA-G.R. SP No.
90947 are AFFIRMED. The Regional Trial Court of Manila,
Branch 51, is ORDERED to proceed with the criminal cases
filed against petitioners.
SO ORDERED.
Equitable PCI Bank, Inc. v. DNG Realty and Development
Corporation Aug. 8, 2010
Before us is a petition for review on certiorari with prayer for
the issuance of a temporary restraining order and/or writ of
56

preliminary injunction filed by petitioner Equitable PCI Bank,
Inc., seeking to set aside the June 23, 2005 Decision [1] of the
Court of Appeals (CA) in CA-G.R. SP No. 86950.
the issuance of a writ of possession. On 4
October 2004, RTC-Br. 23 issued the Writ
of Possession. Consequently, the Office of
the Ex-Officio Sheriff issued the Notice to
Vacate dated 6 October 2004.[2]

The undisputed facts, as found by the CA, are as follows:

On October 15, 2004, respondent filed with the CA

a petition for certiorari, prohibition and mandamus with prayer

(Respondent) DNG Realty and
for the issuance of temporary restraining order/ preliminary
Development Corporation (DNG) obtained
a loan of P20M from x x x Equitable PCI injunction entitled DNG Realty and Development Corporation v.
Bank (EPCIB) secured by a real estate
mortgage over the 63,380 sq. meter land of Hon. LYDIA BAUTO HIPOLITO, in her capacity as the
the former situated in Cabanatuan City. Due
to the Asian Economic Crisis, DNG Presiding Judge of Branch 23, Regional Trial Court, Third
experienced liquidity problems disenabling
Judicial Region, Cabanatuan City; the OFFICE OF THE EX-
DNG from paying its loan on time. For this
reason, EPCIB sought the extrajudicial OFFICIO SHERIFF of the Regional Trial Court, Third Judicial
foreclosure of the said mortgage by filing a
petition for sale on 30 June 2003 before the Region, Cabanatuan City; the OFFICE OF THE REGISTER
Office of the Ex-Officio Sheriff. On 4
September 2003, the mortgage property was OF DEEDS OF CABANATUAN CITY; and EQUITABLE
sold at public auction, which was eventually PCIBANK, INC. The petition for certiorari sought to nullify (1)
awarded to EPCIB as the highest bidder.
That same day, the Sheriff executed a the affidavit of consolidation of ownership dated December 2,
Certificate of Sale in favor of EPCIB.
2003; (2) the cancellation of DNG's TCT No. T-57143 covering
On October 21, 2003, DNG filed a petition
for rehabilitation under Rule 4 of the Interim the mortgaged property and the issuance of TCT No. T-109482
Rules of Procedure on Corporate in favor of petitioner EPCIB by the Register of Deeds of
Rehabilitation before the Regional Trial
Court, Branch 28, docketed as Special Cabanatuan City; (3) the Order dated September 6, 2004 issued
Proceeding No. 125. Pursuant to this, a Stay
Order was issued by RTC Branch 28 on 27 by the RTC, Branch 23, directing the issuance of the writ of
October 2003. The petition for rehabilitation
possession and the writ of possession issued pursuant thereto;
was then published in a newspaper of
general circulation on 19 and 26 November and (4) the sheriff's Notice to Vacate dated October 6, 2004,
2003.
while the petition for prohibition sought to enjoin petitioner
On the other hand, EPCIB caused the
recording of the Sheriff's Certificate of Sale EPCIB, their agents and representatives from enforcing and
on 3 December 2003 with the Registry of implementing the above-mentioned actions. And the petition for
Deeds of Cabanatuan City. EPCIB executed
an Affidavit of Consolidation of Ownership mandamus sought to require petitioner EPCIB to cease and
and had the same annotated on the title of
DNG (TCT No. 57143). Consequently, the desist from taking further action both in the foreclosure
Register of Deeds cancelled DNG's title and
issued TCT No. T-109482 in the name of proceedings as well as in Cadastral Case No. 2414-AF, where
EPCIB on 10 December 2003. This the writ of possession was issued until the petition for
prompted DNG to file Civil Case No. 4631
with RTC-Br. 28 for annulment of the rehabilitation pending before Branch 28 of the Regional Trial
foreclosure proceeding before the Office of
the Ex-Officio Sheriff. This case was Court (RTC) of Cabanatuan City has been terminated or
dismissed for failure to prosecute.
dismissed.
In order to gain possession of the foreclosed On October 22, 2004, the CA issued a temporary
property, EPCIB on 17 March 2004 filed an
Ex-Parte Petition for Issuance of Writ of restraining order (TRO).[3]
Possession docketed as Cadastral Case No.
2414-AF before RTC Br. 23 in Cabanatuan After the parties filed their respective pleadings, the CA issued
City. After hearing, RTC-Br. 23 on 6
its assailed Decision, the dispositive portion of which reads:
September 2004 issued an order directing
57
 refrained from executing its Affidavit of Consolidation of
WHEREFORE, the instant petition is
GRANTED. The Order of 6 September 2004 ownership or filing its ex-parte petition for issuance of a writ of
directing the issuance of a writ of
possession before the RTC Branch 23; respondent Office of the
possession; the Writ of Possession issued
pursuant thereto; and the Notice to Register of Deeds of Cabanatuan City should not have cancelled
Vacate are all REVERSED and SET ASIDE
for being premature and untimely issued. respondent DNG's title and issued a new one in
Lastly, the Transfer Certificate of Title No.
T-109482 under the name of Equitable PCI petitioner EPCIB's name; and that respondent Judge and the Ex-
Bank is hereby ordered CANCELLED for Officio Sheriff should have abstained from issuing the writ of
equally being issued prematurely and
untimely, and in lieu thereof the Transfer possession and the notice to vacate, respectively.
Certificate of Title No. 57143 is ordered
REINSTATED. [4]
The CA found no forum shopping committed by

respondent DNG as Civil Case No. 4631 filed before Branch 28

In finding the petition meritorious, the CA stated that
sought to annul the foreclosure sale and the certificate of sale
under A.M. No. 00-8-10-SC adopting the Interim Rules of
over respondent DNG's property, while Cadastral Case No.
Procedure on Corporate Rehabilitation, all petitions for
2414-AF instituted by petitioner EPCIB, was an ex-
rehabilitation by corporations, partnerships and associations
parte petition to wrest possession of the same property from
under Presidential Decree (PD) 902-A, as amended by Republic
respondent DNG. On the other hand, the present petition sought
Act (RA) 8799, were directed to be transferred from the
only to stay all proceedings on respondent DNG's property after
Securities and Exchange Commission (SEC) to the RTCs,
the Stay Order was issued. Thus, the causes of action and the
and allowed the RTCs to issue a stay order, i.e., staying
reliefs sought in each of those proceedings were not identical.
enforcements of all claims, whether for money or otherwise, and

whether such enforcement is by court action or otherwise,

The CA also found that, despite the Stay Order issued, petitioner
against the debtor. And under Section 6 (c) of PD 902-A, the
EPCIB's over-zealousness in consolidating its title and taking
Commission (now the RTC) upon appointment of a management
possession of the respondent's property left the latter without
committee, rehabilitation receiver, board or body, all actions or
any plain, speedy and adequate remedy but to file the petition.
claims against the corporations, partnerships or associations
Dissatisfied, petitioner EPCIB filed the instant petition
under management or receivership pending before any court,
where it raises the errors committed by the CA as follows:
tribunal, board or body shall be suspended accordingly. The CA,

relying in Bank of the Philippine Islands v. Court of Appeals THE COURT OF APPEALS COMMITTED
GRAVE, PALPABLE, AND REVERSIBLE
(BPI v. CA)[5] found no merit to petitioner EPCIB's claim that the ERRORS IN TAKING COGNIZANCE OF
AN ORIGINAL PETITION FOR
foreclosure sale of the property was made prior to the issuance CERTIORARI, PROHIBITION AND
of the Stay Order and was, therefore, fait accompli; and that MANDAMUS, AND IN ISSUING A
TEMPORARY RESTRAINING
with the consummation of the extrajudicial foreclosure sale, all ORDER, AGAINST THE MINISTERIAL
IMPLEMENTATION OF A WRIT OF
the valid and legal consequences of such could no longer be POSSESSION.
stayed. The CA ruled that after the issuance of the Stay Order,
THE COURT OF APPEALS COMMITTED
effective from the date of its issuance, all subsequent actions A GRAVE, PALPABLE AND
REVERSIBLE ERROR IN HOLDING
pertaining to respondent DNG's Cabanatuan property should THAT THE 1994 CASE OF BPI VS. CA IS
SQUARELY IN POINT IN THE PRESENT
have been held in abeyance. Petitioner EPCIB should have CONTROVERSY.
58
 THE COURT OF APPEALS GRAVELY abeyance is erroneous. Petitioner EPCIB cites the case of Rizal
AND SERIOUSLY ERRED IN HOLDING
Commercial Banking Corporation v. Intermediate Appellate
THAT SINCE THE CONSOLIDATION OF
TITLE, THE APPLICATION FOR THE Court (RCBC v. IAC)[7] as the applicable jurisprudence in this
ISSUANCE OF A WRIT OF POSSESSION,
THE CANCELLATION OF case. Petitioner argues that since the extrajudicial foreclosure
RESPONDENT'S TITLE AND THE
ISSUANCE OF A NEW ONE UNDER sale of respondent DNG's property was conducted on September
EPCIBANKS'S NAME, THE ISSUANCE 4, 2003, or prior to the filing of the petition for rehabilitation on
OF THE WRIT OF POSSESSION, AND
THE SERVICE OF A NOTICE TO October 21, 2003 and the issuance of the Stay Order on October
VACATE HAVE BEEN MADE AFTER
THE ISSUANCE OF THE STAY ORDER, 27, 2003, the enforcement of a creditor claim via an extrajudicial
THE SAME WERE UNTIMELY AND
PREMATURE. foreclosure sale conducted on September 4, 2003 could no
THE COURT OF APPEALS COMMITTED longer be stayed for having been fully consummated prior to the
A GRAVE, PALPABLE AND
REVERSIBLE ERROR IN HOLDING issuance of the Stay Order.
THAT THE RESPONDENT HAD NO
OTHER PLAIN, SPEEDY AND Petitioner argues that the CA erred in its finding that
ADEQUATE REMEDY.[6]
there was no other plain, speedy and adequate remedy available

to respondent but to file the petition for certiorari, prohibition

and mandamus with the CA, since Section 8 of Act 3135

Petitioner contends that upon failure to redeem the foreclosed
provides for the proper remedy against an order granting the
property, consolidation of title becomes a matter of right on the
issuance of a writ of possession.
part of the auction buyer, and the issuance of a certificate of title
In its Comment, respondent echoed the findings made
in favor of the purchaser becomes ministerial upon the Register
by the CA. Petitioner filed its Reply.
of Deeds; that the issuance and implementation of a writ of
The issues for resolution are (1) whether respondent
possession are both ministerial in character, thus, a writ
DNG's petition for certiorari, prohibition and mandamus filed
of certiorari, prohibition and mandamus which respondent DNG
in the CA was a proper remedy; (2) whether the CA correctly
filed with the CA and which were all directed to address the
held that all subsequent actions pertaining to respondent
abuse of discretion allegedly committed by the cadastral court
DNG's Cabanatuan property should have been held in abeyance
and the sheriff will not lie; and that the CA erred in finding
after the Stay Order was issued by the rehabilitation court.
grave abuse of discretion or excess of jurisdiction upon the
We answer both issues in the negative.
cadastral court which issued the writ of possession and the
Anent the first issue, respondent DNG filed before the CA
sheriff who implemented the same, as they acted in compliance
a petition for certiorari, prohibition and mandamus with prayer
with the express provision of Act 3135 as amended.
for the issuance of a TRO and a writ of preliminary injunction
Petitioner claims that the CA's reliance in BPI v. CA in
seeking to annul the RTC Order dated September 6, 2004 issued
ruling that all subsequent actions pertaining to respondent
in Cadastral Case No. 2414-AF, i.e., in re ex-parte petition filed
DNG's Cabanatuan property, i.e., consolidation of ownership,
by petitioner EPCIB for the issuance of a writ of possession,
cancellation of respondent's title and the issuance of a new title
which ordered the issuance of the writ of possession in
in petitioner's name and the issuance of a writ of possession by
petitioner EPCIB's favor as the new registered owner of the
Branch 23 of the RTC in Cadastral Case No. 2414-F, and the
property covered by TCT No. T-109482. We find that the CA
notice to vacate, which were all made after the issuance of the
erred in acting on the petition. Act 3135, as amended by Act
Stay Order by the rehabilitation court, should have been held in
59
4118, which regulates the methods of effecting an extrajudicial parte application of the purchaser, there is no reason why it

foreclosure of mortgage explicitly authorizes the issuance of should not also have the same power after the expiration of the

such writ of possession. [8] Section 7 of Act 3135 as amended redemption period, especially where a new title had already been

provides: issued in the name of the purchaser.[11] Thus, after the

Section 7. Possession during redemption period. - In
any sale made under the provisions of this consolidation of title in the buyers name for failure of the
Act, the purchaser may petition the
mortgagor to redeem, the writ of possession becomes a matter of
[Regional Trial Court] of the province or
place where the property or any part thereof right and the issuance of such writ of possession to a purchaser
is situated, to give him possession thereof
during the redemption period, furnishing in an extrajudicial foreclosure is merely a ministerial function.
bond in an amount equivalent to the use of [12]
the property for a period of twelve months, The basis of this right to possession is the purchasers
to indemnify the debtor in case it be shown ownership of the property.[13]
that the sale was made without violating the
mortgage or without complying with the
requirements of this Act. Such petition shall
be made under oath and filed in the form of Respondent's petition for certiorari, prohibition and
an ex parte motion in the registration or
cadastral proceedings if the property is mandamus filed with the CA was not the proper remedy. A
registered, or in special proceedings in the special civil action for certiorari and prohibition could be
case of property registered under the
Mortgage Law or under section one hundred availed of only if a tribunal, board or officer exercising judicial
and ninety-four of the Administrative Code,
or of any other real property encumbered or quasi-judicial functions has acted without or in excess of its
with a mortgage duly registered in the office
or his jurisdiction, or with grave abuse of discretion amounting
of any register of deeds in accordance with
any existing law, and in each case the clerk to lack or excess of jurisdiction; and if there is no appeal or
of court shall, upon the filing of such
petition, collect the fees specified in other plain, speedy, and adequate remedy in the ordinary course
paragraph eleven of section one hundred and
fourteen of Act Numbered Twenty-eight of law.[14]
hundred and sixty-six, and the court shall, In this case, respondent DNG failed to redeem the foreclosed
upon approval of the bond, order that a writ
of possession issue, addressed to the sheriff property within the reglementary period; thus, petitioner EPCIB
of the province in which the property is
situated, who shall execute said order consolidated its ownership over the property in its favor and
immediately.
annotated the same in respondent's title. Thus, respondent

DNG's title was cancelled and a new title was issued in

Section 7 of Act 3135, as amended, refers to a situation wherein
petitioner EPCIB's name. The RTC's issuance of a writ of
the purchaser seeks possession of the foreclosed property during
possession in favor of petitioner EPCIB as the new registered
the redemption period. Upon the purchaser's filing of the ex
owner of the subject property was in compliance with the
parte petition and posting of the appropriate bond, the RTC
express provisions of Act 3135 as amended. It cannot, therefore,
shall, as a matter of course, order the issuance of the writ of
be charged with grave abuse of discretion as there is no showing
possession in the purchaser's favor.[9] But equally well settled is
that, in the exercise of its judgment, it acted in a capricious,
the rule that a writ of possession will issue as a matter of course,
whimsical, arbitrary or despotic manner tantamount to lack of
even without the filing and approval of a bond, after
jurisdiction.[15]
consolidation of ownership and the issuance of a new TCT in the
In Santiago v. Merchants Rural Bank of Talavera, Inc.,
name of the purchaser.[10] Thus, if under Section 7 of Act 3135 as
[16]
we said that:
amended, the RTC has the power during the period of

redemption to issue a writ of possession on the ex

60
 Case law has it that after the
consolidation of title in the name of the
respondent as the buyer of the property,
upon failure of the mortgagor to redeem the
property, the writ of possession becomes a
matter of right. Its issuance to the purchaser
is merely a ministerial function. As such,
the court neither exercises its discretion nor
judgment. Indeed, in an avuncular case, we
held that:
The right of the petitioner to the
possession of the property is clearly
unassailable. It is founded on its right of
ownership. As the purchaser of the
properties in the foreclosure sale, and to
which the respective titles thereto have
already been issued, petitioners right over
the property has become absolute, vesting
upon him the right of possession over an
enjoyment of the property which the Court
must aid in effecting its delivery. After such
delivery, the purchaser becomes the absolute
owner of the property. As We said in Tan
Soo Huat vs. Ongwico, the deed of
conveyance entitled the purchaser to have
and to hold the purchased property. This
means, that the purchaser is entitled to go
immediately upon the real property, and that
it is the Sheriffs inescapable duty to place
him in such possession.[17]
Thus, in Philippine National Bank v. Sanao Marketing
Corporation,[18] we ruled that:
x x x The judge issuing the order following
these express provisions of [Act 3135]
cannot be charged with having acted without
jurisdiction or with grave abuse of
discretion. If only to stress the writs
ministerial character, we have, in previous
cases, disallowed injunction to prohibit its
issuance, just as we have held that the
issuance of the same may not be stayed by a
pending action for annulment of mortgage or
the foreclosure itself.[19]
Moreover, a writ of certiorari, prohibition and
mandamus will only be issued if there is neither appeal nor any
plain, speedy or adequate relief in the ordinary course of law.
However, Section 8 of Act 3135 provides the plain, speedy, and
adequate remedy in opposing the issuance of a writ of
possession.[20] The provision reads:
Section 8. Setting aside of sale
and writ of possession. The debtor may,
in the proceedings in which possession was
requested, but not later than thirty days after
the purchaser was given possession, petition
that the sale be set aside and the writ of
possession cancelled, specifying the
damages suffered by him, because the
mortgage was not violated or the sale was
not made in accordance with the provisions
hereof, and the court shall take cognizance
of this petition in accordance with the
summary procedure provided for in section
one hundred and twelve of Act Numbered
Four hundred and ninety-six; and if it finds
the complaint of the debtor justified, it shall
dispose in his favor of all or part of the bond
furnished by the person who obtained
possession. Either of the parties may appeal
from the order of the judge in accordance
with section fourteen of Act Numbered Four
hundred and ninety-six; but the order of
possession shall continue in effect during the
pendency of the appeal.
Clearly, a party may file a petition to set aside the
foreclosure sale and to cancel the writ of possession in the same
proceedings where the writ of possession was requested.
[21]
The aggrieved party may thereafter appeal from any
disposition by the court on the matter.[22]
In this case, respondent DNG had the right to file a
petition to set aside the sale and writ of possession issued by the
RTC and to file an appeal in case of an adverse ruling. However,
respondent DNG did not file such petition and, instead, filed the
petition for certiorari, prohibition and mandamus with the
CA. Hence, they were barred from filing such petition from the
61

RTC Order and the writ of possession issued by it.
[23]
Respondent's recourse to the CA via Rule 65 was
inappropriate even though the Sheriff had demanded that they
vacate the property.[24] Section 8 of Act No. 3135 mandates that
even if an appeal is interposed from an order granting a petition
for a writ of possession, such order shall continue to be in effect
during the pendency of an appeal.[25]
As to the second issue of whether the CA correctly
held that after the issuance of the Stay Order by the
rehabilitation court, all subsequent actions in this case
pertaining to respondent's Cabanatuan property should have
been held in abeyance is devoid of merit.
Respondent DNG's petition for rehabilitation filed in Branch 28
of the RTC of Cabanatuan City on October 21, 2003 was made
pursuant to the 2000 Interim Rules of Procedure on Corporate
Rehabilitation, which was the applicable law on rehabilitation
petitions filed by corporations, partnerships or associations,
including rehabilitation cases transferred from the SEC to the
RTCs pursuant to RA 8799 or the Securities Regulation Code.[26]
Section 6 of the Interim Rules of Procedure on Corporate
Rehabilitation[27] provides:
SEC. 6. Stay Order. If the court finds the
petition to be sufficient in form and
substance, it shall, not later than five (5)
days from the filing of the petition, issue an
Order (a) appointing a Rehabilitation
Receiver and fixing his bond; (b) staying
enforcement of all claims, whether for
money or otherwise and whether such
enforcement is by court action or otherwise,
against the debtor, its guarantors and sureties
not solidarily liable with the debtor; (c)
prohibiting the debtor from selling,
encumbering, transferring, or disposing in
any manner any of its properties except in
the ordinary course of business; (d)
prohibiting the debtor from making any
payment of its liabilities outstanding as of
the date of filing of the petition; (e)
prohibiting the debtors suppliers of goods or
services from withholding supply of goods
and services in the ordinary course of
business for as long as the debtor makes
payments for the services and goods
supplied after the issuance of the stay order;
(f) directing the payment in full of all
administrative expenses incurred after the
issuance of the stay order; (g) fixing the
initial hearing on the petition not earlier than
forty five (45) days but not later than sixty
(60) days from the filing thereof; (h)
directing the petitioner to publish the Order
in a newspaper of general circulation in the
Philippines once a week for two (2)
consecutive weeks; (i) directing all creditors
and all interested parties (including the
Securities and Exchange Commission) to file
and serve on the debtor a verified comment
on or opposition to the petition, with
supporting affidavits and documents, not
later than ten (10) days before the date of the
initial hearing and putting them on notice
that their failure to do so will bar them from
participating in the proceedings; and (j)
directing the creditors and interested parties
to secure from the court copies of the
petition and its annexes within such time as
to enable themselves to file their comment
on or opposition to the petition and to
prepare for the initial hearing of the petition.
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. [28]
The CA annulled the RTC Order dated September 6, 2004
directing the issuance of a writ of possession, as well as the writ
of possession issued pursuant thereto on October 4, 2004, and
the notice to vacate issued by the Sheriff for being premature
and untimely and ordered the cancellation of TCT No. T-109482
in the name of petitioner EPCIB as they were all done after the
Stay Order was issued on October 27, 2003 by the rehabilitation
court. In so ruling, the CA relied on BPI v. CA.[29]
In BPI v. CA, BPI filed with the RTC a complaint for foreclosure
of real estate mortgageagainst Ruby Industrial Corporation
(RUBY). After RUBY filed its Answer with Counterclaim, it
submitted a motion for suspension of proceedings, since the
62

SEC had earlier issued an Order placing RUBY under a
rehabilitation plan, pursuant to Section 6 par. (c) ofPD 902-A
which also declared that with the creation of the Management
Committee, all actions or claims against RUBY pending before
any court, tribunal, branch or body weresuspended. Thus, the
RTC suspended the proceedings. BPI moved for the reopening
of the proceedings; however, the RTC denied it, citing the case
of Alemar's Sibal and Sons, Inc v. Elbinias where we held that
suspension of payments applied to all creditors, whether secured
or unsecured, in order to place them on equal footing. As BPI's
motion for reconsiderationwas denied, it went to the CA in a
petition for certiorari and mandamus alleging grave abuse of
discretion on the RTC in refusing to reopen the case, which was
dismissed by the CA. BPI filed its appeal with Us wherein the
issue presented was whether BPI, a secured creditor of RUBY,
may still judicially enforce its claim against RUBY which had
already been placed by the SEC under Rehabilitation. We denied
the petition and found that BPIs action for foreclosure of real
estate mortgage had been filed against RUBY and was pending
with the RTC when RUBY was placed by the SEC under
rehabilitation through the creation of a management
committee. Thus, with the SEC order, which directed that all
actions or claims against RUBY pending before any court,
tribunal, branch or body be deemed suspended, the RTC's
jurisdiction over the foreclosure case was also considered
suspended; and that SEC had acquired jurisdiction with the
appointment of a rehabilitation receiver for the distressed
corporation and had directed all proceedings or claims against
Ruby suspended. We then ruled that:
x x x whenever a distressed corporation asks
[the] SEC for rehabilitation and suspension
of payments, preferred creditors may no
longer assert such preference, but x x x
stand on equal footing with other creditors.
Foreclosure shall be disallowed so as not to
prejudice other creditors, or cause
discrimination among them. If foreclosure
is undertaken despite the fact that a petition
for rehabilitation has been filed, the
certificate of sale shall not be delivered
pending rehabilitation. If this has already
been done, no transfer certificate of title
shall likewise be effected within the period
of rehabilitation. The rationale behind PD
902-A, as amended, is to effect a feasible
and viable rehabilitation. This cannot be
achieved if one creditor is preferred over the
others.[30]
BPI case is not in all fours with the instant case. Notably, in BPI,
the action for judicial foreclosure of the real estate mortgage was
still pending with the RTC when the stay order was issued; thus,
there was no judgment on the foreclosure for payment and the
sale of the mortgaged property at a public auction. In contrast to
this case, herein respondent's mortgaged property had already
been extrajudicially foreclosed and sold to petitioner as the
highest bidder and a Certificate of Sale was issued on September
4, 2003, which was prior to the issuance of the Stay Order on
October 27, 2003.
We find merit in petitioner EPCIB's argument on the
applicability of RCBC v. IAC,[31]an en banc case decided in
1999, to the instant case. There, we ruled that RCBC can
rightfully move for the extrajudicial foreclosure of the mortgage
on the BF Home properties on October 16, 1984, because a
management committee was not appointed by the SEC until
March 18, 1985. Such ruling was a reversal of our earlier
decision in the same case where we found that the prohibition
against foreclosure attaches as soon as a petition for
rehabilitation was filed.
In RCBC v. IAC, BF Homes filed a petition for rehabilitation and
for suspension of payments with the SEC on September 28,
1984. On October 26, 1984, RCBC requested the Provincial
Sheriff to extrajudicially foreclose its real estate mortgage on
some of BF Homes' properties; thus, notices were sent to the
parties. BF Homes filed a motion with the SEC for the issuance
of a TRO to enjoin RCBC and the sheriff from proceeding with
the auction sale, which the SEC granted by issuing a TRO for
twenty days. The sale was rescheduled to January 29, 1985. On
January 25, 1985, the SEC ordered the issuance of a writ of
preliminary injunction conditioned upon BF Homes' filing of a
bond which the latter failed to do not until January 29, the day of
63
the auction sale. As the sheriff was not aware of the filing of the name. Thereafter, RCBC presented with us a motion for the

bond, he proceeded with the auction on January 29, wherein dismissal of its petition, since the issuance of new titles in its

RCBC emerged as the highest bidder. name rendered the petition moot and academic. In our original

decision dated September 14, 1992, we denied petitioners

On February 5, 1985, BF Homes filed with the SEC a motion to dismiss, finding basis for nullifying and setting aside

consolidated motion to annul the auction sale and to cite RCBC the TCTs in the name of RCBC. We dismissed the RCBC

and the sheriff for contempt. The sheriff then withheld the petition and upheld the IAC decision dismissing the mandamus

delivery of a certificate of sale to the RCBC due to the SEC case filed by RCBC. We ordered the nullification of the new

proceedings. On March 13, 1985, RCBC filed with the RTC of titles already issued in RCBC's name and reinstated the old titles

Rizal, Branch 140, an action for mandamus against the in the name of BF Homes. In setting aside RCBCs acquisition of

Provincial Sheriff of Rizal and his deputy to compel them to title and nullifying the TCTs issued to it, we held that

execute in its favor a certificate of sale of the auctioned prohibition against foreclosure attaches as soon as a petition for

properties. The sheriffs filed their answer saying that they rehabilitation was filed.

proceeded with the sale since no writ of preliminary injunction However, as we have said earlier, upon RCBC's

was issued as of the auction sale, but they informed the SEC that motion for reconsideration, we reversed our previous decision

they would suspend the issuance of the certificate of sale. and granted reconsideration for the cogent reason that

On March 18, 1985, the SEC appointed a management suspension of actions for claims commenced only from the time

committee for BF Homes. a management committee or receiver was appointed by the

SEC. We said that RCBC, therefore, could have rightfully, as it

On May 8, 1985, the RTC, Branch 140, rendered a judgment on did, move for the extrajudicial foreclosure of its mortgage on

the pleading in the mandamus case filed by RCBC which October 26, 1984, because a management committee was not

ordered the sheriff to execute and deliver to RCBC the appointed by the SEC until March 18, 1985.

certificate of sale of January 29, 1984. BF Homes filed with the

IAC an original complaint for annulment of the RTC judgment.

The IAC set aside the RTC decision by dismissing the In RCBC, we upheld the extrajudicial foreclosure sale of the
mandamus case and ordered the suspension of the issuance to mortgage properties of BF Homes wherein RCBC emerged as

RCBC of new land titles[32]until the SEC had resolved the the highest bidder as it was done before the appointment of the

petition for rehabilitation. management committee. Noteworthy to mention was the fact

that the issuance of the certificate of sale in RCBC's favor, the

RCBC filed an appeal with us. During the pendency of the consolidation of title, and the issuance of the new titles in

appeal, RCBC filed a manifestation informing us that the SEC RCBC's name had also been upheld notwithstanding that the

issued an Order on October 16, 1986 denying the motion to same were all done after the management committee had already

annul the auction sale and to cite RCBC and the sheriff for been appointed and there was already a suspension of

contempt. Thus, by virtue of the said SEC Order, the Register of claims. Thus, applying RCBC v. IAC in this case, since the

Deeds of Pasay effected transfer of titles over the auctioned foreclosure of respondent DNG's mortgage and the issuance of

properties to RCBC and the issuance of new titles in its the certificate of sale in petitioner EPCIB's favor were done

64

prior to the appointment of a Rehabilitation Receiver and the
Stay Order, all the actions taken with respect to the foreclosed
mortgage property which were subsequent to the issuance of the
Stay Order were not affected by the Stay Order. Thus, after the
redemption period expired without respondent redeeming the
foreclosed property, petitioner becomes the absolute owner of
the property and it was within its right to ask for the
consolidation of title and the issuance of new title in its name as
a consequence of ownership; thus, it is entitled to the possession
and enjoyment of the property.
WHEREFORE, the petition is GRANTED. The
Decision dated June 23, 2005 of the Court of Appeals in CA-
G.R. SP No. 86950 is hereby REVERSED and SET ASIDE.
SO ORDERED.
Ong v. PCIB Jan. 17, 2005
This is a petition for review on certiorari under Rule
45 of the Rules of Court to set aside the Decision of the
Court of Appeals in CA-G.R. SP No. 39255, dated
February 17, 2003, affirming the decision of the trial court
denying petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is
a domestic corporation engaged in the manufacture and
export of finished wood products. Petitioners-spouses
Alfredo and Susana Ong are its President and Treasurer,
respectively.
On April 20, 1992, respondent Philippine Commercial
International Bank (now Equitable-Philippine Commercial
International Bank or E-PCIB) filed a case for collection of
a sum of money[1]against petitioners-spouses. Respondent
bank sought to hold petitioners-spouses liable as sureties
on the three (3) promissory notes they issued to secure
some of BMCs loans, totalling five million pesos
(P5,000,000.00).
The complaint alleged that in 1991, BMC needed
additional capital for its business and applied for various
loans, amounting to a total of five million pesos, with the
respondent bank. Petitioners-spouses acted as sureties
for these loans and issued three (3) promissory notes for
the purpose. Under the terms of the notes, it was
stipulated that respondent bank may consider debtor BMC
in default and demand payment of the remaining balance
of the loan upon the levy, attachment or garnishment of
any of its properties, or upon BMCs insolvency, or if it is
declared to be in a state of suspension of payments.
Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for
rehabilitation and suspension of payments with the
Securities and Exchange Commission (SEC) after its
properties were attached by creditors. Respondent bank
considered debtor BMC in default of its obligations and
sought to collect payment thereof from petitioners-spouses
as sureties. In due time, petitioners-spouses filed their
Answer.
On October 13, 1992, a Memorandum of Agreement
(MOA)[2] was executed by debtor BMC, the petitioners-
spouses as President and Treasurer of BMC, and the
consortium of creditor banks of BMC (of which respondent
bank is included). The MOA took effect upon its approval
by the SEC on November 27, 1992.[3]
Thereafter, petitioners-spouses moved to
dismiss[4] the complaint. They argued that as the SEC
declared the principal debtor BMC in a state of suspension
of payments and, under the MOA, the creditor banks,
including respondent bank, agreed to temporarily suspend
any pending civil action against the debtor BMC, the
benefits of the MOA should be extended to petitioners-
spouses who acted as BMCs sureties in their contracts of
loan with respondent bank. Petitioners-spouses averred
that respondent bank is barred from pursuing its collection
case filed against them.
The trial court denied the motion to dismiss.
Petitioners-spouses appealed to the Court of Appeals
which affirmed the trial courts ruling that a creditor can
proceed against petitioners-spouses as surety
independently of its right to proceed against the principal
debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case
filed against them by respondent bank should be
dismissed for three (3) reasons: First, the MOA provided
that during its effectivity, there shall be a suspension of
filing or pursuing of collection cases against the BMC and
this provision should benefit petitioners as sureties.
Second, principal debtor BMC has been placed under
suspension of payment of debts by the SEC; petitioners
contend that it would prejudice them if the principal debtor
BMC would enjoy the suspension of payment of its debts
while petitioners, who acted only as sureties for some of
BMCs debts, would be compelled to make the payment;
petitioners add that compelling them to pay is contrary
to Article 2063 of the Civil Code which provides that a
compromise between the creditor and principal debtor
benefits the guarantor and should not prejudice the latter.
Lastly, petitioners rely on Article 2081 of the Civil Code
which provides that: the guarantor may set up against the
creditor all the defenses which pertain to the principal
debtor and are inherent in the debt; but not those which
are purely personal to the debtor. Petitioners aver that if
65
the principal debtor BMC can set up the defense of
suspension of payment of debts and filing of collection
suits against respondent bank, petitioners as sureties
should likewise be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063
and 2081 of the Civil Code is misplaced as these
provisions refer to contracts of guaranty. They do not
apply to suretyship contracts. Petitioners-spouses are
not guarantors but sureties of BMCs debts. There is a sea
of difference in the rights and liabilities of a guarantor and
a surety. A guarantor insures the solvency of the
debtor while a surety is an insurer of the debt itself. A
contract of guaranty gives rise to a subsidiary obligation
on the part of the guarantor. It is only after the creditor
has proceeded against the properties of the principal
debtor and the debt remains unsatisfied that a guarantor
can be held liable to answer for any unpaid amount. This
is the principle of excussion. In a suretyship contract,
however, the benefit of excussion is not available to
the surety as he is principally liable for the payment of
the debt. As the surety insures the debt itself, he obligates
himself to pay the debt if the principal debtor will not pay,
regardless of whether or not the latter is financially
capable to fulfill his obligation. Thus, a creditor can go
directly against the surety although the principal debtor is
solvent and is able to pay or no prior demand is made on
the principal debtor. A surety is directly, equally and
absolutely bound with the principal debtor for the
payment of the debt and is deemed as an original
promissor and debtor from the beginning.[5]
Under the suretyship contract entered into by
petitioners-spouses with respondent bank, the former
obligated themselves to be solidarily bound with the
principal debtor BMC for the payment of its debts to
respondent bank amounting to five million pesos
(P5,000,000.00). Under Article 1216 of the Civil Code,
[6]
respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of
the MOA which provided for the suspension of payment
and filing of collection suits against BMC. Respondent
banks right to collect payment from the surety exists
independently of its right to proceed directly against the
principal debtor. In fact, the creditor bank may go against
the surety alone without prior demand for payment on the
principal debtor.[7]
The provisions of the MOA regarding the
suspension of payments by BMC and the non-filing of
collection suits by the creditor banks pertain only to
the property of the principal debtor BMC. Firstly, in the
rehabilitation receivership filed by BMC, only the
properties of BMC were mentioned in the petition with the
SEC.[8] Secondly, there is nothing in the MOA that involves
the liabilities of the sureties whose properties are separate
and distinct from that of the debtor BMC. Lastly, it bears to
stress that the MOA executed by BMC and signed by the
creditor-banks was approved by the SEC whose
jurisdiction is limited only to corporations and corporate
assets. It has no jurisdiction over the properties of BMCs
officers or sureties.
Clearly, the collection suit filed by respondent bank
against petitioners-spouses as sureties can prosper. The
trial courts denial of petitioners motion to dismiss was
proper.
IN VIEW WHEREOF, the petition is DISMISSED for
lack of merit. No pronouncement as to costs.
SO ORDERED.
Metrobank v. SLGT Holdings Sept. 14, 2007
It happened before; it will likely happen again. A developer
embarks on an aggressive marketing campaign and
succeeds in selling units in a yet to-be completed
condominium project. Short of funds, the developer
borrows money from a bank and, without apprising the
latter of the pre-selling transactions, mortgages the
condominium complex, but also without informing the
buyers of the mortgage constitution. Saddled with debts,
the developer fails to meet its part of the bargain. The
defaulting developer is soon sued by the fully-paid unit
buyers for specific performance or refund and is
threatened at the same time with a foreclosure of
mortgage. Having his hands full parrying legal blows from
different directions, the developer seeks a declaration of
suspension of payment, followed by a petition for
rehabilitation with suspension of action.
With a slight variation, the scenario thus depicted
describes the instant case which features respondent ASB
Development Corporation (ASB, for short), as the
defaulting developer of the BSA Twin Towers
Condominium Project (BSA Towers or Project, for short)
situated at Ortigas Center, Mandaluyong City, and
respondents Danilo A. Dylanco and SLGT Holdings, Inc.
(Dylanco and SLGT, respectively, hereinafter) as the unit
buyers. Petitioners Metropolitan Bank and Trust Company,
Inc. (Metrobank) and United Coconut Planters Bank
(UCPB) are the lending-mortgagee banks.
And now to the case:
Before the Court are these separate petitions for review
under Rule 45 of the Rules of Court separately interposed
by Metrobank and UCPB to nullify and set aside the
consolidated Decision1 and Resolution2 dated June 29,
2006, and October 31, 2006, respectively, of the Court of
Appeals (CA) in CA-G.R. SP No. 92807, CA-G.R. SP No.
92808 and CA-G.R. SP No. 92882.
The first assailed issuance affirmed the earlier
Decision3 dated October 10, 2005 of the Office of the
President (OP, hereinafter), as modified in its Order4 of
December 22, 2005, in consolidated OP Case No. 05-F-
212 and OP Case No. 05-G-215. The second assailed
issuance, on the other hand, denied reconsideration of the
first.
66
Per its Resolution5 of March 26, 2007, the Court ordered
the consolidation of these petitions.
From the petitions and the comments thereon, with their
respective annexes, and other pleadings, the Court
gathers the following facts:
On October 25, 1995, Dylanco and SLGT each
entered into a contract to sell with ASB for the
purchase of a unit (Unit 1106 for Dylanco and
Unit 1211 for SLGT) at BSA Towers then being
developed by the latter. As stipulated, ASB will
deliver the units thus sold upon completion of the
construction or before December 1999. Relying
on this and other undertakings, Dylanco and
SLGT each paid in full the contract price of their
respective units. The promised completion date
came and went, but ASB failed to deliver, as the
Project remained unfinished at that time. To make
matters worse, they learned that the lots on
which the BSA Towers were to be erected had
been mortgaged6 to Metrobank, as the lead bank,
and UCPB7 without the prior written approval of
the Housing and Land Use Regulatory Board
(HLURB).
Alarmed by this foregoing turn of events,
Dylanco, on August 10, 2004, filed with the
HLURB a complaint8 for delivery of property and
title and for the declaration of nullity of mortgage.
A similar complaint9 filed by SLGT followed three
(3) days later. At this time, it appears that the
ASB Group of Companies, which included ASB,
had already filed with the Securities and
Exchange Commission a petition for rehabilitation
and a rehabilitation receiver had in fact been
appointed.
What happened next are laid out in the OP decision
adverted to above, thus:
In response to the above complaints, ASB
alleged that it encountered liquidity problems
sometime in 2000 after its creditors [UCPB
and Metrobank] simultaneously demanded
payments of their loans; that on May 4, 2000,
the Commission (SEC) granted its petition for
rehabilitation; that it negotiated with UCPB and
Metrobank but nothing came out positive from
their negotiation .
On the other hand, Metrobank claims that
complainants [Dylanco and SLGT] have no
personality to ask for the nullification of the
mortgage because they are not parties to the
mortgage transaction ; that the complaints
must be dismissed because of the ongoing
rehabilitation of ASB; xxx that its claim against
ASB, including the mortgage to the [Project] have
already been transferred to Asia Recovery
Corporation; xxx.
UCPB, for its part, denies its liability to SLGT [for
lack of privity of contract] [and] questioned the
personality of SLGT to challenge the validity of
the mortgage reasoning that the latter is not party
to the mortgage contract [and] maintains that
the mortgage transaction was done in good
faith. Finally, it prays for the suspension of the
proceedings because of the on-going
rehabilitation of ASB.
In resolving the complaint in favor of Dylanco and
SLGT, the Housing Arbiter ruled that the
mortgage constituted over the lots is invalid for
lack of mortgage clearance from the HLURB. He
also rebuffed the banks request to suspend the
proceedings under Section 5 of Presidential
Decree (PD) No. 902-A as the banks are parties
under receivership. xxx
The HLURB Board of Commissioners, [per its
separate Decision both dated April 21, 2005]
affirmed the above rulings with the
modification that ASB should cause the
subdivision of the mother titles into condominium
certificates of title of Dylanco and SLGT free from
all liens and encumbrances. [On June 28, 2005
the HLURB denied the separate motions of
Metrobank and UCPB for reconsideration.
(Words in brackets and emphasis added).
For perspective, the decretal portion of the HLURBs
underlying decision10 with respect to the Dylanco case,
docketed thereat as REM-A-050208-0021, reads as
follows:
WHEREFORE, the appeals are dismissed for
lack of merit and the decision of the office below
is modified as follows:
1. Declaring the mortgage over the
subject condominium unit in favor of
respondent [Metrobank] as null and void
for violation of Section 18 of [PD] No.
957;
2. Directing respondent bank to
cancel/release the mortgage on the
subject condominium unit [Unit 1106];
and accordingly, surrender/release the
title thereof to the complainant;
3. Directing respondent Bank to release
to respondent ASB the transfer
certificate of title of the lots covering the
BSA Twin Towers Project; directing ASB
to cause the subdivision of the mother
titles into condominium certificates of tile
within 90 days and to thereafter deliver
title to complainant [Dylanco] free from
all liens and encumbrances; [and]
67
 4. Ordering respondent ASB to complete
the subject condominium project as per
SEC Order dated 03 November 2004.
(Words in brackets added)
On the other hand, the HLURB decision11 on
the SLGT case, docketed as REM-A-050208-0020, was,
on all material points, of the same tenor as in
the Dylanco case, albeit the unit involved is different and
the banks referred to in SLGT are UCPB and Metrobank.
From the HLURB resolutions in REM-A-050208-0020 and
REM-A-050208-0021, Metrobank appealed to the OP,
followed by UCPBs own appeal from the resolution in
REM-A-050208-0020. Owing to the obvious similarities in
both cases, the OP had them consolidated, the Dylanco
case docketed as O.P. Case No. 05-F-212 and the SLGT
case as O.P. Case No. 05-F-215.
On October 10, 2005, the OP rendered a
decision12 against Metrobank and UCPB, disposing as
follows:
WHEREFORE, premises considered, the
appeals filed by Metropolitan Bank and Trust
Company and the United Coconut Planters Bank
are hereby DISMISSED for lack of merit.
SO ORDERED.
From the October 10, 2005 OP Decision, petitioner banks
and SLGT interposed their respective motions for
reconsideration, SLGT excepting to that portion of the
decision declaring the mortgage contract as void only
insofar as it and Dylanco are concerned. To SLGT, the
indivisibility of a mortgage contract requires that a
declaration of nullity or a validity for that matter - should
cover the entire mortgage.
On December 22, 2005, the OP issued an Order13 acting
favorably on SLGTs motion, but denying those of
Metrobank and UCPB. The fallo of the OPs Order reads:
"WHEREFORE, the Motions for Reconsideration
of [Metrobank] and [UCPB] are hereby DENIED.
With respect to the partial motion for
reconsideration of SLGT , the same is
hereby GRANTED. Accordingly, the mortgage
contract executed between ASB Development
Corporation and respondent banks
(Metrobank and UCPB) is hereby declared
null and void in its entirety. Respondents-
appellants are hereby ordered to release to
ASBDC [TCT] Nos. 9834 and 9835, and for
ASBDC to cause the subdivision of the mother
titles into condominium certificates of title, and
thereafter deliver to complainants [SLGT and
Dylanco] their respective condominium
certificates of title free of lien and encumbrances.
The records of the instant cases are hereby
remanded to [HLURB] for its appropriate
disposition.
SO ORDERED. (Emphasis and words in
brackets added)
In time, petitioner banks went to the CA on a petition for
review under Rule 43 of the Rules of Court whereat the
appellate recourses were likewise consolidated and
docketed as CA-G.R. SP No. 92807, CA-G.R. SP No.
92808 and CA-G.R. SP No. 92882.
As stated at the threshold hereof, the appellate court, in its
assailed Decision14 of June 29, 2006, affirmed the OPs
October 10, 2005 Decision as modified in its December
22, 2005 Order, the affirmance being predicated, in gist,
on the following main premises:
1. A mortgage constituted on a condominium
project without the approval of the HLURB in
violation of the prescription of Presidential
Decree (PD) 957, like the ASB-Metrobank-Trust
Division mortgage contract, is void; a mortgage is
indivisible and cannot be divided into a valid and
invalid parts.
2. The complaints of Dylanco and SLGT are not
covered by the order issued by the SEC
suspending all actions and proceedings against
ASB.
Petitioner banks separate motions for reconsideration
were later denied in the CAs equally assailed
resolution15dated October 31, 2006.
Hence, these separate petitions.
Although formulated a bit differently, the grounds and
arguments advanced in support of the petitions converge
and focus on two issues, to wit:
1. The declaration of nullity of the entire mortgage
constituted on the project land site and the
improvements thereon; and
2. The applicability to this case of the suspension
order granted by SEC to ASB.
We DENY.
As to the first issue, it is the petitioners posture that the
CA, and, before it, the OP, erred when it declared the
subject mortgage contract void in its entirety and then
directed both petitioner banks to release the mortgage on
the Project.
We are not persuaded.
68
Both petitioners do not dispute executing the mortgage in
question without the HLURBs prior written approval and
notice to both individual respondents. Section 18 of
Presidential Decree No. (PD) 957 The Subdivision and
Condominium Buyers Protective Decree provides:
SEC. 18. Mortgages. - No mortgage of any unit
or lot shall be made by the owner or
developer without prior written approval of
the [HLURB]. Such approval shall not be granted
unless it is shown that the proceeds of the
mortgage loan shall be used for the development
of the condominium or subdivision project . The
loan value of each lot or unit covered by the
mortgage shall be determined and the buyer
thereof, if any, shall be notified before the
release of the loan. The buyer may, at his
option, pay his installment for the lot or unit
directly to the mortgagee who shall apply the
payments to the corresponding mortgage
indebtedness secured by the particular lot or unit
being paid for . (Emphasis and word in bracket
added)
There can thus be no quibbling that the project lot/s and
the improvements introduced or be introduced thereon
were mortgaged in clear violation of the aforequoted
provision of PD 957. And to be sure, Dylanco and SLGT,
as Project unit buyers, were not notified of the mortgage
before the release of the loan proceeds by petitioner
banks.
As it were, PD 957 aims to protect innocent subdivision lot
and condominium unit buyers against fraudulent real
estate practices. Its preambulatory clauses say so and the
Court need not belabor the matter presently. Section
18, supra, of the decree directly addresses the problem of
fraud and other manipulative practices perpetrated against
buyers when the lot or unit they have contracted to
acquire, and which they religiously paid for, is mortgaged
without their knowledge, let alone their consent. The
avowed purpose of PD 957 compels, as the OP correctly
stated, the reading of Section 18 as prohibitory and acts
committed contrary to it are void.16 Any less stringent
construal would only accord unscrupulous developers and
their financiers unbridled discretion to follow or not to
follow PD 957 and thus defeat the very lofty purpose of
that decree. It thus stands to reason that a mortgage
contract executed in breach of Section 18 of the decree is
null and void.
In Philippine National Bank v. Office of the
President,17 involving a defaulting mortgagor-subdivision
developer, a mortgagee-bank and a lot buyer, the Court
expounded on the rationale behind PD 957, as a tool to
protect subdivision lot and/or condominium unit buyers
against developers and mortgaging banks, in the following
wise:
xxx [T]he unmistakable intent of the law [is] to
protect innocent lot buyers from scheming
subdivision developers. As between these small
lot buyers and the gigantic financial institutions
which the developers deal with, it is obvious that
the law as an instrument of social justice
must favor the weak. Indeed, the petitioner bank
had at its disposal vast resources with which it
could adequately protect its loan activities, and
therefore is presumed to have conducted the
usual "due diligence" checking and ascertaining
the actual status, condition, utilization and
occupancy of the property offered as
collateral. xxx On the other hand, private
respondents obviously were powerless to
discover the attempt of the land developer to
hypothecate the property being sold to them. It
was precisely in order to deal with this kind of
situation that P.D. 957 was enacted, its very
essence and intendment being to provide a
protective mantle over helpless citizens who may
fall prey to the razzmatazz of what P.D. 957
termed "unscrupulous subdivision and
condominium sellers."
The Court then quoted with approval the following
instructive comments of the Solicitor General:
Verily, if P.D. 957 were to exclude from its
coverage the aforecited mortgage contract, the
vigorous regulation which P.D. 957 seeks to
impose on unconscientious subdivision sellers
will be translated into a feeble exercise of police
power just because the iron hand of the state
cannot particularly touch mortgage contracts
badged with the unfortunate accident of having
been constituted prior to the enactment of P.D.
957. Indeed, it would be illogical in the extreme if
P.D. 957 is to be given full force and effect and
yet, the fraudulent practices and manipulations it
seeks to curb. xxx
Given the foregoing perspective, the next question to be
addressed turns on whether or not the nullity extends to
the entire mortgage contract.
The poser should be resolved, as the CA and OP did
resolve it, in the affirmative. This disposition stems from
the basic postulate that a mortgage contract is, by nature,
indivisible.18 Consequent to this feature, a debtor cannot
ask for the release of any portion of the mortgaged
property or of one or some of the several properties
mortgaged unless and until the loan thus secured has
been fully paid, notwithstanding the fact that there has
been partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the debt
cannot ask for the proportionate extinguishments of the
mortgage as long as the debt is not completely satisfied.
The situation obtaining in the case at bench is within the
purview of the aforesaid rule on the indivisibility of
mortgage. It may be that Section 18 of PD 957 allows
partial redemption of the mortgage in the sense that the
buyer is entitled to pay his installment for the lot or unit
directly to the mortgagee so as to enable him - the said
69
buyer - to obtain title over the lot or unit after full payment
thereof. Such accommodation statutorily given to a unit/lot
buyer does not, however, render the mortgage contract
also divisible. Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the
mortgage. The real estate mortgage voluntarily constituted
by the debtor (ASB) on the lots or units is one and
indivisible. In this case, the mortgage contract executed
between ASB and the petitioner banks is considered
indivisible, that is, it cannot be divided among the different
buildings or units of the Project. Necessarily, partial
extinguishment of the mortgage cannot be allowed. In the
same token, the annulment of the mortgage is an all or
nothing proposition. It cannot be divided into valid or
invalid parts. The mortgage is either valid in its entirety or
not valid at all. In the present case, there is doubtless only
one mortgage to speak of. Ergo, a declaration of nullity for
violation of Section 18 of PD 957 should result to the
mortgage being nullified wholly.
It will not avail the petitioners any to feign ignorance of PD
957 requiring prior written approval of the HLURB, they
being charged with knowledge of such requirement since
granting loans secured by a real estate mortgage is an
ordinary part of their business.
Neither could they rightly claim to be mortgagees in good
faith. We shall explain.
The unyielding rule is that persons dealing with property
brought under the Torrens system of land registration have
the right to rely on what appears on the certificate of title
without inquiring further;19 that in the absence of anything
to excite or arouse suspicion that should impel a
reasonably cautious person to make such further inquiry, a
would-be mortgagee is without obligation to look beyond
the certificate and investigate the title of the mortgagor.
Such rule, however, does not apply to mortgagee-
banks,20 their business being one affected with public
interest, holding as they do and keeping, in trust, money
pertaining to the depositing public which they should guard
with earnest. Unlike private individuals, it behooves banks
to exercise greater care and prudence in their dealings,
including those involving registered lands.21 As we wrote
in Cruz v. Bancom Finance Corporation,22 "a banking
institution is expected to exercise due diligence before
entering into a mortgage contract. The ascertainment of
the status or condition of a property offered to it as a
security must be standard and indispensable part of its
operations." A bank that failed to observe due diligence
cannot be accorded the status of a bona fide mortgagee.23
Surely, petitioner banks cannot plausibly assert
compliance with the due diligence requirement exacted
contextually by the situation. For, have they done so, they
could have easily discovered that there is an on-going
condominium project on the lots offered as mortgage
collateral and, as such, could have aroused their suspicion
that the developer may have engaged in pre-selling, or,
with like effect, that there may be unit buyers therein, as
was the case here. Having been short in care and
prudence, petitioners cannot be deemed to be mortgagees
in good faith entitled to the benefits arising from such
status.
This thus brings us to the next issue of whether or not the
HLURB, OP and, necessarily, the CA reversibly erred in
continuing with the resolution of this case notwithstanding
the rehabilitation proceedings before, and the appointment
by, the SEC of a receiver for ASB which, under Section 6
(c)24 of PD 902-A, as amended,25necessarily suspended
"all actions for claims" against distressed corporations.
Petitioners maintain that individual respondents demands
initially filed with the HLURB partake of the nature of
"claim" within the contemplation of the aforesaid
suspensive section of PD 902-A. They cite Sobrejuanite v.
ASB Development Corporation26 to drive home the idea of
the encompassing reach of the word "claim" which they
deem to include any and all claims or demands of
whatever nature and character.
The Court is unable to accommodate the petitioners.
As we articulated in Arranza v. B.F. Homes, Inc.,27 the fact
that respondent B.F. Homes is under receivership does
not preclude the continuance before the HLURB of the
case for specific performance of a real estate developers
obligation under PD 957. For, "[E]"ven if respondent is
under receivership, its obligations as a real estate
developer under P.D. 957 are not suspended. Section 6
(C) of P.D. No. 902-A, as amended , on suspension of
all actions for claims against corporations refers solely to
monetary claims."28 Says the Court further:
xxx The appointment of a receiver does not
dissolve the corporation, nor does it interfere with
the exercise of corporate rights. In this case
where there appears to be no restraints imposed
upon respondent as it undergoes rehabilitation
receivership, respondent continues or should
continue to perform its contractual and statutory
responsibilities to petitioners as homeowners.
xxx xxx xxx
No violation of the SEC order suspending
payments to creditors would result as far as
petitioners complaint before the HLURB is
concerned. To reiterate, what petitioners seek to
enforce are respondents obligation as
subdivision developer [for which the HLURB, not
the SEC, is equipped with the expertise to deal
with the matter]. Such claims are basically not
pecuniary in nature.29
Arranza actually complemented the earlier case of Finasia
Investments and Finance Corporation v. CA30 where the
Court defined and explained the term "claim" in the
following wise:
We agree that the word "claim" as used in
Sec. 6 (c) of P.D. 902-A, as amended, refers to
70
 debts or demands of a pecuniary nature. It
means "the assertion of a right to have money
paid. It is used in special proceedings like those
before administrative court, on insolvency.
Consequently, the word "claim"
Petitioners citation and undue reliance on Sobrejuanite is
quite misplaced in view of differing set of facts. In that
case, the Court held that the HLURB is bereft of
jurisdiction to proceed with the case during the pendency
of the rehabilitation proceedings since the spouses
Sobrejuanites claim involves pecuniary consideration, or a
claim for refund of the purchase price paid, with interest, to
be precise. Unlike the spouses Sobrejuanite
in Sobrejuanite, SLGTs and Dylancos complaints in the
instant case did not seek monetary recovery or to touch
the corporate coffers of ASB ahead of others. They did not
even consider themselves as money claimants. All they
ask was for the enforcement of ASBs statutory and
contractual obligations as a condominium developer. In
the concrete, they pressed for the delivery of their units
free from all liens and encumbrances and the declaration
of nullity of the mortgage in question arising from the
breach of Section 18 of PD 957.
Significantly, in Sobrejuanite, the Court stated the
observation, in reference to the Arranza case, that "the
proceedings before the HLURB [may] be suspended
during the rehabilitation [of the ailing corporation]" "if the
claim was for monetary awards."31
The Court is very much aware of A.M. No. 00-8-10-SC or
the Interim Rules on Corporate Rehabilitation32 which
defines the term "claim" as including all claims or
demands of whatever character against a debtor or its
property, whether for money or otherwise. But as aptly
explained by the CA, Section 2433 of the interim rules limits
the coverage of the Rules on rehabilitation and
consequently the rule of suspension of action to those who
stand in the category or debtors and creditors. The
relationship between the petitioner banks, as mortgagor of
the ASB property, on one hand, and respondents SLGT
and Dylanco, as unit buyers, on the other, cannot be that
of a debtor-creditor as to bring the case within the purview
of the rules on corporate recovery, let alone
the Sobrejuanite case. Then, too, the vinculum that binds
SLGT/Dylanco, as unit buyers and as suitors before the
HLURB, and ASB is far from being akin to that of debtor-
creditor. As it were, SLGT/Dylanco sued ASB for having
constituted, in breach of PD 957, a mortgage on the
condominium project without prior HLURB approval and
so much as notifying them of the loan release for which
reason they prayed for the delivery of their units free from
all liens and encumbrances. With the view we take of the
case, the complaint of individual respondents is not in the
nature of "claims" that should be covered by the
suspensive effect of a rehabilitation proceeding.
Looking beyond the strictly legal issues involved in this
case, however, the pendency of the rehabilitation
proceedings ought not, as stressed in the Order34 of the
OP, be invoked to defeat or deny the claim of individual
respondents. Suspending the proceedings would only
perpetuate and compound the injustice committed by ASB
on SLGT and Dylanco. It would reduce to pure jargon the
beneficent provisions and render illusory the purpose of
PD 957 which, to repeat, is to protect innocent unit and lot
buyers from scheming subdivision/condominium
owners/developers. As a matter of good conscience, the
Court cannot allow it under the factual and legal premises
surrounding this case.
WHEREFORE, the instant petitions are DENIED and the
assailed CA Decision and Resolution are AFFIRMED.
Cost against the petitioners.
SO ORDERED.
Steel Corporation of the Philippines v. Mapfre Insular
Insurance Corporation Oct. 16, 2013
The Case
This is a petition1 for review on certiorari under
Rule 45 of the Rules of Court. Petitioner Steel
Corporation of the Philippines (SCP) challenges the
8 February 2012 Decision2 and 27 March 2012
Resolution3 of the Court of Appeals in CA-G.R. SP
No. 1 19760. The Court of Appeals declared void
the 1 June 2011 Order4 of the Regional Trial Court
(RTC), acting as rehabilitation court, Fourth Judicial
Region, Branch 3, Batangas City, in SP. PROC. No.
06-7993.
The Facts
SCP is a domestic corporation engaged in the
manufacture and distribution of cold-rolled and
galvanized steel sheets and coils. It obtained loans
from several creditors and, as security, mortgaged
its assets in their favor. The creditors appointed
Bank of the Philippine Islands (BPI) as their
trustee. On 17 December 1997, SCP and BPI
entered into a Mortgage Trust Indenture (MTI)
requiring SCP to insure all of its assets until the
loans are fully paid. Under the MTI, the insurance
policies were to be made payable to BPI.
During the course of its business, SCP suffered
financial difficulties. On 11 September 2006, one of
the creditors, Equitable PCI Bank, Inc., now known
as Banco de Oro-EPCI, Inc., filed with the RTC a
petition to have SCP placed under corporate
rehabilitation. On 12 September 2006, the RTC
issued a stay order to defer all claims against SCP
and appointed Atty. Santiago T. Gabionza, Jr. as
rehabilitation receiver. On 3 December 2007, the
RTC rendered a Decision approving the modified
rehabilitation plan.
71

Under Collective Master Policy No. UCPB Gem
HOF075089, SCP insured against material damage
and business interruption its assets located in
Barangay Munting Tubig, Balayan, Batangas, for
the period 19 August 2007 to 19 August 2008. On
8 June 2008, a fire broke out at SCPs plant
damaging its machineries. Invoking its right under
the MTI, BPI demanded and received from the
insurers $450,000 insurance proceeds.
On 13 October 2009, SCP filed with the RTC a
motion to direct BPI to turn over the $450,000
insurance proceeds in order for SCP to repair and
replace the damaged machineries. On 5 January
2010, the RTC issued an Order directing BPI to
release the insurance proceeds directly to the
contractors and suppliers who will undertake the
repairs and replacements of the damaged
machineries. BPI filed with the Court of Appeals a
petition for certiorari under Rule 65 of the Rules of
Court and, in its 28 September 2010 Decision,5 the
Court of Appeals affirmed the RTCs 5 January
2010 Order. However, in its 3 October 2012
Amended Decision,6 the Court of Appeals reversed
itself and set aside the RTCs 5 January 2010
Order. SCP filed with the Court a petition for review
on certiorari under Rule 45 and, in its 16
September 2013 Resolution,7 the Court denied the
petition. The Court held
that:chanroblesvirtualawlibrary
After a judicious review of the records, the Court
resolves to DENY the instant petition and AFFIRM
the October 3, 2012 Amended Decision and July 2,
2013 Resolution of the Court of Appeals (CA) in
CA-G.R. SP No. 113078 for failure of Steel
Corporation of the Philippines (petitioner) to show
that the CA committed any reversible error in
holding Bank of the Philippine Islands (respondent)
entitled to receive and hold in trust the subject
insurance proceeds. Section 4.04, sub-paragraph
(f) of the Mortgage Trust Indenture Agreement
between the parties expressly stipulated that
respondent shall receive the insurance proceeds in
case the risk or risks covered by the said policy
occur and it may be released, applied, and/or paid
to petitioner to procure replacement equipment
and/or machinery only upon written notice to the
creditors, who shall issue a Deed of Undertaking.
No such compliance was shown. It is hornbook that
a contract is the law between the parties and the
obligation arising therefrom should be complied
with in good faith. Moreover, the rehabilitation
proceedings were already terminated by the CA
(which decisions are immediately executory),
hence, petitioners justification for release of the
insurance proceeds in its favor, i.e., to replace the
burnt machineries, is not feasible at this time.
Besides, the petition suffers from procedural defect
in that it lacked copy of the Regional Trial Court
Order as well as relevant pleadings thereto, as
required under Section 4(d), Rule 45 of the Rules
of Court.
SO ORDERED.8
Under Industrial All Risks Insurance Policy No. F-
369430, SCP insured with respondents Mapfre
Insular Insurance Corporation, New India
Assurance Company Limited, Philippine Charter
Insurance Corporation, Malayan Insurance Co.,
Inc., and Asia Insurance Phil. Corp. (respondent
insurers) against material damage and business
interruption its assets located in Barangay Munting
Tubig for the period 19 August 2009 to 19 August
2010. On 7 December 2009, a fire again broke out
at SCPs plant damaging its cold rolling mill and
other machineries.
On 17 December 2010, SCP filed with the RTC a
motion to direct respondent insurers to pay
insurance proceeds in the amounts of $28,000,000
property damage and $8,000,000 business
interruption.
During the 21 January 2011 hearing of SCPs 17
December 2010 motion, respondent insurers
entered a special appearance solely for the
purpose of questioning the RTCs jurisdiction over
the insurance claim. On 7 February 2011,
respondent insurers filed with the RTC an
opposition ad cautelam praying that SCPs 17
December 2010 motion be denied.
In a letter dated 22 March 2011, respondent
insurers denied liability on SCPs insurance claim
because (1) SCP failed to comply with the terms of
the policies; (2) SCP defrauded the respondent
insurers; (3) the gross over-insurance of the cold
rolling mill constitutes prima facie proof of arson;
(4) SCP failed to show the actual damage
sustained by its machineries; (5) SCP failed to
commence the repair and replacement of the
damaged machineries within 12 months; (6) SCPs
negligence caused the fire; and (7) since SCPs
claim for property damage is non-compensable, its
claim for business interruption is also non-
compensable. In their ad cautelam opposition
dated 24 March 2011, respondent insurers prayed
that SCPs 17 December 2010 motion be denied
because (1) the amount of the claim for property
damage was increased from $28,000,000 to
$30,000,000; (2) the RTC lacked jurisdiction; (3)
the RTCs 5 January 2010 Order directing BPI to
release the insurance proceeds directly to the
contractors and suppliers who will undertake the
repairs and replacements of SCPs damaged
machineries did not apply; and (4) respondent
insurers already denied SCPs insurance claim.
72
On 25 March and 8 April 2011, the RTC issued an
Order directing (1) SCP to formally manifest its
amenability to the repair and replacement of the
damaged machineries instead of payment of
insurance proceeds; (2) SCP and respondent
insurers to file their memoranda; and (3) the
creditors to file their respective comments.
The RTCs Ruling
In its 1 June 2011 Order, the RTC granted SCPs 17
December 2010 motion and directed respondent
insurers to pay SCP $33,882,393 property damage
and $8,000,000 business interruption. The RTC
held that:chanroblesvirtualawlibrary
At the outset, this Court notes that SCPs
manufacturing operations have suffered from two
separate fire incidents: one which damaged the
ABB roll on June 8, 2008, and the other which
damaged the entire Cold Rolling Mill (CRM) on
December 7, 2009. The claim for the first fire
incident was partially paid by the insurers but the
proceeds were withheld by BPI as MTI Trustee.
Thus, feeling aggrieved, SCP was forced to file a
Motion to Direct Trustee to Release Insurance
Proceeds to SCP which was granted by the
previous judge, (over and above the objections of
BPI which argued that this Court had no
jurisdiction over the matter) through his Order
dated January 5, 2010 x x x.
This Court, in resolving the instant motion, is
inclined to agree with the previous judges order
and so upholds that it has jurisdiction over the
insurance claims filed by SCP in these rehabilitation
proceedings. x x x.
In a resolution dated September 28, 2010, the
Court of Appeals (BPI vs. Hon. Albert A. Kalalo,
C.A.-G.R. SP No. 113078) confirmed this Courts
authority and jurisdiction to take cognizance of the
insurance matter in the same rehabilitation
proceedings. The appellate court made it very clear
that this courts jurisdiction includes the necessary
and usual incidental powers that are essential to
effectuate SCPs rehabilitation. x x x.
The argument that this Court cannot possibly pass
upon the insurance claim of SCP because it is only
acting as a rehabilitation court cannot hold water.
The mere fact that this Court by raffle has been
designated as a rehabilitation court in view of the
inhibition of RTC Branches 2 and 4 does not mean
that it has lost its powers or authority as a court of
general jurisdiction. x x
x x x x
It is not true that the second panel of insurers are
not affected parties and therefore cannot be
deemed covered by the in rem nature of the
rehabilitation proceedings. It is apt to note that the
second panel of insurers unequivocably admitted,
in par. 21 of their Opposition, that the panel of
insurers are aware that any proceeding initiated
under the Rules on [C]orporate Rehabilitation shall
be considered in rem and that jurisdiction over all
persons affected by the proceedings shall be
considered acquired upon publication of the notice
of the commencement of the proceedings in any
newspaper of general circulation in the Philippines
as required by the Rules.
The panel of insurers argument that they are not
affected parties in the rehabilitation proceedings
because they do not hold any asset belonging to
SCP []which should be reflected in its audited
financial statements was sufficiently rebutted by
SCP when the latter argued that the insurers,
holding as they do, sums of money, recovery of
which is sought by SCP, as the insured, are parts of
the assets of its estate (Bank of the Philippine
Islands vs. Posadas, 56 Phil. 215, 230). They are
sums of money redounding to the benefit of its
estate (i.e. assets) as an insured (Heirs of Loreto
Maramag vs. Heirs of Maramag, et al., 586 SCRA
774, 787). Thus, the fact that SCP, as insured, is
claiming the proceeds of insurance policies issued
to it, makes the insurers affected parties covered
by the instant rehabilitation proceedings.
The panel of insurers further contend, that the
claim may not be resolved summarily as the same
requires a full-blown trial such that it may be
considered a complaint and therefore this Court did
not acquire jurisdiction over the res because of the
non-payment of docket fees. Contrary to this line
of reasoning however, it should be pointed out that
the Interim Rules of Procedure on Corporate
Rehabilitation clearly recognizes the right of the
parties affected by the proceedings to file their
opposition (Rule 3, Secs. 6, 10 and 20). The
rehabilitation judge can hold clarificatory hearings
if there is a need to clarify certain questions arising
from such opposition. In short, the right to oppose
(together with the corresponding right to be heard
on the opposition) does not necessarily mean that
a full-blown trial should be conducted. The
instant proceedings does [sic] not automatically
become adversarial (as compared to summary
proceedings) necessitating full-blown trial just
because the insurers have conveyed their intent to
oppose (which they did) the claim.
As the insurers themselves admit in par. 37 of their
x.
Opposition adversarial proceedings simply means
that it is one having opposing parties, contested
73
as distinguished from an ex-parte application, one
of which the party seeking relief has given legal
warning to the other party and afforded the latter
an opportunity to contest it (Republic of the
Philippines vs. Valencia, 141 SCRA 462[,] 1986). It
is very clear that the insurers have all the
opportunity in these proceedings to oppose even
without the necessity of a full-blown hearing.
And since the subject motion for payment of the
insurance claim does not necessarily entail full-
blown hearings despite it being an adversarial
motion (i.e. contested), the argument of the
insurers that it is a complaint that must be
resolved in an original, separate, full-blown
proceedings, independently of the instant case
which is summary in nature, and necessarily must
comply with Sec. 141 of the Revised Rules of Court
regarding the payment of filing fees []upon filing
of the pleading or other application which initiates
an action or proceeding does not hold water and
is fallacious.
x x x x
As to the corollary issue of the rightful payee of the
insurance proceeds, this Court hereby rules that
contrary to the creditors argument that the
proceeds of the insurance claims should be given
to the MTI Trustee pursuant to the MTI, it is
appropriate for this Court to emphasize what the
appellate court in BPI vs. Hon. Kalalo, has said
that although it is beyond dispute that the
provisions of the MTI continue to bind the parties,
the MTIs binding effect should be qualified.
Pursuant to the provision of the Interim Rules and
in deference to the purpose of rehabilitation
proceedings, the Mortgage Trust Indenture would
be binding only insofar as it does not conflict with
the provisions of the rehabilitation plan undertaken
by the private respondent as well as if it does not
hinder the corporate rehabilitation of private
respondent itself. In deciding who has the better
right to receive the disputed insurance proceeds,
the Court of Appeals said that utmost regard must
be had to the restoration of herein private
respondent to a position of successful operation
and solvency.
x x x x
It is not true as contended by the second panel of
insurers that there are distinctions between the
instant motion (for the second fire) from the first
motion (for the first fire) which had already been
ruled in favor of SCP by the previous judge. The
factual circumstances under the first motion and
the present one are similar or analogous even if
not entirely identical. Both motions refer to
disputed insurance claims arising from losses
covered by existing policies issued to SCP. Both
have been disputed or opposed either by the MTI
Trustee or by the insurers themselves. Thus, both
motions should be resolved in the same manner in
order to maintain consistency and stability in this
Courts judicial pronouncements.
This Court agrees with SCP when it argues that the
creditors should realize that if they insist on being
paid the cash proceeds of the claim or if the
proceeds are to be given to the MTI trustee, the
said act may not only constitute a violation of the
Stay Order (since it is virtually a
satisfaction/enforcement/collection of their money
claims) but it would also result in SCP not being
able to restart normal operations which would
adversely affect its rehabilitation. Hence, this Court
mandates the second panel of insurers to pay the
insurance claims of SCP or in lieu thereof, replace
or reinstate the CRM.
WHEREFORE, premised and predicated on the
foregoing, the Court hereby orders the
following:chanroblesvirtualawlibrary
1. Grant SCPs unopposed Urgent Motion (to
Withdraw Motion to Admit Supplemental Motion
dated December 2, 2009) dated September 9,
2010;
2. Order the second panel of insurers to already
pay the additional business interruption claim of
US$8 million plus interest at the rate provided by
Sec. 243 of the Insurance Code (for the second
fire); and
3. Order the second panel of insurers to pay to
SCP the total sum of US$33,882,393.00, plus
interest at the rate provided by Sec. 243 of the
Insurance Code inclusive of the value of its CRM or
in lieu thereof, replace or reinstate the
CRM.chanrob1esvirtualawlibrary
SO ORDERED.9
Respondent insurers filed with the Court of Appeals
a petition10 for certiorari under Rule 65 of the Rules
of Court raising mainly as issue that the RTC
lacked jurisdiction over SCPs insurance claim and
over respondent insurers.
The Court of Appeals Ruling
In its 8 February 2012 Decision, the Court of
Appeals declared void the RTCs 1 June 2011 Order.
The Court of Appeals held
that:chanroblesvirtualawlibrary
x x x [T]he present petition for certiorari under
Rule 65, 1997 Rules of Civil Procedure is an
appropriate remedy, as it assails the very
jurisdiction of the trial court in granting private
74
respondents insurance claims which were raised
through a mere Motion to Pay in the
rehabilitation proceedings. It is basic that a special
civil action for certiorari is intended for the
correction of errors of jurisdiction or grave abuse
of discretion amounting to lack or excess of
jurisdiction. Its principal office is to keep the
inferior court within the parameters of its
jurisdiction or to prevent it from committing such a
grave abuse of discretion amounting to lack or
excess of jurisdiction.
x x x x
Notably, even in the proceedings below, petitioners
questioned the trial courts jurisdiction to resolve
private respondents Motion to Pay. As the trial
court noted in its Order dated June 1, 2011, during
the hearing on private respondents Motion to
Pay on January 21, 2011, petitioners entered a
very special appearance solely for the purpose of
questioning the trial courts jurisdiction. Record
also bears that petitioners assailed the trial courts
jurisdiction during the hearing on private
respondents Motion to Resolve Critical Pending
Incidents, dated March 25, 2011, and in pleadings
filed before the trial court, to wit: (i) Insurers
Opposition Ad Cautelam (To: Motion to Direct
Insurers to Pay Insurance Proceeds to Insured
Steel Corporation of the Philippines dated
December 17, 2010); (ii) Comment Ad
Cautelam (On Steel Corporation of the Philippines
Comment on the Opposition Ad Cautelam dated
January 20, 2011); (iii) Insurers Ad the Interim Rules on Corporate Rehabilitation to
Cautelam Opposition versus Honorable Courts
Assumption of Jurisdiction and/or Summary
Resolution of Motion in Movants Favor; and (iv)
Insurers Memorandum (on Issue of
Jurisdiction).
There is no denying that the subject matter of
private respondents Motion to Pay comprised of
its insurance claims for (i) business interruption in
the amount of US$8 million, and (ii) property loss
in the amount of US$28 million. Said insurance
claims cannot be considered as claims within the
jurisdiction of the trial court functioning as a
rehabilitation court. Rehabilitation courts only have
limited jurisdiction over the claims by creditors
against the distressed company, not on the claims
of said distressed company against its debtors. The
interim rules define claim as referring to all claims
or demands, of whatever nature or character
against a debtor or its property, whether for money
or otherwise.
Even under the new Rules of Procedure on
Corporate Rehabilitation, claim is defined under
Section 1, Rule 2 as all claims or demands of
whatever nature or character against a debtor or
its property, whether for money or otherwise. This
is also the definition of a claim under Republic Act
No. 10142. Section 4(c) thereof
reads:chanroblesvirtualawlibrary
(c) Claim shall refer to all claims or demands of
whatever nature or character against the debtor or
its property, whether for money or otherwise,
liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed,
including, but not limited to[:] (1) all claims of the
government, whether national or local, including
taxes, tariffs and customs duties; and (2) claims
against directors and officers of the debtor arising
from the acts done in the discharge of their
functions falling within the scope of their authority:
Provided, That, this inclusion does not prohibit the
creditors or third parties from filing cases against
the directors and officers acting in their personal
capacities.
Contrary to the trial courts finding, petitioners
cannot be considered as affected parties within
the purview of Section 1, Rule 3 of the Interim
Rules o[n] Corporate Rehabilitation. As explained
in Metropolitan Waterworks and Sewerage System
vs. Daway, the provision, being merely a logical
consequence of filing an in rem petition for
rehabilitation, shall only cover the distressed
companys creditors and those other persons
holding the assets belonging to the debtor under
rehabilitation that would be material to the
rehabilitation proceedings. As the Supreme Court
explained in said case:chanroblesvirtualawlibrary
The public respondent relied on Sec. 1, Rule 3 of
support its jurisdiction over the Irrevocable
Standby Letter of Credit and the banks that issued
it. The section reads in part []that jurisdiction over
those affected by the proceedings is considered
acquired upon the publication of the notice of
commencement of proceedings in a newspaper of
general circulation[] and goes further to define
rehabilitation as an in rem proceeding. This
provision is a logical consequence of the in
rem nature of the proceedings, where jurisdiction
is acquired by publication and where it is necessary
that the assets of the debtor come within the
courts jurisdiction to secure the same for the
benefit of creditors. The reference to []all those
affected by the proceedings[] covers creditors or
such other persons or entities holding assets
belonging to the debtor under rehabilitation which
should be reflected in its audited financial
statements. The banks do not hold any assets of
respondent Maynilad that would be material to the
rehabilitation proceedings nor is Maynilad liable to
the banks at this point.
In essence, private respondents Motion to Pay is
a collection suit; hence, it must be filed in a
separate proceeding and the corresponding docket
fees must be paid. Too basic to require further
75
elucidation is the settled doctrine that a court
acquires jurisdiction over a case only upon the
payment of the prescribed fees. Here, the filing of
the Motion to Pay in the rehabilitation court was
a circumvention of the basic and indispensable
requirement of payment of docket fees.
x x x x
There is also no gainsaying that the trial court had
not validly acquired jurisdiction over the persons of
petitioners. Jurisdiction over the person of a party
defendant is acquired upon the service of
summons in the manner required by law or,
otherwise, by his voluntary appearance. Petitioners
were not served with summons. Their appearance
before the trial court cannot be considered as
voluntary appearance since the same was done
precisely to question the jurisdiction of the trial
court. It is well-settled that a party who makes a
special appearance in court challenging the
jurisdiction of said court based on the ground of
invalidity of summons, among others, cannot be
considered to have submitted himself to the
jurisdiction of the court.
In fine, the Court finds that the trial court
committed grave abuse of discretion amounting to
lack or excess of jurisdiction in issuing the Order
dated June 1, 2011. Grave abuse of discretion
implies such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction or,
in other words, where the power is exercised in an
arbitrary manner by reason of passion, prejudice,
or personal hostility, and it must be so patent or
gross as to amount to an evasion of a positive duty
or to a virtual refusal to perform the duty enjoined
or to act at all in contemplation of law.
WHEREFORE, the trial courts Order dated June 1,
2011 is declared NULL and VOID. Respondents and
all persons acting on their behalf are
PERMANENTLY ENJOINED from implementing the
said Order dated June 1, 2011 and all related
issuances, if any, in SP Proc. No. 06-7993.
SO ORDERED.11
SCP filed a motion for reconsideration, which the
Court of Appeals denied in its 27 March 2012
Resolution. Hence, the present petition.
The Issues
SCP raises mainly as issues that the Court of
Appeals erred when it entertained respondent
insurers petition for certiorari filed under Rule 65
of the Rules of Court, and when it held that the
RTC acted with grave abuse of discretion
amounting to lack or excess of
jurisdiction:chanroblesvirtualawlibrary
FIRST REASON
THE COURT OF APPEALS ERRED WHEN, AFTER
EXPRESSLY SAYING THAT IT IS THE MANDATE OF
THE COURT TO APPLY RELEVANT DECISIONS
MATERIAL TO THE RESOLUTION OF QUESTIONS
BEFORE IT, NEVERTHELESS REFUSED TO FOLLOW
AND APPLY CHINA BANKING CORPORATION VS.
CEBU PRINTING AND PACKAGING CORPORATION x
x x UPON THE RESPONDENTS AND, INSTEAD,
SUSTAINED A REMEDY WHICH WAS NOT ONLY
WRONG BUT ALSO COULD NOT HAVE BEEN
VALIDLY AVAILED OF BY THE RESPONDENTS FOR
THE REVERSAL AND NULLIFICATION OF THE
ORDER OF THE REHABILITATION COURT OF
BATANGAS DIRECTING THE RESPONDENTS TO PAY
TO THE PETITIONER THE PROCEEDS OF
INSURANCE POLICIES ISSUED BY THEM AND/OR
TO REPLACE THE COLD ROLLING MILL OF THE
PETITIONER WHICH WAS LOST AS A
CONSEQUENCE OF THE RISK INSURED AGAINST.
SECOND REASON
THE COURT OF APPEALS ERRED WHEN IT DID NOT
CONSIDER THE STATUS OF THE PROCEEDINGS
UNDER WHICH THE REHABILITATION COURT
EXERCISED ITS JURISDICTION AND, INSTEAD,
FOUND THE SAID COURT AS WITHOUT
JURISDICTION TO DIRECT THE RESPONDENTS AS
INSURERS TO PAY THE INSURANCE PROCEEDS
DUE FROM THEM AND/OR REPLACE THE COLD
ROLLING MILL OF THE PETITIONER SO THAT IT
COULD CONTINUE TO REHABILITATE ITSELF IN A
MANNER AS WOULD SERVE THE POLICIES ON
CORPORATE REHABILITATION AS MANDATED BY
P.D. NO. 902-A AND THE INTERIM RULES OF
PROCEDURE ON CORPORATE REHABILITATION.12
The Courts Ruling
The petition is unmeritorious.
SCP claims that respondent insurers availed of the
improper remedy when they filed with the Court of
Appeals a petition for certiorari under Rule 65 of
the Rules of Court, instead of a petition for review
under Rule 43. Thus, the Court of Appeals erred
when it did not dismiss respondent insurers
petition, applying China Banking Corporation v.
Cebu Printing and Packaging
Corporation.13cralawlibrary
The Court disagrees. A petition for certiorari under
Rule 65 is the proper remedy when the issue
raised involves errors of jurisdiction. On the other
hand, a petition for review under Rule 43 is the
proper remedy when the issue raised involves
76
errors of judgment. In ABS-CBN Broadcasting
Corp. v. World Interactive Network Systems Japan
Co., Ltd.,14 the Court held
that:chanroblesvirtualawlibrary
Proper issues that may be raised in a petition for
review under Rule 43 pertain to errors of fact, law
or mixed questions of fact and law. While a petition
for certiorari under Rule 65 should only limit itself
to errors of jurisdiction, that is, grave abuse of
discretion amounting to a lack or excess of
jurisdiction.15
In Suyat, Jr. v. Torres,16 the Court held
that:chanroblesvirtualawlibrary
In a petition for certiorari, the jurisdiction of the
court is narrow in scope. It is limited to resolving
only errors of jurisdiction. x x x Certiorari will issue
only to correct errors of jurisdiction. It is not a
remedy to correct errors of judgment. An error of
judgment is one in which the court may commit in
the exercise of its jurisdiction, and which error is
reversible only by appeal. Error of jurisdiction is
one where the act complained was issued by the
court without or in excess of jurisdiction and which
error is correctible only by the extraordinary writ of
certiorari. Certiorari will not be issued to cure
errors by the trial court or quasi-judicial body in its
appreciation of the evidence of the parties, and its
conclusions anchored on the said findings, and its
conclusions of law. As long as the court acts within
its jurisdiction, any alleged errors committed in the
exercise of its discretion will amount to nothing
more than mere errors of judgment, correctible by
an appeal or a petition for review under Rule 43 of
the Rules of Court.17
China Banking Corporation is inapplicable because
the issue in that case is different from the issue
raised by respondent insurers in CA-G.R. SP No.
119760. In China Banking Corporation, the issue
involved errors of judgment. In particular, Cebu
Printing and Packaging Corporation (CPPC)
questioned the rehabilitation courts findings of fact
and law in its 30 April 2002 Order denying due
course to the petition for corporate rehabilitation.
CPPC never questioned the rehabilitation courts
jurisdiction. Since the issue involved errors of
judgment, the proper remedy, as held in China
Banking Corporation, was to file a petition for
review under Rule 43. In the present case, the
issue raised by respondent insurers in CA-G.R. SP
No. 119760 involved errors of jurisdiction.
Respondent insurers questioned the RTCs
jurisdiction over the subject matter of SCPs
insurance claim and over the persons of
respondent insurers. Since the issue involved
errors of jurisdiction, the proper remedy was to file
a petition for certiorari under Rule 65.
SCP claims that the RTC has jurisdiction over the
subject matter of the insurance claim. Thus, the
Court of Appeals erred when it held that the RTC
acted with grave abuse of discretion amounting to
lack or excess of jurisdiction in issuing the 1 June
2011 Order.
The Court disagrees. The RTC, acting as
rehabilitation court, has no jurisdiction over the
subject matter of the insurance claim of SCP
against respondent insurers. SCP must file a
separate action for collection where respondent
insurers can properly thresh out their defenses.
SCP cannot simply file with the RTC a motion to
direct respondent insurers to pay insurance
proceeds. Section 3 of Republic Act No.
1014218states that rehabilitation proceedings are
summary and non-adversarial in nature. They do
not include adjudication of claims that require full
trial on the merits, like SCPs insurance claim
against respondent insurers. In Advent Capital and
Finance Corporation v. Alcantara,19 the Court held
that:chanroblesvirtualawlibrary
Ultimately, the issue is what court has
jurisdiction to hear and adjudicate the
conflicting claims of the parties over the
dividends that Belson held in trust for their
owners. Certainly, not the rehabilitation
court which has not been given the power to
resolve ownership disputes between Advent Capital
and third parties. x x x.
Advent Capital must file a separate action for
collection to recover the trust fees that it
allegedly earned and, with the trial courts
authorization if warranted, put the money in
escrow for payment to whoever it belongs. Having
failed to collect the trust fees at the end of each
calendar quarter as stated in the contract, all it
had against the Alcantaras was a claim for
payment which is proper subject for an
ordinary action for collection. It cannot
enforce its money claim by simply filing a
motion in the rehabilitation case for delivery
of money belonging to the Alcantaras but in the
possession of a third party.
Rehabilitation proceedings are summary and
non-adversarial in nature, and do not
contemplate adjudication of claims that must
be threshed out in ordinary court
proceedings. Adversarial proceedings similar to
that in ordinary courts are inconsistent with the
commercial nature of a rehabilitation case. The
latter must be resolved quickly and expeditiously
for the sake of the corporate debtor, its creditors
and other interested parties. Thus, the Interim
Rules incorporate the concept of prohibited
pleadings, affidavit evidence in lieu of oral
testimony, clarificatory hearings instead of the
77
traditional approach of receiving evidence, and the
grant of authority to the court to decide the case,
or any incident, on the basis of affidavits and
documentary evidence.
Here, Advent Capitals claim is disputed and
requires a full trial on the merits. It must be
resolved in a separate action where the
Alcantaras claim and defenses may also be
presented and heard.20 (Emphases supplied)
The Court agrees with the ruling of the Court of
Appeals that the jurisdiction of the rehabilitation
courts is over claims against the debtor that is
under rehabilitation, not over claims by the
debtor against its own debtors or against third
parties. In its 8 February 2012 Decision, the Court
of Appeals held that:chanroblesvirtualawlibrary
x x x Said insurance claims cannot be considered
as claims within the jurisdiction of the trial court
functioning as a rehabilitation court. Rehabilitation
courts only have limited jurisdiction over the claims
by creditors against the distressed company, not
on the claims of said distressed company against
its debtors. The interim rules define claim as
referring to all claims or demands, of whatever
nature or character against a debtor or its
property, whether for money or otherwise.
Even under the new Rules of Procedure on
Corporate Rehabilitation, claim is defined under
Section 1, Rule 2 as all claims or demands of
whatever nature or character against a debtor or
its property, whether for money or otherwise. This
is also the definition of a claim under Republic Act
No. 10142. Section 4(c) thereof
reads:chanroblesvirtualawlibrary
(c) Claim shall refer to all claims or demands
of whatever nature or character against the
debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, including, but not limited to[:] (1) all
claims of the government, whether national or
local, including taxes, tariffs and customs duties;
and (2) claims against directors and officers of the
debtor arising from the acts done in the discharge
of their functions falling within the scope of their
authority: Provided, That, this inclusion does not
prohibit the creditors or third parties from filing
cases against the directors and officers acting in
their personal capacities.21 (Emphasis supplied)
Respondent insurers are not claiming or
demanding any money or property from SCP. In
other words, respondent insurers are not
creditors of SCP. Respondent insurers
are contingent debtors of SCP because they may
possibly be, subject to proof during trial, liable to
SCP. Thus, the RTC has no jurisdiction over the
insurance claim of SCP against respondent
insurers. SCP must file a separate action against
respondent insurers to recover whatever claim it
may have against them.
WHEREFORE, the petition is DENIED. The
Court AFFIRMS the 8 February 2012 Decision and
27 March 2012 Resolution of the Court of Appeals
in CA-G.R. SP No. 119760.
SO ORDERED.
Lexber, Inc. v. Dalman April 20, 2015
We resolve in this petition for review on certiorari1 the
challenge to the April 14, 2008 decision2 and the June 30,
2008 resolution3 of the Court of Appeals (CA) in CA-G.R.
SP No. 100946. These assailed CA rulings annulled the
June 12, 20074 and August 8, 20075 orders of the
Regional Trial Court of Quezon City, Branch 90 (trial
court), which gave due course to the September 28, 2006
petition for rehabilitation6 of petitioner Lexber, Inc.
(Lexber). Factual Antecedents
Lexber is a domestic corporation engaged in the business
of housing, construction, and real estate development. Its
housing projects are mostly located in the province of
Benguet, Baguio City, and Cabanatuan City.7
Among those who availed of Lexbers housing projects are
respondent-spouses Caesar and Conchita Dalman
(Spouses Dalman), who bought a house and lot under a
contract to sell in Lexbers Regal Lexber Homes at Tuba,
Benguet.8
Because of the 1997 Asian financial crisis and other
external factors, Lexbers financial condition deteriorated.
It was forced to discontinue some of its housing
projects,9 including the one where the Spouses Dalmans
purchased property is located.
As Lexber could no longer pay its creditors, it filed a
petition for rehabilitation with prayer for the suspension of
payments on its loan obligations.10 Among its creditors are
the Spouses Dalman who are yet to receive their
purchased house and lot, or, in the alternative, a refund of
their payments which amounted to P900,000.00.11
In an order dated June 12, 2007, the trial court gave due
course to Lexbers rehabilitation petition and appointed
Atty. Rafael Chris F. Teston (Atty. Teston) as rehabilitation
receiver. It further ordered Atty. Teston to evaluate
Lexbers rehabilitation plan and recommend the necessary
actions to be taken.12
The Spouses Dalman filed a motion for reconsideration13
from this order and argued that consistent with Rule 4,
Section 1114 of the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules), the trial court
should have dismissed outright the rehabilitation petition
because it failed to approve the rehabilitation plan within
180 days from the date of the initial hearing.
78
The Spouses Dalman further submitted that no when it gave due course to the rehabilitation petition,
rehabilitation petition of a real estate company like Lexber despite:
should be given due course without the Housing and Land
Use Regulatory Boards (HLURB) prior request for the a. the absence of the HLURBs prior request for the
appointment of the rehabilitation receiver. appointment of a rehabilitation receiver; and b. the lapse
of the 180-day period for the approval of a rehabilitation
On August 8, 2007, the trial court denied Spouses plan.
Dalmans motion for reconsideration, prompting the
Spouses Dalman to seek relief from the CA through a Rule The Courts Ruling
65 petition.15
We resolve to DENY the petition due to the pendency of
The CAs Ruling CA G.R. No. 103917, pending with the CA after the trial
court dismissed Lexbers rehabilitation petition in its May
The CA granted the petition for certiorari. 23, 2008 order. Because of this supervening event, the
Court is also compelled to deny the present petition. We
The CA ruled that the trial court should have dismissed so rule to avoid any conflicting ruling with the CAs
Lexbers rehabilitation petition outright as there was no decision in CA G.R. No. 103917, which is reviewing the
evidence to show that the HLURB requested the rehabilitation petitions dismissal but for a different and
appointment of Lexbers rehabilitation receiver.16 The CA more substantive reason, i.e., the disapproval of Lexbers
posited that under Section 6(c)17 of Presidential Decree rehabilitation plan.
(PD) 902-A, as amended,18 it is only after the HLURBs
request that a rehabilitation court can give due course to a This possibility of rendering conflicting decisions among
rehabilitation petition and validly appoint a receiver.19 reviewing courts is one of the reasons why the Rules of
Procedure on Corporate Rehabilitation23 (2008 Rules)
Lastly, the CA held that the rehabilitation petition must also amended the Interim Rules provision on the available
be dismissed since the rehabilitation plan was not procedural remedies after the filing of the rehabilitation
approved within the prescribed 180-day period under Rule petition. This has also been further amended in the new
4,Section 11 of the Interim Rules. Financial Rehabilitation Rules of Procedure24 (2013
Rules).
The Petition
Under the Interim Rules, a motion for reconsideration is a
prohibited pleading.25 This is no longer true under the 2008
Lexber disclosed in its petition that in an order dated May Rules and the new 2013 Rules, which implemented the
23, 2008, the trial court eventually dismissed the procedural changes outlined below:
rehabilitation petition because of the disapproval of
Lexbers proposed rehabilitation plan. The CA is currently
reviewing this subsequent order in a separate proceeding, 2008 Rules 2013 Rules
docketed as CA G.R. No. 103917.20
Rule 8 Rule 6
Notwithstanding this supervening dismissal, Lexber Procedural Remedies Procedural Remedies
argues that the CA erred in reversing the trial courts initial
finding of merit in the rehabilitation petition. Section 1. Motion for Section 1. Motion for
Reconsideration.- A party Reconsideration A party
Lexber submits that nowhere in Section 6(c) of PD 902-A, may file a motion for may file a motion for
as amended, is it provided that the HLURBs prior request reconsideration of any reconsideration of any
for the appointment of a receiver is mandatory before the order issued by the court order issued by the court
rehabilitation court can give due course to the petition for prior to the approval of the prior to the approval of the
rehabilitation of a real estate company.21 rehabilitation plan. No rehabilitation plan. No
relief can be extended to relief can be extended to
the party aggrieved by the the party aggrieved by the
Finally, Lexber contends that the outright dismissal of a court's order on the motion courts order on the motion
rehabilitation petition for non-compliance with the 180-day through a special civil through a special civil
period for the approval of the rehabilitation plan is against action for certiorari under action for certiorari under
the Interim Rules policy of liberal construction to facilitate Rule 65 of the Rules of Rule 65 of the Rules of
the rehabilitation of distressed corporations.22 Court. Such order can Court.
only be elevated to the
The Issues Court of Appeals as an An order issued after the
assigned error in the approval of the
The main issue before us is whether the CA erred in petition for review of the rehabilitation plan can be
finding grave abuse of discretion on the trial courts part decision or order reviewed only through a
approving or disapproving special civil action for

79
 legal principles for the benefit of the bench, the bar and
the rehabilitation plan. An certiorari under Rule 65 of
the public.
order issued after the the Rules of Court.
approval of the
rehabilitation plan can be The HLURBs prior request for the appointment of a
Section 2. Review of
reviewed only through a rehabilitation receiver is not a condition precedent before
Decision or Order on
special civil action for the trial court can give due course to a rehabilitation
Rehabilitation Plan.- An
certiorari under Rule 65 of petition.
order approving or
the Rules of Court. disapproving a
Section 2. Review of rehabilitation plan can only To support its argument that the HLURBs prior request is
Decision or Order on be reviewed through a a condition precedent that must be complied with before
Rehabilitation Plan. - An petition for certiorari to the the trial court can give due course to a rehabilitation
order approving or Court of Appeals under petition of a real estate company like Lexber, the CA
disapproving a Rule 65 of the Rules of invoked Section 6(c) of PD-902-A as basis. The pertinent
rehabilitation plan can only Court within fifteen (15) part of this provision states:
be reviewed through a days from notice of the
petition for review to the decision or order.
Court of Appeals under [T]he [SEC] may appoint a rehabilitation receiver of
[Emphasis supplied.] corporations, partnerships or other associations
Rule 43 of the Rules of
Court within fifteen (15) supervised or regulated by other government agencies,
days from notice of the such as banks and insurance companies, upon request of
decision or order. the government agency concerned. [Emphasis supplied.]
[Emphasis supplied.] Notably, the Securities and Exchange Commissions
(SECs) jurisdiction over rehabilitation cases had already
been transferred to the regional trial courts acting as
Hence, under the 2008 Rules, an appeal (through a Rule commercial courts by virtue of Republic Act (RA) 879927 or
43 petition) may be filed only after the trial court issues an the Securities Regulation Code.28 The CA argues that
order approving or disapproving the rehabilitation plan. despite this jurisdictional transfer, the substantive
Any issue arising from a denied motion for reconsideration provisions of PD 902-A, particularly those powers which
may only be raised as an assigned error in the Rule 43 the SEC may exercise in rehabilitation cases, remain.
petition and may not be questioned in a separate Rule 65
petition. The exception to this is when the issue only arose The CA is correct in this line of reasoning. However it
after the issuance of the order denying or approving the erred in interpreting Section 6(c) to mean that no
rehabilitation plan. rehabilitation petition of a corporation that the HLURB
regulates, can be heard unless a prior request of this
This procedural guideline had been further amended in the agency for the appointment of a rehabilitation receiver was
2013 Rules where any relief from the trial courts denial of made.
a motion for reconsideration is no longer available.
Moreover, the CAs mode of review is now through Rule 65 The CA explains that its reasoning is consistent with the
and not Rule 43. But despite this further change, the 2013 rule that if there is a particular agency regulating a
Rules retained the guideline in the 2008 Rules that review business, e.g., the Bangko Sentral ng Pilipinas (BSP) over
may be sought from the CA only after the rehabilitation banks, and the Insurance Commission (IC) over insurance
court issues an order approving or disapproving the companies, no rehabilitation petition can be initiated
rehabilitation plan. Thus, if after the filing of the without their request for the appointment of a receiver.
rehabilitation petition the trial court is satisfied that the
jurisdictional requirements were complied with, the initial
The error in this generalization is its failure to identify the
hearing shall commence and the petition for rehabilitation
distinction between the enumerated examples in Section
shall be given due course.26 At this stage, no appeal or
6(c), i.e., banks and insurance companies, and Lexber, a
certiorari petition may yet be filed as any remedy is only
construction and real estate company.
available after the order approving or disapproving the
rehabilitation plan. This is to avoid the present situation
where there are multiple petitions filed with the appellate Under Section 3029 of RA 7653,30 which had been retained
courts from which conflicting decisions may be rendered. under Section 6931 of RA 8971,32 the designation of a
conservator or the appointment of a receiver for the
rehabilitation of banks and quasi-banks, is vested
But since these procedural rules were not yet in place
exclusively with the Monetary Board. On the other hand,
when the facts of this case occurred, the Courts remedy is
PD 61233 specifically mandates the IC to designate the
to deny the present petition in order to avoid pre-empting
receiver of an insurance company in case of its insolvency
the proceedings in CA G.R. No. 103917.
or rehabilitation.34

Despite this denial, the Court still deems it appropriate to

Clearly, the respective charters of the BSP and the IC
resolve the substantive issues which Lexber raised vis--
specifically authorize them to appoint a receiver in case a
vis the Interim Rules. This is to correct any erroneous legal
company under their regulation is undergoing corporate
reasoning which the CA committed, and uphold controlling
rehabilitation. Notably, this is not the case with the
80
HLURB. Its enabling law does not grant it this particular
power.1wphi1 Section 535 of Executive Order 64836 of the
HLURBs charter, enumerates the powers that the HLURB
is authorized to exercise.
Section 8 of the same law also provides the functions
which had been transferred from the National Housing
Authority to the HLURB, viz:
1. Regulation of the real estate trade and
business;
2. Registration of subdivision lots and
condominium projects;
3. Issuance of license to sell subdivision lots and
condominium units in the registered units;
4. Approval of performance bond and the
suspension of license to sell;
5. Registration of dealers, brokers and salesman
engaged in the business of selling subdivision
lots or condominium units;
6. Revocation of registration of dealers, brokers
and salesmen;
7. Approval or mortgage on any subdivision lot or
condominium unit made by the owner of
developer;
8. Granting of permits for the alteration of plans
and the extension of period for completion of
subdivision or condominium projects;
9. Approval of the conversion to other purposes
of roads and open spaces found within the
project which have been donated to the city or
municipality concerned;
10. Regulation of the relationship between
lessors and lessees; and
11. Hear and decide cases on unsound real
estate business practices; claims involving refund
filed against project owners, developers, dealers,
brokers or salesmen and cases of specific
performance.
An examination of these functions confirms that in sharp
contrast to the BSP and the IC, nowhere in the HLURBs
charter is it expressly or impliedly granted the power to
appoint the rehabilitation receivers of financially distressed
corporations under its supervision and regulation. An
administrative agencys powers are limited to those
expressly conferred on it or granted by necessary or fair
implication in its enabling act.37 In our constitutional
framework, which mandates a limited government, its
branches and administrative agencies exercise only those
powers delegated to them as "defined either in the
Constitution or in legislation, or in both."38 Notably, the
powers granted to the HLURB are focused on its
regulation of real estate companies to ensure that the
investing public is protected from fraudulent real estate
practices. These powers do not touch upon the HLURBs
authority to intervene in the general corporate acts, e.g.
the rehabilitation, of those under its supervision.
While it may be argued that the HLURB should be
informed of the financial rehabilitation of a real estate
company, to enable it to intelligently and meaningfully
exercise its functions, the law is clear that the HLURBs
prior request for the appointment of a receiver of real
estate companies, is not a condition sine qua non before
the trial court can give due course to their rehabilitation
petition.
The lapse of the 180-day period for the approval of the
rehabilitation plan should not automatically result to the
dismissal of the rehabilitation petition.
In ruling for the outright dismissal of Lexbers rehabilitation
petition, the CA noted that the trial court failed to approve
Lexbers rehabilitation plan within 180 days from the date
of the initial hearing, thus prompting the application of
Rule 4, Section 11 of the Interim Rules, to wit: Section 11.
Period of the Stay Order- The stay order shall be effective
from the date of its issuance until the dismissal of the
petition or the termination of the rehabilitation
proceedings. The 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. The court may grant an extension beyond
this period only if it appears by convincing and compelling
evidence that the debtor may successfully be rehabilitated.
In no instance, however, shall the period for approving or
disapproving a rehabilitation plan exceed eighteen (18)
months from the date of filing of the petition. [Emphasis
supplied.]
The CA explained that the word "shall" is a word of
command. Thus, the essential effect of the non-approval
of the rehabilitation plan after 180 days from the initial
hearing is the dismissal of the rehabilitation petition.
However, while the general rule in statutory construction is
that the words "shall," "must," "ought," or "should" are of
mandatory character in common parlance, it is also well-
recognized in law and equity that this is not an absolute
rule or inflexible criterion.39
The records of the present case show that on May 4,
2007, Lexber filed a motion for the extension of the period
for the approval of the rehabilitation plan. However, the
trial court never issued a resolution on this motion.
Instead, on June 12, 2007, it issued an order giving due
course to the petition.1wphi1 The records also reveal that
after the initial hearing, the trial court had to conduct
additional hearings even after the lapse of the 180-day
period.
81
Under these circumstances, the Court concludes that
Lexber could not be faulted for the non-approval of the
rehabilitation plan within the 180-day period. A petitioner-
corporation should not be penalized if the trial court
needed more time to evaluate the rehabilitation plan.
Notably, in the present case, Lexber filed a motion for the
extension of the 180-day period. However, the trial court
did not issue a resolution on this motion. Instead, it issued
an order giving due course to the petition, which also fell
within the 18-month limit prescribed under the law.
Rule 2, Section 2 of the Interim Rules dictates the courts
to liberally construe the rehabilitation rules in order to carry
out the objectives of Sections 6(c) of PD 902-A, as
amended, and to assist the parties in obtaining a just,
expeditious, and inexpensive determination of
rehabilitation cases. The trial courts decision to approve
or disapprove a rehabilitation plan is not a ministerial
function and would require its extensive study and
analysis. As it turned out, after careful scrutiny of the
rehabilitation petition, and its annexes, the trial court
eventually disapproved Lexbers rehabilitation plan and
dismissed the rehabilitation petition.
WHEREFORE, premises considered, we hereby DENY
the present petition in view of the pendency of CA G.R.
No. 103917. No costs.
SO ORDERED.
BPI Family Savings Bank v. St. Michael Medical Center, Inc.
March 25, 2015
Before the Court is a petition for review
on certiorari1 assailing the Decision2 dated August
30, 2012 and the Resolution3 dated January 18,
2013 of the Court of Appeals (CA) in CA-G.R. SP
No. 121004 which affirmed the approval of the
Rehabilitation Plan of respondent St. Michael
Medical Center, Inc. (SMMCI) by the Regional Trial
Court of Imus, Cavite, Branch 21 (RTC) through its
Order4 dated August 4, 2011 in SEC Case No. 086-
10.chanroblesvirtuallawlibrary
The 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), a 5-storey
secondary level hospital built on their property
located in Molino 2, Bacoor, Cavite. With a vision to
upgrade St. Michael Hospital into a modern, well-
equipped and full service tertiary 11-storey
hospital, Sps. Rodil purchased two (2) parcels of
land adjoining their existing property and, on May
22, 2003, incorporated SMMCI, with which entity
they planned to eventually consolidate St. Michael
Hospitals operations. SMMCI had an initial capital
of P2,000,000.00 which was later increased to
P53,500,000.00, 94.49% of which outstanding
capital stock, or P50,553,000.00, was subscribed
and paid by Sps. Rodil.5cralawred
In May 2004, construction of a new hospital
building on the adjoining properties commenced,
with Sps. Rodil contributing personal funds as
initial capital for the project which was estimated
to cost at least P100,000,000.00.6 To finance the
costs of construction, SMMCI applied for a loan
with petitioner BPI Family Savings Bank, Inc. (BPI
Family) which gave a credit line of up to
P35,000,000.00,7 secured by a Real Estate
Mortgage8 (mortgage) over three (3) parcels of
land9 belonging to Sps. Rodil, on a portion of which
stands the hospital building being constructed.
SMMCI was able to draw the aggregate amount of
P23,700,000.00,10 with interest at the rate of
10.25% per annum (p.a.) and a late payment
charge of 3% per month accruing on the overdue
amount, for which Sps. Rodil, who agreed to be co-
borrowers on the loan, executed and signed a
Promissory Note.11cralawred
In the meantime, after suffering financial losses
due to problems with the first building
contractor,12Sps. 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 up to the 5th floor. In this regard, they
spent an additional P25,000,000.00, or a total of
P55,000,000.00 for the construction. The lack of
funds for the finishing works of the 3rd, 4thand
5th floors, however, kept the new building from
becoming completely functional and, in turn,
hampered the plans for the physical transfer of St.
Michael Hospitals operations to SMMCI.
Nevertheless, using hospital-generated revenues,
Sps. Rodil were still able to purchase new
equipment and machinery for St. Michael Hospital
valued in excess of P20,000,000.00.13cralawred
Although the finishing works were later resumed
and some of the hospital operations were
eventually transferred to the completed first two
floors of the new building, 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, or the amount of P3,000,000.00
over a two-year period, from the income of St.
Michael Hospital.14cralawred
On September 25, 2009, BPI Family demanded
immediate payment of the entire loan
obligation15 and, soon after, filed a petition for
extrajudicial foreclosure16 of the real properties
covered by the mortgage. The auction sale was
82
scheduled on December 11, 2009, which was
postponed to February 15, 2010 with the
conformity of BPI Family.17cralawred
On August 11, 2010, SMMCI filed a Petition for
Corporate Rehabilitation18 (Rehabilitation Petition),
docketed as SEC Case No. 086-10, before the RTC,
with prayer for the issuance of a Stay Order as it
foresaw the impossibility of meeting its obligation
to BPI Family, its purported sole
creditor.19cralawred
In the said petition, 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. As of date, only two (2)
floors of the new building are functional, in which
some of the operations of St. Michael had already
been transferred.20cralawred
Also, it was alleged that more than
P66,000,000.00 had been spent for the
construction of the existing structure (in excess of
its proportionate share of the original estimated
cost for the entire project), said amount having
come from the personal funds of Sps. Rodil and/or
income generated by St. Michael Hospital, aside
from the drawings from the credit line with BPI
Family. At the same time, Sps. Rodil continued to
shoulder the costs of equipment and machinery
amounting to P20,000,000.00, in order to build up
the hospitals medical capabilities. However, since
SMMCI was neither operational nor earning
revenues, it could only pay interest on the BPI
Family loan, using St. Michael Hospitals income,
over a two-year period.21cralawred
Further, it was averred that while St. Michael
Hospital whose operations were to be eventually
absorbed by SMMCI was operating profitably, it
was saddled with the burden of paying the loan
obligation of SMMCI and Sps. Rodil to BPI Family,
which it cannot service together with its current
obligations to other persons and/or entities. The
situation became even more difficult when the
bank called the entire loan obligation which, as of
November 16, 2009, amounted to P52,784,589.34
(net of unapplied payment), consisting of: (a) the
principal of P23,700,000.00; (b) accrued interest
of P7,048,152.74; and (c) late payment charges
amounting to P23,510,400.00. 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,22 hence, the
Rehabilitation Petition.
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.24 SMMCI declared that it intends to
conclude pending negotiations for investments
offered by a group of medical doctors whose
capital infusion shall be used (a) to complete the
finishing requirements for the 3rd and 5th floors of
the new building; (b) to renovate the old 5-storey
building where St. Michael Hospital operates; and
(c) to pay, in whole or in part, the bank loan with
the view of finally integrating St. Michael Hospital
with SMMCI.25cralawred
The Proceedings Before the RTC
Finding the Rehabilitation Petition to be sufficient in
form and substance, the RTC issued a Stay
Order26on August 16, 2010. After the initial hearing
on October 5, 2010, and the filing of comments to
the said petition,27 the same was referred to the
court-appointed Rehabilitation Receiver, Dr. Uriel S.
Halum (Dr. Halum), who submitted in due time his
Report and Recommendations28 (Receivers Report)
to the RTC on February 17, 2011.29cralawred
In the said report, Dr. Halum gave credence to the
feasibility study conducted by Mrs. Nenita
Alibangbang (Mrs. Alibangbang), a certified public
accountant and Dean of the College of Accountancy
at the University of Perpetual Help Dalta, 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,
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.31 Thus, he made the following
recommendations:
1. The two-year moratorium period to pay the
bank is not enough. The Court should
seriously consider extending it by another
three years or a total of five (5) years, at
least. The bank, whose loan is secured by
mortgages on three prime parcels of land
with improvements should discuss
83
 restructuring the loan with the creditors
with the end in view of stretching the term
and allowing for more flexible rate.
2. Obligations to other creditors such as the
suppliers and lenders can be serviced at
once. Given the performance of the
hospital, the undersigned reasonably
believes that these obligations can be
settled in next three (3) years. These
accounts can be paid proportionately
provided that [SMMCI] should be allowed
to re-structure these accounts to allow for
longer and more convenient payment
terms.
3. [SMMCI] should be allowed to spend for
the improvement of the building but not
necessarily continuing with the planned 11-
storey building. It should make do with
what it has but should be permitted to
spend reasonable part of the hospitals
revenues to improve the facilities. For
instance, we recommend that the fifth floor
of the building should be finished to
provide for an intensive care unit or ICU
with equipments (sic) and required
facilities. [SMMCI] should also consider
spending (sic) an elevator to make access
to and from the higher floors convenient to
patients, doctors, nurses and guests.
Incidentally, these improvements should be
programmed for the next two to three
years. Given the budgetary constraints of
the hospital, doing all these improvements
all at once would be impossible.
4. Finally, [SMMCI] should provide for details
on its statements regarding the
prospective investors. It (sic) true, or in
case it happens, then this fresh capital
should be used partly to pay the bank and
the rest to improve the hospital to make it
more competitive with the nearby medical
service providers.32cralawredy
On May 26, 2011, the RTC issued an order
requiring the counsels of the creditors/oppositors
to file their comments to the Receivers Report
within ten (10) days from notice, but only counsel
for South East Star Enterprises
complied. 33cralawred
The RTC Ruling
In an Order34dated August 4, 2011, the RTC
approved the Rehabilitation Plan with the
modifications recommended by the Rehabilitation
Receiver and thus, ordered: (a) a five-year
moratorium on SMMCIs bank loan; (b) a
restructuring and payment of obligations to other
creditors such as suppliers and lenders; (c) a
programmed spending of a reasonable part of the
hospitals revenues for the finishing of the 5th floor
and the improvement of hospital facilities in the
next two or three years; and (d) use of fresh
capital from prospective investors to partly pay
SMMCIs bank loan and improve St. Michael
Hospitals competitiveness.35cralawred
It cited the following considerations which had
justified its approval: (1) the Rehabilitation Plan is
endorsed by the Rehabilitation Receiver subject to
certain recommendations; (2) the plan ensures
preservation of assets and orderly payment of
debts; (3) the plan provides for recovery rates on
operating mode as opposed to liquidation values;
(4) it contains details for a business plan which will
restore profitability and solvency of petitioner; (5)
the projected cash flow can support the continuous
operation of the debtor as a going concern; (6) the
plan did not ask for a waiver of the principal; (7)
the plan preserves the security of the secured
creditor; (8) the plan has provisions to ensure that
future income will inure to the benefit of the
creditors; and (9) the rehabilitation of the debtor
benefits its employees, creditors, stockholders and,
in a large sense, the general public as it will
generate employment and is a potential source of
revenue for the government.36cralawred
Aggrieved, BPI Family elevated the matter before
the CA, mainly arguing that the approval of the
Rehabilitation Plan violated its rights as an unpaid
creditor/mortgagee and that the same was
submitted without prior consultation with
creditors.37cralawred
The CA Ruling
In a Decision38 dated August 30, 2012, the CA
affirmed the RTCs approval of the Rehabilitation
Plan.39cralawred
It found that: (a) the rehabilitation of SMMCI is
feasible considering the outstanding revenue
performance of St. Michael Hospital, which it shall
absorb, showing its gross profit exceeding its
operating expenses and the large probability of
increased profitability due to the favorable
economic conditions of the locality; (b) the
approval of the Rehabilitation Plan did not amount
to an impairment of contract since there was no
directive for the release of the mortgaged
properties to which BPI Family is entitled to as a
secured creditor but only a suspension of the
84
provisions of the loan agreements; (c) it is not
mandatory for the validity of the Rehabilitation
Plan that the Rehabilitation Receiver should consult
with the creditors; and (d) the approval of the
Rehabilitation Plan was not made arbitrarily since it
was done only after a review of the pleadings filed
and the report submitted by the Rehabilitation
Receiver, and its approval was anchored on valid
considerations.40cralawred
Dissatisfied, BPI Family moved for reconsideration
which was denied in a Resolution41 dated January
18, 2013, hence, this petition.
The Issue Before the Court
The essential issue in this case is whether or not
the CA correctly affirmed SMMCIs Rehabilitation
Plan as approved by the RTC.
The Courts Ruling
The petition is meritorious.
I.
Restoration is the central idea behind the remedy
of corporate rehabilitation. In common parlance, to
restore means to bring back to or put back into
a former or original state.42 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.43 Consistent therewith is the terms
statutory definition under Republic Act No.
10142,44 otherwise known as the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA),
which provides:chanRoblesvirtualLawlibrary
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
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.chanrobleslaw
x x x x (Emphasis supplied)cralawlawlibrary
In other words, 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.
In this case, 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.
Perforce, the remedy of corporate rehabilitation is
improper, thus rendering the dispositions of the
courts a quo infirm.chanroblesvirtuallawlibrary
II.
In fact, for the same reasons, 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. Section 2, Rule 4 of the 2008
Rules of Procedure on Corporate
Rehabilitation47 (Rules), which were in force at the
time SMMCIs rehabilitation petition was filed on
August 11, 2010, pertinently
provides:chanRoblesvirtualLawlibrary
SEC. 2. Contents of Petition. -
x x x x
(b) The petition shall be accompanied by the
following documents:
(1) An audited financial statement of the debtor at
85
the end of its last fiscal
year;ChanRoblesVirtualawlibrary
(2) Interim financial statements as of the end of
the month prior to the filing of the
petition;ChanRoblesVirtualawlibrary
x x x xcralawlawlibrary
Note that 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 Hospitals
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 Hospitals
operations, there was dearth of evidence to show
that a merger was already agreed upon between
them. Accordingly, St. Michael Hospitals financials
cannot be utilized as basis to determine the
feasibility of SMMCIs 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. Neither is the
proceeding the proper forum to pierce the
corporate fictions of both entities for it involves no
creditor claiming to be a victim of fraud, an
essential requisite for the application of such
doctrine.49cralawred
In fine, the petition should not have been given
due course, nor should a Stay Order have been
issued.
III.
To compound its error, the CA even disregarded the
fact that SMMCIs Rehabilitation Plan, an
indispensable requisite in corporate rehabilitation
proceedings, failed to comply with the fundamental
requisites outlined in Section 18, Rule 3 of the
Rules, particularly, that of a material financial
commitment to support the rehabilitation and an
accompanying liquidation analysis, all of the
petitioning debtor:chanRoblesvirtualLawlibrary
SEC. 18. Rehabilitation Plan. - The rehabilitation
plan shall include (a) the desired business targets
or goals and the duration and coverage of the
rehabilitation; (b) the terms and conditions of such
rehabilitation which shall include the manner of its
implementation, giving due regard to the interests
of secured creditors such as, but not limited, to the
non-impairment of their security liens or interests;
(c) the material financial commitments to
support the rehabilitation plan; (d) the means
for the execution of the rehabilitation plan, which
may include debt to equity conversion,
restructuring of the debts, dacion en pago or sale
exchange or any disposition of assets or of the
interest of shareholders, partners or members;
(e) a liquidation analysis setting out for each
creditor that the present value of payments it
would receive under the plan is more than
that which it would receive if the assets of
the debtor were sold by a liquidator within a
six-month period from the estimated date of
filing of the petition; and (f) such other relevant
information to enable a reasonable investor to
make an informed decision on the feasibility of the
rehabilitation plan. (Emphases
supplied)cralawlawlibrary
A. Lack of Material Financial Commitment
to Support the 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 contribute
funds or property to guarantee the continued
successful operation of the debtor
corporation during the period of
rehabilitation.50cralawred
In this case, 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
SMMCIs 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.
In fact, the Rehabilitation Receiver himself
recognizes the ambiguity of the proposition when
he recommended that:chanRoblesvirtualLawlibrary
86

[T]he petitioner should provide for details on its
statements regarding the prospective investors. If
true or in case it happens, then this fresh capital
should be used partly to pay the bank and the rest,
to improve the hospital to make it more
competitive with the nearby medical service
providers.51cralawred
cralawlawlibrary
In the same manner, the fact that St. Michael
Hospital had previously made payments for the
benefit of SMMCI is not enough assurance that the
arrangement would prospectively apply in the
event that rehabilitation is granted. As case law
intimates, nothing short of legally binding
investment commitment/s from third parties is
required to qualify as a material financial
commitment.52 However, no such binding
investment was presented in this case.
B. Lack of Liquidation Analysis.
SMMCI likewise failed to include any liquidation
analysis in its Rehabilitation Plan. The Court
observes that as of November 16, 2009, or about 9
months prior to the filing of the petition for
rehabilitation, the loan with BPI Family had already
amounted to P52,784,589.34, with interest at
10.25% p.a. or a daily interest of about P6,655.48
and late payment charge of 36% p.a. 53 However,
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 debtors 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.
At any rate, records disclose that St. Michael
Hospitals current cash operating position54 is just
enough to meet its own maturing
obligations.55 While it has substantial total assets,
a large portion thereof is comprised of fixed assets,
while its current assets56 consist mostly of
inventory.57 Still, the total liquidation assets and
the estimated liquidation return to the creditors, as
well as the fair market value vis--vis the forced
liquidation value of the fixed assets that would
guide the Court in assessing the feasibility of the
Rehabilitation Plan were not shown.
C. Effect of Non-Compliance.
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 RTCs
stated considerations for approval, i.e., that (a) the
plan provides for recovery rates on operating mode
as opposed to liquidation values; (b) it contains
details for a business plan which will restore
profitability and solvency on petitioner; (c) the
projected cash flow can support the continuous
operation of the debtor as a going concern; and
(d) the plan has provisions to ensure that future
income will inure to the benefit of the
creditors,58 are actually unsubstantiated, and
hence, insufficient to decree SMMCIs
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 SMMCIs chagrin.
IV.
While the Court recognizes the financial
predicaments of upstart corporations under the
prevailing economic climate, it must nonetheless
remain forthright in limiting the remedy of
rehabilitation only to meritorious cases. As above-
mentioned, the purpose of rehabilitation
proceedings is not only to enable the company to
gain a new lease on life but also to allow creditors
to be paid their claims from its earnings, when so
rehabilitated. Hence, the remedy must be
accorded only after a judicious regard of all
stakeholders interests; it is not a one-sided tool
that may be graciously invoked to escape every
position of distress.
In this case, not only has the petitioning debtor
failed to show that it has formally began its
operations which would warrant restoration, but
also it has failed to show compliance with the key
requirements under the Rules, the purpose of
87
which are vital in determining the propriety of
rehabilitation. Thus, for all the reasons
hereinabove explained, the Court is constrained to
rule in favor of BPI Family and hereby dismiss
SMMCIs Rehabilitation Petition. With this
pronouncement, it is now unnecessary to delve on
the other ancillary issues raised herein.
WHEREFORE, the petition is GRANTED. The
Decision dated August 30, 2012 and the Resolution
dated January 18, 2013 of the Court of Appeals in
CA-G.R. SP No. 121004 upholding the Order dated
August 4, 2011 of the Regional Trial Court of Imus,
Cavite, Branch 21 approving the Rehabilitation Plan
of respondent St. Michael Medical Center, Inc.
(SMMCI) are hereby REVERSED and SET
ASIDE. Accordingly, SMMCIs Petition for
Corporate Rehabilitation is DISMISSED.
SO ORDERED.cralawlaw
IV. Special Proceedings Relating to Arbitration
AM No. 07-11-08-SC Special Rules of Procedure on
Alternative Dispute Resolution
SPECIAL RULES OF COURT ON ALTERNATIVE
DISPUTE RESOLUTION
PART I
GENERAL PROVISIONS AND POLICIES
RULE 1: GENERAL PROVISIONS
Rule 1.1. Subject matter and governing rules.-The Special
Rules of Court on Alternative Dispute Resolution (the
"Special ADR Rules") shall apply to and govern the
following cases:
a. Relief on the issue of Existence, Validity, or
Enforceability of the Arbitration Agreement;
b. Referral to Alternative Dispute Resolution
("ADR");
c. Interim Measures of Protection;
d. Appointment of Arbitrator;
e. Challenge to Appointment of Arbitrator;
f. Termination of Mandate of Arbitrator;
g. Assistance in Taking Evidence;
h. Confirmation, Correction or Vacation of Award
in Domestic Arbitration;
i. Recognition and Enforcement or Setting Aside
of an Award in International Commercial
Arbitration;
j. Recognition and Enforcement of a Foreign
Arbitral Award;
k. Confidentiality/Protective Orders; and
l. Deposit and Enforcement of Mediated
Settlement Agreements.
Rule 1.2. Nature of the proceedings.-All proceedings
under the Special ADR Rules are special proceedings.
Rule 1.3. Summary proceedings in certain cases.-The
proceedings in the following instances are summary in
nature and shall be governed by this provision:
a. Judicial Relief Involving the Issue of Existence,
Validity or Enforceability of the Arbitration
Agreement;
b. Referral to ADR;
c. Interim Measures of Protection;
d. Appointment of Arbitrator;
e. Challenge to Appointment of Arbitrator;
f. Termination of Mandate of Arbitrator;
g. Assistance in Taking Evidence;
h. Confidentiality/Protective Orders; and
i. Deposit and Enforcement of Mediated
Settlement Agreements.
(A) Service and filing of petition in summary proceedings.-
The petitioner shall serve, either by personal service or
courier, a copy of the petition upon the respondent before
the filing thereof. Proof of service shall be attached to the
petition filed in court.
For personal service, proof of service of the petition
consists of the affidavit of the person who effected service,
stating the time, place and manner of the service on the
respondent. For service by courier, proof of service
consists of the signed courier proof of delivery. If service is
refused or has failed, the affidavit or delivery receipt must
state the circumstances of the attempted service and
refusal or failure thereof.
(B) Notice.-Except for cases involving Referral to ADR and
Confidentiality/Protective Orders made through motions,
the court shall, if it finds the petition sufficient in form and
88
substance, send notice to the parties directing them to
appear at a particular time and date for the hearing thereof
which shall be set no later than five (5) days from the
lapse of the period for filing the opposition or comment.
The notice to the respondent shall contain a statement
allowing him to file a comment or opposition to the petition
within fifteen (15) days from receipt of the notice.
The motion filed pursuant to the rules on Referral to ADR
or Confidentiality/Protective Orders shall be set for hearing
by the movant and contain a notice of hearing that
complies with the requirements under Rule 15 of the Rules
of Court on motions.
(C) Summary hearing. - In all cases, as far as practicable,
the summary hearing shall be conducted in one (1) day
and only for purposes of clarifying facts.
Except in cases involving Referral to ADR or
Confidentiality/Protective Orders made through motions, it
shall be the court that sets the petition for hearing within
five (5) days from the lapse of the period for filing the
opposition or comment.
(D) Resolution. - The court shall resolve the matter within
a period of thirty (30) days from the day of the hearing.
Rule 1.4. Verification and submissions. -Any pleading,
motion, opposition, comment, defense or claim filed under
the Special ADR Rules by the proper party shall be
supported by verified statements that the affiant has read
the same and that the factual allegations therein are true
and correct of his own personal knowledge or based on
authentic records and shall contain as annexes the
supporting documents.
The annexes to the pleading, motion, opposition,
comment, defense or claim filed by the proper party may
include a legal brief, duly verified by the lawyer submitting
it, stating the pertinent facts, the applicable law and
jurisprudence to justify the necessity for the court to rule
upon the issue raised.
Rule 1.5. Certification Against Forum Shopping. - A
Certification Against Forum Shopping is one made under
oath made by the petitioner or movant: (a) that he has not
theretofore commenced any action or filed any claim
involving the same issues in any court, tribunal or quasi-
judicial agency and, to the best of his knowledge, no such
other action or claim is pending therein; (b) if there is such
other pending action or claim, a complete statement of the
present status thereof; and (c) if he should thereafter learn
that the same or similar action or claim has been filed or is
pending, he shall report that fact within five (5) days
therefrom to the court wherein his aforementioned petition
or motion has been filed.
A Certification Against Forum Shopping shall be appended
to all initiatory pleadings except a Motion to Refer the
Dispute to Alternative Dispute Resolution.
Rule 1.6. Prohibited submissions. - The following
pleadings, motions, or petitions shall not be allowed in the
cases governed by the Special ADR Rules and shall not
be accepted for filing by the Clerk of Court:
a. Motion to dismiss;
b. Motion for bill of particulars;
c. Motion for new trial or for reopening of trial;
d. Petition for relief from judgment;
e. Motion for extension, except in cases where an
ex-parte temporary order of protection has been
issued;
f. Rejoinder to reply;
g. Motion to declare a party in default; and
h. Any other pleading specifically disallowed
under any provision of the Special ADR Rules.
The court shall motu proprio order a pleading/motion that it
has determined to be dilatory in nature be expunged from
the records.
Rule 1.7. Computation of time. - In computing any period
of time prescribed or allowed by the Special ADR Rules, or
by order of the court, or by any applicable statute, the day
of the act or event from which the designated period of
time begins to run is to be excluded and the date of
performance included. If the last day of the period, as thus
computed, falls on a Saturday, a Sunday, or a legal holiday
in the place where the court sits, the time shall not run
until the next working day.
Should an act be done which effectively interrupts the
running of the period, the allowable period after such
interruption shall start to run on the day after notice of the
cessation of the cause thereof.
The day of the act that caused the interruption shall be
excluded from the computation of the period.
Rule 1.8. Service and filing of pleadings, motions and
other papers in non-summary proceedings. - The initiatory
pleadings shall be filed directly with the court. The court
will then cause the initiatory pleading to be served upon
the respondent by personal service or courier. Where an
action is already pending, pleadings, motions and other
papers shall be filed and/or served by the concerned party
by personal service or courier. Where courier services are
not available, resort to registered mail is allowed.
(A) Proof of filing. - The filing of a pleading shall be proved
by its existence in the record of the case. If it is not in the
record, but is claimed to have been filed personally, the
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filing shall be proved by the written or stamped
acknowledgment of its filing by the clerk of court on a copy
of the same; if filed by courier, by the proof of delivery from
the courier company.
(B) Proof of service. - Proof of personal service shall
consist of a written admission by the party served, or the
official return of the server, or the affidavit of the party
serving, containing a full statement of the date, place and
manner of service. If the service is by courier, proof
thereof shall consist of an affidavit of the proper person,
stating facts showing that the document was deposited
with the courier company in a sealed envelope, plainly
addressed to the party at his office, if known, otherwise at
his residence, with postage fully pre-paid, and with
instructions to the courier to immediately provide proof of
delivery.
(C) Filing and service by electronic means and proof
thereof. - Filing and service of pleadings by electronic
transmission may be allowed by agreement of the parties
approved by the court. If the filing or service of a pleading
or motion was done by electronic transmission, proof of
filing and service shall be made in accordance with the
Rules on Electronic Evidence.
Rule 1.9. No summons. - In cases covered by the Special
ADR Rules, a court acquires authority to act on the
petition or motion upon proof of jurisdictional facts, i.e.,
that the respondent was furnished a copy of the petition
and the notice of hearing.
(A) Proof of service. - A proof of service of the petition and
notice of hearing upon respondent shall be made in writing
by the server and shall set forth the manner, place and
date of service.
(B) Burden of proof. - The burden of showing that a copy
of the petition and the notice of hearing were served on
the respondent rests on the petitioner.
The technical rules on service of summons do not apply to
the proceedings under the Special ADR Rules. In
instances where the respondent, whether a natural or a
juridical person, was not personally served with a copy of
the petition and notice of hearing in the proceedings
contemplated in the first paragraph of Rule 1.3 (B), or the
motion in proceedings contemplated in the second
paragraph of Rule 1.3 (B), the method of service resorted
to must be such as to reasonably ensure receipt thereof
by the respondent to satisfy the requirement of due
process.
Rule 1.10. Contents of petition/motion. - The initiatory
pleading in the form of a verified petition or motion, in the
appropriate case where court proceedings have already
commenced, shall include the names of the parties, their
addresses, the necessary allegations supporting the
petition and the relief(s) sought.
Rule 1.11. Definition. - The following terms shall have the
following meanings:
a. "ADR Laws" refers to the whole body of ADR
laws in the Philippines.
b. "Appointing Authority" shall mean the person
or institution named in the arbitration agreement
as the appointing authority; or the regular
arbitration institution under whose rule the
arbitration is agreed to be conducted. Where the
parties have agreed to submit their dispute to
institutional arbitration rules, and unless they
have agreed to a different procedure, they shall
be deemed to have agreed to procedure under
such arbitration rules for the selection and
appointment of arbitrators. In ad hoc arbitration,
the default appointment of arbitrators shall be
made by the National President of the Integrated
Bar of the Philippines or his duly authorized
representative.
c. "Authenticate" means to sign, execute or use a
symbol, or encrypt a record in whole or in part,
intended to identify the authenticating party and
to adopt, accept or establish the authenticity of a
record or term.
d. "Foreign Arbitral Award" is one made in a
country other than the Philippines.
e. "Legal Brief" is a written legal argument
submitted to a court, outlining the facts derived
from the factual statements in the witnesss
statements of fact and citing the legal authorities
relied upon by a party in a case submitted in
connection with petitions, counter-petitions (i.e.,
petitions to vacate or to set aside and/or to
correct/modify in opposition to petitions to confirm
or to recognize and enforce, or petitions to
confirm or to recognize and enforce in opposition
to petitions to vacate or set aside and/or
correct/modify), motions, evidentiary issues and
other matters that arise during the course of a
case. The legal brief shall state the applicable law
and the relevant jurisprudence and the legal
arguments in support of a partys position in the
case.
f. "Verification" shall mean a certification under
oath by a party or a person who has authority to
act for a party that he has read the
pleading/motion, and that he certifies to the truth
of the facts stated therein on the basis of his own
personal knowledge or authentic documents in
his possession. When made by a lawyer,
verification shall mean a statement under oath by
a lawyer signing a pleading/motion for delivery to
the Court or to the parties that he personally
prepared the pleading/motion, that there is
sufficient factual basis for the statements of fact
stated therein, that there is sufficient basis in the
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 facts and the law to support the prayer for relief
therein, and that the pleading/motion is filed in
good faith and is not interposed for delay.
Rule 1.12. Applicability of Part II on Specific Court Relief. -
Part II of the Special ADR Rules on Specific Court Relief,
insofar as it refers to arbitration, shall also be applicable to
other forms of ADR.
Rule 1.13. Spirit and intent of the Special ADR Rules.
In situations where no specific rule is provided under the
Special ADR Rules, the court shall resolve such matter
summarily and be guided by the spirit and intent of the
Special ADR Rules and the ADR Laws.
RULE 2: STATEMENT OF POLICIES
Rule 2.1. General policies. - It is the policy of the State to
actively promote the use of various modes of ADR and to
respect party autonomy or the freedom of the parties to
make their own arrangements in the resolution of disputes
with the greatest cooperation of and the least intervention
from the courts. To this end, the objectives of the Special
ADR Rules are to encourage and promote the use of ADR,
particularly arbitration and mediation, as an important
means to achieve speedy and efficient resolution of
disputes, impartial justice, curb a litigious culture and to
de-clog court dockets.
The court shall exercise the power of judicial review as
provided by these Special ADR Rules. Courts shall
intervene only in the cases allowed by law or these
Special ADR Rules.
Rule 2.2. Policy on arbitration.- (A) Where the parties
have agreed to submit their dispute to arbitration, courts
shall refer the parties to arbitration pursuant to Republic
Act No. 9285 bearing in mind that such arbitration
agreement is the law between the parties and that they
are expected to abide by it in good faith. Further, the
courts shall not refuse to refer parties to arbitration for
reasons including, but not limited to, the following:
a. The referral tends to oust a court of its
jurisdiction;
b. The court is in a better position to resolve the
dispute subject of arbitration;
c. The referral would result in multiplicity of suits;
d. The arbitration proceeding has not
commenced;
e. The place of arbitration is in a foreign country;
f. One or more of the issues are legal and one or
more of the arbitrators are not lawyers;
g. One or more of the arbitrators are not
Philippine nationals; or
h. One or more of the arbitrators are alleged not
to possess the required qualification under the
arbitration agreement or law.
(B) Where court intervention is allowed under ADR Laws
or the Special ADR Rules, courts shall not refuse to grant
relief, as provided herein, for any of the following reasons:
a. Prior to the constitution of the arbitral tribunal,
the court finds that the principal action is the
subject of an arbitration agreement; or
b. The principal action is already pending before
an arbitral tribunal.
The Special ADR Rules recognize the principle of
competence-competence, which means that the arbitral
tribunal may initially rule on its own jurisdiction, including
any objections with respect to the existence or validity of
the arbitration agreement or any condition precedent to
the filing of a request for arbitration.
The Special ADR Rules recognize the principle of
separability of the arbitration clause, which means that
said clause shall be treated as an agreement independent
of the other terms of the contract of which it forms part. A
decision that the contract is null and void shall not entail
ipso jure the invalidity of the arbitration clause.
Rule 2.3. Rules governing arbitral proceedings. - The
parties are free to agree on the procedure to be followed
in the conduct of arbitral proceedings. Failing such
agreement, the arbitral tribunal may conduct arbitration in
the manner it considers appropriate.
Rule 2.4. Policy implementing competence-competence
principle. - The arbitral tribunal shall be accorded the first
opportunity or competence to rule on the issue of whether
or not it has the competence or jurisdiction to decide a
dispute submitted to it for decision, including any objection
with respect to the existence or validity of the arbitration
agreement. When a court is asked to rule upon issue/s
affecting the competence or jurisdiction of an arbitral
tribunal in a dispute brought before it, either before or after
the arbitral tribunal is constituted, the court must exercise
judicial restraint and defer to the competence or
jurisdiction of the arbitral tribunal by allowing the arbitral
tribunal the first opportunity to rule upon such issues.
Where the court is asked to make a determination of
whether the arbitration agreement is null and void,
inoperative or incapable of being performed, under this
policy of judicial restraint, the court must make no more
than a prima facie determination of that issue.
Unless the court, pursuant to such prima facie
determination, concludes that the arbitration agreement is
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null and void, inoperative or incapable of being performed,
the court must suspend the action before it and refer the
parties to arbitration pursuant to the arbitration agreement.
Rule 2.5. Policy on mediation. - The Special ADR Rules
do not apply to Court-Annexed Mediation, which shall be
governed by issuances of the Supreme Court.
Where the parties have agreed to submit their dispute to
mediation, a court before which that dispute was brought
shall suspend the proceedings and direct the parties to
submit their dispute to private mediation. If the parties
subsequently agree, however, they may opt to have their
dispute settled through Court-Annexed Mediation.
Rule 2.6. Policy on Arbitration-Mediation or Mediation-
Arbitration. - No arbitrator shall act as a mediator in any
proceeding in which he is acting as arbitrator; and all
negotiations towards settlement of the dispute must take
place without the presence of that arbitrator. Conversely,
no mediator shall act as arbitrator in any proceeding in
which he acted as mediator.
Rule 2.7. Conversion of a settlement agreement to an
arbitral award. - Where the parties to mediation have
agreed in the written settlement agreement that the
mediator shall become the sole arbitrator for the dispute or
that the settlement agreement shall become an arbitral
award, the sole arbitrator shall issue the settlement
agreement as an arbitral award, which shall be subject to
enforcement under the law.
PART II
SPECIFIC COURT RELIEF
RULE 3: JUDICIAL RELIEF INVOLVING THE ISSUE OF
EXISTENCE, VALIDITY AND ENFORCEABILITY OF
THE ARBITRATION AGREEMENT
Rule 3.1. When judicial relief is available. - The judicial
relief provided in Rule 3, whether resorted to before or
after commencement of arbitration, shall apply only when
the place of arbitration is in the Philippines.
A. Judicial Relief before Commencement of Arbitration
Rule 3.2. Who may file petition. - Any party to an
arbitration agreement may petition the appropriate court to
determine any question concerning the existence, validity
and enforceability of such arbitration agreement serving a
copy thereof on the respondent in accordance with Rule
1.4 (A).
Rule 3.3. When the petition may be filed. - The petition for
judicial determination of the existence, validity and/or
enforceability of an arbitration agreement may be filed at
any time prior to the commencement of arbitration.
Despite the pendency of the petition provided herein,
arbitral proceedings may nevertheless be commenced and
continue to the rendition of an award, while the issue is
pending before the court.
Rule 3.4. Venue. - A petition questioning the existence,
validity and enforceability of an arbitration agreement may
be filed before the Regional Trial Court of the place where
any of the petitioners or respondents has his principal
place of business or residence.
Rule 3.5. Grounds. - A petition may be granted only if it is
shown that the arbitration agreement is, under the
applicable law, invalid, void, unenforceable or inexistent.
Rule 3.6. Contents of petition. - The verified petition shall
state the following:
a. The facts showing that the persons named as
petitioner or respondent have legal capacity to
sue or be sued;
b. The nature and substance of the dispute
between the parties;
c. The grounds and the circumstances relied
upon by the petitioner to establish his position;
and
d. The relief/s sought.
Apart from other submissions, the petitioner must attach to
the petition an authentic copy of the arbitration agreement.
Rule 3.7. Comment/Opposition.-The comment/opposition
of the respondent must be filed within fifteen (15) days
from service of the petition.
Rule 3.8. Court action. - In resolving the petition, the court
must exercise judicial restraint in accordance with the
policy set forth in Rule 2.4, deferring to the competence or
jurisdiction of the arbitral tribunal to rule on its competence
or jurisdiction.
Rule 3.9. No forum shopping. - A petition for judicial relief
under this Rule may not be commenced when the
existence, validity or enforceability of an arbitration
agreement has been raised as one of the issues in a prior
action before the same or another court.
Rule 3.10. Application for interim relief. - If the petitioner
also applies for an interim measure of protection, he must
also comply with the requirements of the Special ADR
Rules for the application for an interim measure of
protection.
Rule 3.11. Relief against court action. - Where there is a
prima facie determination upholding the arbitration
agreement.-A prima facie determination by the court
upholding the existence, validity or enforceability of an
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arbitration agreement shall not be subject to a motion for
reconsideration, appeal or certiorari.
Such prima facie determination will not, however,
prejudice the right of any party to raise the issue of the
existence, validity and enforceability of the arbitration
agreement before the arbitral tribunal or the court in an
action to vacate or set aside the arbitral award. In the
latter case, the courts review of the arbitral tribunals
ruling upholding the existence, validity or enforceability of
the arbitration agreement shall no longer be limited to a
mere prima facie determination of such issue or issues as
prescribed in this Rule, but shall be a full review of such
issue or issues with due regard, however, to the standard
for review for arbitral awards prescribed in these Special
ADR Rules.
B. Judicial Relief after Arbitration Commences
Rule 3.12. Who may file petition. - Any party to arbitration
may petition the appropriate court for judicial relief from
the ruling of the arbitral tribunal on a preliminary question
upholding or declining its jurisdiction. Should the ruling of
the arbitral tribunal declining its jurisdiction be reversed by
the court, the parties shall be free to replace the arbitrators
or any one of them in accordance with the rules that were
applicable for the appointment of arbitrator sought to be
replaced.
Rule 3.13. When petition may be filed. - The petition may
be filed within thirty (30) days after having received notice
of that ruling by the arbitral tribunal.
Rule 3.14. Venue. - The petition may be filed before the
Regional Trial Court of the place where arbitration is taking
place, or where any of the petitioners or respondents has
his principal place of business or residence.
Rule 3.15. Grounds. - The petition may be granted when
the court finds that the arbitration agreement is invalid,
inexistent or unenforceable as a result of which the arbitral
tribunal has no jurisdiction to resolve the dispute.
Rule 3.16. Contents of petition. - The petition shall state
the following:
a. The facts showing that the person named as
petitioner or respondent has legal capacity to sue
or be sued;
b. The nature and substance of the dispute
between the parties;
c. The grounds and the circumstances relied
upon by the petitioner; and
d. The relief/s sought.
In addition to the submissions, the petitioner shall attach to
the petition a copy of the request for arbitration and the
ruling of the arbitral tribunal.
The arbitrators shall be impleaded as nominal parties to
the case and shall be notified of the progress of the case.
Rule 3.17. Comment/Opposition. - The
comment/opposition must be filed within fifteen (15) days
from service of the petition.
Rule 3.18. Court action. - (A) Period for resolving the
petition.- The court shall render judgment on the basis of
the pleadings filed and the evidence, if any, submitted by
the parties, within thirty (30) days from the time the petition
is submitted for resolution.
(B) No injunction of arbitration proceedings. - The court
shall not enjoin the arbitration proceedings during the
pendency of the petition.
Judicial recourse to the court shall not prevent the arbitral
tribunal from continuing the proceedings and rendering its
award.
(C) When dismissal of petition is appropriate. - The court
shall dismiss the petition if it fails to comply with Rule 3.16
above; or if upon consideration of the grounds alleged and
the legal briefs submitted by the parties, the petition does
not appear to be prima facie meritorious.
Rule 3.19. Relief against court action. - The aggrieved
party may file a motion for reconsideration of the order of
the court. The decision of the court shall, however, not be
subject to appeal. The ruling of the court affirming the
arbitral tribunals jurisdiction shall not be subject to a
petition for certiorari. The ruling of the court that the
arbitral tribunal has no jurisdiction may be the subject of a
petition for certiorari.
Rule 3.20. Where no petition is allowed. - Where the
arbitral tribunal defers its ruling on preliminary question
regarding its jurisdiction until its final award, the aggrieved
party cannot seek judicial relief to question the deferral
and must await the final arbitral award before seeking
appropriate judicial recourse.
A ruling by the arbitral tribunal deferring resolution on the
issue of its jurisdiction until final award, shall not be
subject to a motion for reconsideration, appeal or a
petition for certiorari.
Rule 3.21. Rendition of arbitral award before court
decision on petition from arbitral tribunals preliminary
ruling on jurisdiction. - If the arbitral tribunal renders a final
arbitral award and the Court has not rendered a decision
on the petition from the arbitral tribunals preliminary ruling
affirming its jurisdiction, that petition shall become ipso
facto moot and academic and shall be dismissed by the
Regional Trial Court. The dismissal shall be without
93
prejudice to the right of the aggrieved party to raise the
same issue in a timely petition to vacate or set aside the
award.
Rule 3.22. Arbitral tribunal a nominal party. - The arbitral
tribunal is only a nominal party. The court shall not require
the arbitral tribunal to submit any pleadings or written
submissions but may consider the same should the latter
participate in the proceedings, but only as nominal parties
thereto.
RULE 4: REFERRAL TO ADR
Rule 4.1. Who makes the request. - A party to a pending
action filed in violation of the arbitration agreement,
whether contained in an arbitration clause or in a
submission agreement, may request the court to refer the
parties to arbitration in accordance with such agreement.
Rule 4.2. When to make request. - (A) Where the
arbitration agreement exists before the action is filed. -
The request for referral shall be made not later than the
pre-trial conference. After the pre-trial conference, the
court will only act upon the request for referral if it is made
with the agreement of all parties to the case.
(B) Submission agreement. - If there is no existing
arbitration agreement at the time the case is filed but the
parties subsequently enter into an arbitration agreement,
they may request the court to refer their dispute to
arbitration at any time during the proceedings.
Rule 4.3. Contents of request. - The request for referral
shall be in the form of a motion, which shall state that the
dispute is covered by an arbitration agreement.
Apart from other submissions, the movant shall attach to
his motion an authentic copy of the arbitration agreement.
The request shall contain a notice of hearing addressed to
all parties specifying the date and time when it would be
heard. The party making the request shall serve it upon
the respondent to give him the opportunity to file a
comment or opposition as provided in the immediately
succeeding Rule before the hearing.
Rule 4.4. Comment/Opposition. - The comment/opposition
must be filed within fifteen (15) days from service of the
petition. The comment/opposition should show that: (a)
there is no agreement to refer the dispute to arbitration;
and/or (b) the agreement is null and void; and/or (c) the
subject-matter of the dispute is not capable of settlement
or resolution by arbitration in accordance with Section 6 of
the ADR Act.
Rule 4.5. Court action. - After hearing, the court shall stay
the action and, considering the statement of policy
embodied in Rule 2.4, above, refer the parties to
arbitration if it finds prima facie, based on the pleadings
and supporting documents submitted by the parties, that
there is an arbitration agreement and that the subject-
matter of the dispute is capable of settlement or resolution
by arbitration in accordance with Section 6 of the ADR Act.
Otherwise, the court shall continue with the judicial
proceedings.
Rule 4.6. No reconsideration, appeal or certiorari. - An
order referring the dispute to arbitration shall be
immediately executory and shall not be subject to a motion
for reconsideration, appeal or petition for certiorari.
An order denying the request to refer the dispute to
arbitration shall not be subject to an appeal, but may be
the subject of a motion for reconsideration and/or a
petition for certiorari.
Rule 4.7. Multiple actions and parties. - The court shall not
decline to refer some or all of the parties to arbitration for
any of the following reasons:
a. Not all of the disputes subject of the civil action
may be referred to arbitration;
b. Not all of the parties to the civil action are
bound by the arbitration agreement and referral
to arbitration would result in multiplicity of suits;
c. The issues raised in the civil action could be
speedily and efficiently resolved in its entirety by
the court rather than in arbitration;
d. Referral to arbitration does not appear to be
the most prudent action; or
e. The stay of the action would prejudice the
rights of the parties to the civil action who are not
bound by the arbitration agreement.
The court may, however, issue an order directing the
inclusion in arbitration of those parties who are not bound
by the arbitration agreement but who agree to such
inclusion provided those originally bound by it do not
object to their inclusion.
Rule 4.8. Arbitration to proceed.- Despite the pendency of
the action referred to in Rule 4.1, above, arbitral
proceedings may nevertheless be commenced or
continued, and an award may be made, while the action is
pending before the court.
RULE 5: INTERIM MEASURES OF PROTECTION
Rule 5.1. Who may ask for interim measures of protection.
- A party to an arbitration agreement may petition the court
for interim measures of protection.
Rule 5.2. When to petition. - A petition for an interim
measure of protection may be made (a) before arbitration
is commenced, (b) after arbitration is commenced, but
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before the constitution of the arbitral tribunal, or (c) after
the constitution of the arbitral tribunal and at any time
during arbitral proceedings but, at this stage, only to the
extent that the arbitral tribunal has no power to act or is
unable to act effectively.
Rule 5.3. Venue. - A petition for an interim measure of
protection may be filed with the Regional Trial Court,
which has jurisdiction over any of the following places:
a. Where the principal place of business of any of
the parties to arbitration is located;
b. Where any of the parties who are individuals
resides;
c. Where any of the acts sought to be enjoined
are being performed, threatened to be performed
or not being performed; or
d. Where the real property subject of arbitration,
or a portion thereof is situated.
Rule 5.4. Grounds. - The following grounds, while not
limiting the reasons for the court to grant an interim
measure of protection, indicate the nature of the reasons
that the court shall consider in granting the relief:
a. The need to prevent irreparable loss or injury;
b. The need to provide security for the
performance of any obligation;
c. The need to produce or preserve evidence; or
d. The need to compel any other appropriate act
or omission.
Rule 5.5. Contents of the petition. - The verified petition
must state the following:
a. The fact that there is an arbitration agreement;
b. The fact that the arbitral tribunal has not been
constituted, or if constituted, is unable to act or
would be unable to act effectively;
c. A detailed description of the appropriate relief
sought;
d. The grounds relied on for the allowance of the
petition
Apart from other submissions, the petitioner must attach to
his petition an authentic copy of the arbitration agreement.
Rule 5.6. Type of interim measure of protection that a
court may grant.- The following, among others, are the
interim measures of protection that a court may grant:
a. Preliminary injunction directed against a party
to arbitration;
b. Preliminary attachment against property or
garnishment of funds in the custody of a bank or
a third person;
c. Appointment of a receiver;
d. Detention, preservation, delivery or inspection
of property; or,
e. Assistance in the enforcement of an interim
measure of protection granted by the arbitral
tribunal, which the latter cannot enforce
effectively.
Rule 5.7. Dispensing with prior notice in certain cases. -
Prior notice to the other party may be dispensed with
when the petitioner alleges in the petition that there is an
urgent need to either (a) preserve property, (b) prevent the
respondent from disposing of, or concealing, the property,
or (c) prevent the relief prayed for from becoming illusory
because of prior notice, and the court finds that the
reason/s given by the petitioner are meritorious.
Rule 5.8. Comment/Opposition. - The comment/opposition
must be filed within fifteen (15) days from service of the
petition. The opposition or comment should state the
reasons why the interim measure of protection should not
be granted.
Rule 5.9. Court action. - After hearing the petition, the
court shall balance the relative interests of the parties and
inconveniences that may be caused, and on that basis
resolve the matter within thirty (30) days from (a)
submission of the opposition, or (b) upon lapse of the
period to file the same, or (c) from termination of the
hearing that the court may set only if there is a need for
clarification or further argument.
If the other parties fail to file their opposition on or before
the day of the hearing, the court shall motu proprio render
judgment only on the basis of the allegations in the petition
that are substantiated by supporting documents and
limited to what is prayed for therein.
In cases where, based solely on the petition, the court
finds that there is an urgent need to either (a) preserve
property, (b) prevent the respondent from disposing of, or
concealing, the property, or (c) prevent the relief prayed
for from becoming illusory because of prior notice, it shall
issue an immediately executory temporary order of
protection and require the petitioner, within five (5) days
from receipt of that order, to post a bond to answer for any
damage that respondent may suffer as a result of its order.
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The ex-parte temporary order of protection shall be valid
only for a period of twenty (20) days from the service on
the party required to comply with the order. Within that
period, the court shall:
a. Furnish the respondent a copy of the petition
and a notice requiring him to comment thereon
on or before the day the petition will be heard;
and
b. Notify the parties that the petition shall be
heard on a day specified in the notice, which
must not be beyond the twenty (20) day period of
the effectivity of the ex-parte order.
The respondent has the option of having the temporary
order of protection lifted by posting an appropriate
counter-bond as determined by the court.
If the respondent requests the court for an extension of the
period to file his opposition or comment or to reset the
hearing to a later date, and such request is granted, the
court shall extend the period of validity of the ex-
parte temporary order of protection for no more than
twenty days from expiration of the original period.
After notice and hearing, the court may either grant or
deny the petition for an interim measure of protection. The
order granting or denying any application for interim
measure of protection in aid of arbitration must indicate
that it is issued without prejudice to subsequent grant,
modification, amendment, revision or revocation by an
arbitral tribunal.
Rule 5.10. Relief against court action. - If respondent was
given an opportunity to be heard on a petition for an
interim measure of protection, any order by the court shall
be immediately executory, but may be the subject of a
motion for reconsideration and/or appeal or, if warranted, a
petition for certiorari.
Rule 5.11. Duty of the court to refer back. - The court shall
not deny an application for assistance in implementing or
enforcing an interim measure of protection ordered by an
arbitral tribunal on any or all of the following grounds:
a. The arbitral tribunal granted the interim relief
ex parte; or
b. The party opposing the application found new
material evidence, which the arbitral tribunal had
not considered in granting in the application, and
which, if considered, may produce a different
result; or
c. The measure of protection ordered by the
arbitral tribunal amends, revokes, modifies or is
inconsistent with an earlier measure of protection
issued by the court.
If it finds that there is sufficient merit in the opposition to
the application based on letter (b) above, the court shall
refer the matter back to the arbitral tribunal for appropriate
determination.
Rule 5.12. Security. - The order granting an interim
measure of protection may be conditioned upon the
provision of security, performance of an act, or omission
thereof, specified in the order.
The Court may not change or increase or decrease the
security ordered by the arbitral tribunal.
Rule 5.13. Modification, amendment, revision or
revocation of courts previously issued interim measure of
protection. - Any court order granting or denying interim
measure/s of protection is issued without prejudice to
subsequent grant, modification, amendment, revision or
revocation by the arbitral tribunal as may be warranted.
An interim measure of protection issued by the arbitral
tribunal shall, upon its issuance be deemed to have ipso
jure modified, amended, revised or revoked an interim
measure of protection previously issued by the court to the
extent that it is inconsistent with the subsequent interim
measure of protection issued by the arbitral tribunal.
Rule 5.14. Conflict or inconsistency between interim
measure of protection issued by the court and by the
arbitral tribunal. - Any question involving a conflict or
inconsistency between an interim measure of protection
issued by the court and by the arbitral tribunal shall be
immediately referred by the court to the arbitral tribunal
which shall have the authority to decide such question.
Rule 5.15. Court to defer action on petition for an interim
measure of protection when informed of constitution of the
arbitral tribunal. - The court shall defer action on any
pending petition for an interim measure of protection filed
by a party to an arbitration agreement arising from or in
connection with a dispute thereunder upon being informed
that an arbitral tribunal has been constituted pursuant to
such agreement. The court may act upon such petition
only if it is established by the petitioner that the arbitral
tribunal has no power to act on any such interim measure
of protection or is unable to act thereon effectively.
Rule 5.16. Court assistance should arbitral tribunal be
unable to effectively enforce interim measure of protection.
- The court shall assist in the enforcement of an interim
measure of protection issued by the arbitral tribunal which
it is unable to effectively enforce.
RULE 6: APPOINTMENT OF ARBITRATORS
Rule 6.1. When the court may act as Appointing Authority.
- The court shall act as Appointing Authority only in the
following instances:
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 a. Where any of the parties in an institutional
arbitration failed or refused to appoint an
arbitrator or when the parties have failed to reach
an agreement on the sole arbitrator (in an
arbitration before a sole arbitrator) or when the
two designated arbitrators have failed to reach an
agreement on the third or presiding arbitrator (in
an arbitration before a panel of three arbitrators),
and the institution under whose rules arbitration
is to be conducted fails or is unable to perform its
duty as appointing authority within a reasonable
time from receipt of the request for appointment;
b. In all instances where arbitration is ad hoc and
the parties failed to provide a method for
appointing or replacing an arbitrator, or substitute
arbitrator, or the method agreed upon is
ineffective, and the National President of the
Integrated Bar of the Philippines (IBP) or his duly
authorized representative fails or refuses to act
within such period as may be allowed under the
pertinent rules of the IBP or within such period as
may be agreed upon by the parties, or in the
absence thereof, within thirty (30) days from
receipt of such request for appointment;
c. Where the parties agreed that their dispute
shall be resolved by three arbitrators but no
method of appointing those arbitrators has been
agreed upon, each party shall appoint one
arbitrator and the two arbitrators thus appointed
shall appoint a third arbitrator. If a party fails to
appoint his arbitrator within thirty (30) days of
receipt of a request to do so from the other party,
or if the two arbitrators fail to agree on the third
arbitrator within a reasonable time from their
appointment, the appointment shall be made by
the Appointing Authority. If the latter fails or
refuses to act or appoint an arbitrator within a
reasonable time from receipt of the request to do
so, any party or the appointed arbitrator/s may
request the court to appoint an arbitrator or the
third arbitrator as the case may be.
Rule 6.2. Who may request for appointment. - Any party to
an arbitration may request the court to act as an
Appointing Authority in the instances specified in Rule 6.1
above.
Rule 6.3. Venue. - The petition for appointment of
arbitrator may be filed, at the option of the petitioner, in the
Regional Trial Court (a) where the principal place of
business of any of the parties is located, (b) if any of the
parties are individuals, where those individuals reside, or
(c) in the National Capital Region.
Rule 6.4. Contents of the petition. -The petition shall state
the following:
a. The general nature of the dispute;
b. If the parties agreed on an appointment
procedure, a description of that procedure with
reference to the agreement where such may be
found;
c. The number of arbitrators agreed upon or the
absence of any agreement as to the number of
arbitrators;
d. The special qualifications that the arbitrator/s
must possess, if any, that were agreed upon by
the parties;
e. The fact that the Appointing Authority, without
justifiable cause, has failed or refused to act as
such within the time prescribed or in the absence
thereof, within a reasonable time, from the date a
request is made; and
f. The petitioner is not the cause of the delay in,
or failure of, the appointment of the arbitrator.
Apart from other submissions, the petitioner must attach to
the petition (a) an authentic copy of the arbitration
agreement, and (b) proof that the Appointing Authority has
been notified of the filing of the petition for appointment
with the court.
Rule 6.5. Comment/Opposition. - The comment/opposition
must be filed within fifteen (15) days from service of the
petition.
Rule 6.6. Submission of list of arbitrators. - The court may,
at its option, also require each party to submit a list of not
less than three (3) proposed arbitrators together with their
curriculum vitae.
Rule 6.7. Court action. - After hearing, if the court finds
merit in the petition, it shall appoint an arbitrator;
otherwise, it shall dismiss the petition.
In making the appointment, the court shall have regard to
such considerations as are likely to secure the
appointment of an independent and impartial arbitrator.
At any time after the petition is filed and before the court
makes an appointment, it shall also dismiss the petition
upon being informed that the Appointing Authority has
already made the appointment.
Rule 6.8. Forum shopping prohibited. - When there is a
pending petition in another court to declare the arbitration
agreement inexistent, invalid, unenforceable, on account
of which the respondent failed or refused to participate in
the selection and appointment of a sole arbitrator or to
appoint a party-nominated arbitrator, the petition filed
under this rule shall be dismissed.
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Rule 6.9. Relief against court action. - If the court appoints
an arbitrator, the order appointing an arbitrator shall be
immediately executory and shall not be the subject of a
motion for reconsideration, appeal or certiorari. An order of
the court denying the petition for appointment of an
arbitrator may, however, be the subject of a motion for
reconsideration, appeal or certiorari.
RULE 7: CHALLENGE TO APPOINTMENT OF
ARBITRATOR
Rule 7.1. Who may challenge. - Any of the parties to an
arbitration may challenge an arbitrator.
Rule 7.2. When challenge may be raised in court. - When
an arbitrator is challenged before the arbitral tribunal
under the procedure agreed upon by the parties or under
the procedure provided for in Article 13 (2) of the Model
Law and the challenge is not successful, the aggrieved
party may request the Appointing Authority to rule on the
challenge, and it is only when such Appointing Authority
fails or refuses to act on the challenge within such period
as may be allowed under the applicable rule or in the
absence thereof, within thirty (30) days from receipt of the
request, that the aggrieved party may renew the challenge
in court.
Rule 7.3. Venue. - The challenge shall be filed with the
Regional Trial Court (a) where the principal place of
business of any of the parties is located, (b) if any of the
parties are individuals, where those individuals reside, or
(c) in the National Capital Region.
Rule 7.4. Grounds. - An arbitrator may be challenged on
any of the grounds for challenge provided for in Republic
Act No. 9285 and its implementing rules, Republic Act No.
876 or the Model Law. The nationality or professional
qualification of an arbitrator is not a ground to challenge
an arbitrator unless the parties have specified in their
arbitration agreement a nationality and/or professional
qualification for appointment as arbitrator.
Rule 7.5. Contents of the petition. - The petition shall state
the following:
a. The name/s of the arbitrator/s challenged and
his/their address;
b. The grounds for the challenge;
c. The facts showing that the ground for the
challenge has been expressly or impliedly
rejected by the challenged arbitrator/s; and
d. The facts showing that the Appointing Authority
failed or refused to act on the challenge.
The court shall dismiss the petition motu proprio unless it
is clearly alleged therein that the Appointing Authority
charged with deciding the challenge, after the resolution of
the arbitral tribunal rejecting the challenge is raised or
contested before such Appointing Authority, failed or
refused to act on the challenge within thirty (30) days from
receipt of the request or within such longer period as may
apply or as may have been agreed upon by the parties.
Rule 7.6. Comment/Opposition. - The challenged
arbitrator or other parties may file a comment or opposition
within fifteen (15) days from service of the petition.
Rule 7.7. Court action. - After hearing, the court shall
remove the challenged arbitrator if it finds merit in the
petition; otherwise, it shall dismiss the petition.
The court shall allow the challenged arbitrator who
subsequently agrees to accept the challenge to withdraw
as arbitrator.
The court shall accept the challenge and remove the
arbitrator in the following cases:
a. The party or parties who named and appointed
the challenged arbitrator agree to the challenge
and withdraw the appointment.
b. The other arbitrators in the arbitral tribunal
agree to the removal of the challenged arbitrator;
and
c. The challenged arbitrator fails or refuses to
submit his comment on the petition or the brief of
legal arguments as directed by the court, or in
such comment or legal brief, he fails to object to
his removal following the challenge.
The court shall decide the challenge on the basis of
evidence submitted by the parties.
The court will decide the challenge on the basis of the
evidence submitted by the parties in the following
instances:
a. The other arbitrators in the arbitral tribunal
agree to the removal of the challenged arbitrator;
and
b. If the challenged arbitrator fails or refuses to
submit his comment on the petition or the brief of
legal arguments as directed by the court, or in
such comment or brief of legal arguments, he
fails to object to his removal following the
challenge.
Rule 7.8. No motion for reconsideration, appeal or
certiorari. - Any order of the court resolving the petition
shall be immediately executory and shall not be the
subject of a motion for reconsideration, appeal, or
certiorari.
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Rule 7.9. Reimbursement of expenses and reasonable
compensation to challenged arbitrator. - Unless the bad
faith of the challenged arbitrator is established with
reasonable certainty by concealing or failing to disclose a
ground for his disqualification, the challenged arbitrator
shall be entitled to reimbursement of all reasonable
expenses he may have incurred in attending to the
arbitration and to a reasonable compensation for his work
on the arbitration. Such expenses include, but shall not be
limited to, transportation and hotel expenses, if any. A
reasonable compensation shall be paid to the challenged
arbitrator on the basis of the length of time he has devoted
to the arbitration and taking into consideration his stature
and reputation as an arbitrator. The request for
reimbursement of expenses and for payment of a
reasonable compensation shall be filed in the same case
and in the court where the petition to replace the
challenged arbitrator was filed. The court, in determining
the amount of the award to the challenged arbitrator, shall
receive evidence of expenses to be reimbursed, which
may consist of air tickets, hotel bills and expenses, and
inland transportation. The court shall direct the challenging
party to pay the amount of the award to the court for the
account of the challenged arbitrator, in default of which the
court may issue a writ of execution to enforce the award.
RULE 8: TERMINATION OF THE MANDATE OF
ARBITRATOR
Rule 8.1. Who may request termination and on what
grounds.- Any of the parties to an arbitration may request
for the termination of the mandate of an arbitrator where
an arbitrator becomes de jure or de facto unable to
perform his function or for other reasons fails to act
without undue delay and that arbitrator, upon request of
any party, fails or refuses to withdraw from his office.
Rule 8.2. When to request. - If an arbitrator refuses to
withdraw from his office, and subsequently, the Appointing
Authority fails or refuses to decide on the termination of
the mandate of that arbitrator within such period as may
be allowed under the applicable rule or, in the absence
thereof, within thirty (30) days from the time the request is
brought before him, any party may file with the court a
petition to terminate the mandate of that arbitrator.
Rule 8.3. Venue. - A petition to terminate the mandate of
an arbitrator may, at that petitioners option, be filed with
the Regional Trial Court (a) where the principal place of
business of any of the parties is located, (b) where any of
the parties who are individuals resides, or (c) in the
National Capital Region.
Rule 8.4. Contents of the petition. - The petition shall state
the following:
a. The name of the arbitrator whose mandate is
sought to be terminated;
b. The ground/s for termination;
c. The fact that one or all of the parties had
requested the arbitrator to withdraw but he failed
or refused to do so;
d. The fact that one or all of the parties requested
the Appointing Authority to act on the request for
the termination of the mandate of the arbitrator
and failure or inability of the Appointing Authority
to act within thirty (30) days from the request of a
party or parties or within such period as may
have been agreed upon by the parties or allowed
under the applicable rule.
The petitioner shall further allege that one or all of the
parties had requested the arbitrator to withdraw but he
failed or refused to do so.
Rule 8.5. Comment/Opposition. - The comment/opposition
must be filed within fifteen (15) days from service of the
petition.
Rule 8.6. Court action. - After hearing, if the court finds
merit in the petition, it shall terminate the mandate of the
arbitrator who refuses to withdraw from his office;
otherwise, it shall dismiss the petition.
Rule 8.7. No motion for reconsideration or appeal. - Any
order of the court resolving the petition shall be
immediately executory and shall not be subject of a motion
for reconsideration, appeal or petition for certiorari.
Rule 8.8. Appointment of substitute arbitrator. - Where the
mandate of an arbitrator is terminated, or he withdraws
from office for any other reason, or because of his
mandate is revoked by agreement of the parties or is
terminated for any other reason, a substitute arbitrator
shall be appointed according to the rules that were
applicable to the appointment of the arbitrator being
replaced.
RULE 9: ASSISTANCE IN TAKING EVIDENCE
Rule 9.1. Who may request assistance. - Any party to an
arbitration, whether domestic or foreign, may request the
court to provide assistance in taking evidence.
Rule 9.2. When assistance may be sought. - Assistance
may be sought at any time during the course of the arbitral
proceedings when the need arises.
Rule 9.3. Venue. - A petition for assistance in taking
evidence may, at the option of the petitioner, be filed with
Regional Trial Court where (a) arbitration proceedings are
taking place, (b) the witnesses reside or may be found, or
(c) where the evidence may be found.
Rule 9.4. Ground. - The court may grant or execute the
request for assistance in taking evidence within its
competence and according to the rules of evidence.
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Rule 9.5. Type of assistance. - A party requiring
assistance in the taking of evidence may petition the court
to direct any person, including a representative of a
corporation, association, partnership or other entity (other
than a party to the ADR proceedings or its officers) found
in the Philippines, for any of the following:
a. To comply with a subpoena ad
testificandum and/or subpoena duces tecum;
b. To appear as a witness before an officer for the
taking of his deposition upon oral examination or
by written interrogatories;
c. To allow the physical examination of the
condition of persons, or the inspection of things
or premises and, when appropriate, to allow the
recording and/or documentation of condition of
persons, things or premises (i.e., photographs,
video and other means of
recording/documentation);
d. To allow the examination and copying of
documents; and
e. To perform any similar acts.
Rule 9.6. Contents of the petition. - The petition must state
the following:
a. The fact that there is an ongoing arbitration
proceeding even if such proceeding could not
continue due to some legal impediments;
b. The arbitral tribunal ordered the taking of
evidence or the party desires to present evidence
to the arbitral tribunal;
c. Materiality or relevance of the evidence to be
taken; and
d. The names and addresses of the intended
witness/es, place where the evidence may be
found, the place where the premises to be
inspected are located or the place where the acts
required are to be done.
Rule 9.7. Comment/Opposition. - The comment/opposition
must be filed within fifteen (15) days from service of the
petition.
Rule 9.8. Court action. - If the evidence sought is not
privileged, and is material and relevant, the court shall
grant the assistance in taking evidence requested and
shall order petitioner to pay costs attendant to such
assistance.
Rule 9.9. Relief against court action. - The order granting
assistance in taking evidence shall be immediately
executory and not subject to reconsideration or appeal. If
the court declines to grant assistance in taking evidence,
the petitioner may file a motion for reconsideration or
appeal.
Rule 9.10. Perpetuation of testimony before the arbitral
tribunal is constituted. - At anytime before arbitration is
commenced or before the arbitral tribunal is constituted,
any person who desires to perpetuate his testimony or that
of another person may do so in accordance with Rule 24
of the Rules of Court.
Rule 9.11. Consequence of disobedience. - The court may
impose the appropriate sanction on any person who
disobeys its order to testify when required or perform any
act required of him.
RULE 10: CONFIDENTIALITY/PROTECTIVE ORDERS
Rule 10.1. Who may request confidentiality. - A party,
counsel or witness who disclosed or who was compelled
to disclose information relative to the subject of ADR under
circumstances that would create a reasonable
expectation, on behalf of the source, that the information
shall be kept confidential has the right to prevent such
information from being further disclosed without the
express written consent of the source or the party who
made the disclosure.
Rule 10.2. When request made. - A party may request a
protective order at anytime there is a need to enforce the
confidentiality of the information obtained, or to be
obtained, in ADR proceedings.
Rule 10.3. Venue. - A petition for a protective order may
be filed with the Regional Trial Court where that order
would be implemented.
If there is a pending court proceeding in which the
information obtained in an ADR proceeding is required to
be divulged or is being divulged, the party seeking to
enforce the confidentiality of the information may file a
motion with the court where the proceedings are pending
to enjoin the confidential information from being divulged
or to suppress confidential information.
Rule 10.4. Grounds. - A protective order may be granted
only if it is shown that the applicant would be materially
prejudiced by an unauthorized disclosure of the
information obtained, or to be obtained, during an ADR
proceeding.
Rule 10.5. Contents of the motion or petition. - The
petition or motion must state the following:
a. That the information sought to be protected
was obtained, or would be obtained, during an
ADR proceeding;
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 b. The applicant would be materially prejudiced
by the disclosure of that information;
c. The person or persons who are being asked to
divulge the confidential information participated in
an ADR proceedings; and
d. The time, date and place when the ADR
proceedings took place.
Apart from the other submissions, the movant must set the
motion for hearing and contain a notice of hearing in
accordance with Rule 15 of the Rules of Court.
Rule 10.6. Notice. - Notice of a request for a protective
order made through a motion shall be made to the
opposing parties in accordance with Rule 15 of the Rules
of Court.
Rule 10.7. Comment/Opposition. - The
comment/opposition must be filed within fifteen (15) days
from service of the petition. The opposition or comment
may be accompanied by written proof that (a) the
information is not confidential, (b) the information was not
obtained during an ADR proceeding, (c) there was a
waiver of confidentiality, or (d) the petitioner/movant is
precluded from asserting confidentiality.
Rule 10.8. Court action. - If the court finds the petition or
motion meritorious, it shall issue an order enjoining a
person or persons from divulging confidential information.
In resolving the petition or motion, the courts shall be
guided by the following principles applicable to all ADR
proceedings: Confidential information shall not be subject
to discovery and shall be inadmissible in any adversarial
proceeding, whether judicial or quasi judicial. However,
evidence or information that is otherwise admissible or
subject to discovery does not become inadmissible or
protected from discovery solely by reason of its use
therein.
For mediation proceedings, the court shall be further
guided by the following principles:
a. Information obtained through mediation shall
be privileged and confidential.
b. A party, a mediator, or a nonparty participant
may refuse to disclose and may prevent any
other person from disclosing a mediation
communication.
c. In such an adversarial proceeding, the
following persons involved or previously involved
in a mediation may not be compelled to disclose
confidential information obtained during the
mediation: (1) the parties to the dispute; (2) the
mediator or mediators; (3) the counsel for the
parties: (4) the nonparty participants; (5) any
persons hired or engaged in connection with the
mediation as secretary, stenographer; clerk or
assistant; and (6) any other person who obtains
or possesses confidential information by reason
of his/ her profession.
d. The protection of the ADR Laws shall continue
to apply even if a mediator is found to have failed
to act impartially.
e. A mediator may not be called to testify to
provide information gathered in mediation. A
mediator who is wrongfully subpoenaed shall be
reimbursed the full cost of his attorney fees and
related expenses.
Rule 10.9. Relief against court action. - The order
enjoining a person or persons from divulging confidential
information shall be immediately executory and may not
be enjoined while the order is being questioned with the
appellate courts.
If the court declines to enjoin a person or persons from
divulging confidential information, the petitioner may file a
motion for reconsideration or appeal.
Rule 10.10. Consequence of disobedience. - Any person
who disobeys the order of the court to cease from
divulging confidential information shall be imposed the
proper sanction by the court.
RULE 11: CONFIRMATION, CORRECTION OR
VACATION OF AWARD IN DOMESTIC ARBITRATION
Rule 11.1. Who may request confirmation, correction or
vacation. - Any party to a domestic arbitration may petition
the court to confirm, correct or vacate a domestic arbitral
award.
Rule 11.2. When to request confirmation,
correction/modification or vacation. -
(A) Confirmation. - At any time after the lapse of thirty (30)
days from receipt by the petitioner of the arbitral award, he
may petition the court to confirm that award.
(B) Correction/Modification. - Not later than thirty (30) days
from receipt of the arbitral award, a party may petition the
court to correct/modify that award.
(C) Vacation. - Not later than thirty (30) days from receipt
of the arbitral award, a party may petition the court to
vacate that award.
(D) A petition to vacate the arbitral award may be filed, in
opposition to a petition to confirm the arbitral award, not
later than thirty (30) days from receipt of the award by the
petitioner. A petition to vacate the arbitral award filed
beyond the reglementary period shall be dismissed.
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(E) A petition to confirm the arbitral award may be filed, in
opposition to a petition to vacate the arbitral award, at any
time after the petition to vacate such arbitral award is filed.
The dismissal of the petition to vacate the arbitral award
for having been filed beyond the reglementary period shall
not result in the dismissal of the petition for the
confirmation of such arbitral award.
(F) The filing of a petition to confirm an arbitral award shall
not authorize the filing of a belated petition to vacate or set
aside such award in opposition thereto.
(G) A petition to correct an arbitral award may be included
as part of a petition to confirm the arbitral award or as a
petition to confirm that award.
Rule 11.3. Venue. - The petition for confirmation,
correction/modification or vacation of a domestic arbitral
award may be filed with Regional Trial Court having
jurisdiction over the place in which one of the parties is
doing business, where any of the parties reside or where
arbitration proceedings were conducted.
Rule 11.4. Grounds. - (A) To vacate an arbitral award. -
The arbitral award may be vacated on the following
grounds:
a. The arbitral award was procured through
corruption, fraud or other undue means;
b. There was evident partiality or corruption in the
arbitral tribunal or any of its members;
c. The arbitral tribunal was guilty of misconduct or
any form of misbehavior that has materially
prejudiced the rights of any party such as
refusing to postpone a hearing upon sufficient
cause shown or to hear evidence pertinent and
material to the controversy;
d. One or more of the arbitrators was disqualified
to act as such under the law and willfully
refrained from disclosing such disqualification; or
e. The arbitral tribunal exceeded its powers, or so
imperfectly executed them, such that a complete,
final and definite award upon the subject matter
submitted to them was not made.
The award may also be vacated on any or all of the
following grounds:
a. The arbitration agreement did not exist, or is
invalid for any ground for the revocation of a
contract or is otherwise unenforceable; or
b. A party to arbitration is a minor or a person
judicially declared to be incompetent.
The petition to vacate an arbitral award on the ground that
the party to arbitration is a minor or a person judicially
declared to be incompetent shall be filed only on behalf of
the minor or incompetent and shall allege that (a) the other
party to arbitration had knowingly entered into a
submission or agreement with such minor or incompetent,
or (b) the submission to arbitration was made by a
guardian or guardian ad litem who was not authorized to
do so by a competent court.
In deciding the petition to vacate the arbitral award, the
court shall disregard any other ground than those
enumerated above.
(B) To correct/modify an arbitral award. - The Court may
correct/modify or order the arbitral tribunal to
correct/modify the arbitral award in the following cases:
a. Where there was an evident miscalculation of
figures or an evident mistake in the description of
any person, thing or property referred to in the
award;
b. Where the arbitrators have awarded upon a
matter not submitted to them, not affecting the
merits of the decision upon the matter submitted;
c. Where the arbitrators have omitted to resolve
an issue submitted to them for resolution; or
d. Where the award is imperfect in a matter of
form not affecting the merits of the controversy,
and if it had been a commissioners report, the
defect could have been amended or disregarded
by the Court.
Rule 11.5. Form of petition. - An application to vacate an
arbitral award shall be in the form of a petition to vacate or
as a petition to vacate in opposition to a petition to confirm
the same award.
An application to correct/modify an arbitral award may be
included in a petition to confirm an arbitral award or in a
petition to vacate in opposition to confirm the same award.
When a petition to confirm an arbitral award is pending
before a court, the party seeking to vacate or
correct/modify said award may only apply for those reliefs
through a petition to vacate or correct/modify the award in
opposition to the petition to confirm the award provided
that such petition to vacate or correct/modify is filed within
thirty (30) days from his receipt of the award. A petition to
vacate or correct/modify an arbitral award filed in another
court or in a separate case before the same court shall be
dismissed, upon appropriate motion, as a violation of the
rule against forum-shopping.
When a petition to vacate or correct/modify an arbitral
award is pending before a court, the party seeking to
confirm said award may only apply for that relief through a
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petition to confirm the same award in opposition to the
petition to vacate or correct/modify the award. A petition to
confirm or correct/modify an arbitral award filed as
separate proceeding in another court or in a different case
before the same court shall be dismissed, upon
appropriate motion, as a violation of the rule against forum
shopping.
As an alternative to the dismissal of a second petition for
confirmation, vacation or correction/modification of an
arbitral award filed in violation of the non-forum shopping
rule, the court or courts concerned may allow the
consolidation of the two proceedings in one court and in
one case.
Where the petition to confirm the award and petition to
vacate or correct/modify were simultaneously filed by the
parties in the same court or in different courts in the
Philippines, upon motion of either party, the court may
order the consolidation of the two cases before either
court.
In all instances, the petition must be verified by a person
who has knowledge of the jurisdictional facts.
Rule 11.6. Contents of petition. - The petition must state
the following:
a. The addresses of the parties and any change
thereof;
b. The jurisdictional issues raised by a party
during arbitration proceedings;
c. The grounds relied upon by the parties in
seeking the vacation of the arbitral award
whether the petition is a petition for the vacation
or setting aside of the arbitral award or a petition
in opposition to a petition to confirm the award;
and
d. A statement of the date of receipt of the arbitral
award and the circumstances under which it was
received by the petitioner.
Apart from other submissions, the petitioner must attach to
the petition the following:
a. An authentic copy of the arbitration agreement;
b. An authentic copy of the arbitral award;
c. A certification against forum shopping executed
by the applicant in accordance with Section 5 of
Rule 7 of the Rules of Court; and
d. An authentic copy or authentic copies of the
appointment of an arbitral tribunal.
Rule 11.7. Notice. - Upon finding that the petition filed
under this Rule is sufficient both in form and in substance,
the Court shall cause notice and a copy of the petition to
be delivered to the respondent allowing him to file a
comment or opposition thereto within fifteen (15) days
from receipt of the petition. In lieu of an opposition, the
respondent may file a petition in opposition to the petition.
The petitioner may within fifteen (15) days from receipt of
the petition in opposition thereto file a reply.
Rule 11.8. Hearing. - If the Court finds from the petition or
petition in opposition thereto that there are issues of fact, it
shall require the parties, within a period of not more than
fifteen (15) days from receipt of the order, to
simultaneously submit the affidavits of all of their
witnesses and reply affidavits within ten (10) days from
receipt of the affidavits to be replied to. There shall be
attached to the affidavits or reply affidavits documents
relied upon in support of the statements of fact in such
affidavits or reply affidavits.
If the petition or the petition in opposition thereto is one for
vacation of an arbitral award, the interested party in
arbitration may oppose the petition or the petition in
opposition thereto for the reason that the grounds cited in
the petition or the petition in opposition thereto, assuming
them to be true, do not affect the merits of the case and
may be cured or remedied. Moreover, the interested party
may request the court to suspend the proceedings for
vacation for a period of time and to direct the arbitral
tribunal to reopen and conduct a new hearing and take
such other action as will eliminate the grounds for vacation
of the award. The opposition shall be supported by a brief
of legal arguments to show the existence of a sufficient
legal basis for the opposition.
If the ground of the petition to vacate an arbitral award is
that the arbitration agreement did not exist, is invalid or
otherwise unenforceable, and an earlier petition for judicial
relief under Rule 3 had been filed, a copy of such petition
and of the decision or final order of the court shall be
attached thereto. But if the ground was raised before the
arbitral tribunal in a motion to dismiss filed not later than
the submission of its answer, and the arbitral tribunal ruled
in favor of its own jurisdiction as a preliminary question
which was appealed by a party to the Regional Trial Court,
a copy of the order, ruling or preliminary award or decision
of the arbitral tribunal, the appeal therefrom to the Court
and the order or decision of the Court shall all be attached
to the petition.
If the ground of the petition is that the petitioner is an
infant or a person judicially declared to be incompetent,
there shall be attached to the petition certified copies of
documents showing such fact. In addition, the petitioner
shall show that even if the submission or arbitration
agreement was entered into by a guardian or guardian ad
litem, the latter was not authorized by a competent court to
sign such the submission or arbitration agreement.
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If on the basis of the petition, the opposition, the affidavits
and reply affidavits of the parties, the court finds that there
is a need to conduct an oral hearing, the court shall set the
case for hearing. This case shall have preference over
other cases before the court, except criminal cases.
During the hearing, the affidavits of witnesses shall take
the place of their direct testimonies and they shall
immediately be subject to cross-examination thereon. The
Court shall have full control over the proceedings in order
to ensure that the case is heard without undue delay.
Rule 11.9. Court action. - Unless a ground to vacate an
arbitral award under Rule 11.5 above is fully established,
the court shall confirm the award.
An arbitral award shall enjoy the presumption that it was
made and released in due course of arbitration and is
subject to confirmation by the court
In resolving the petition or petition in opposition thereto in
accordance with these Special ADR Rules, the court shall
either confirm or vacate the arbitral award. The court shall
not disturb the arbitral tribunals determination of facts
and/or interpretation of law.
In a petition to vacate an award or in petition to vacate an
award in opposition to a petition to confirm the award, the
petitioner may simultaneously apply with the Court to refer
the case back to the same arbitral tribunal for the purpose
of making a new or revised award or to direct a new
hearing, or in the appropriate case, order the new hearing
before a new arbitral tribunal, the members of which shall
be chosen in the manner provided in the arbitration
agreement or submission, or the law. In the latter case,
any provision limiting the time in which the arbitral tribunal
may make a decision shall be deemed applicable to the
new arbitral tribunal.
In referring the case back to the arbitral tribunal or to a
new arbitral tribunal pursuant to Rule 24 of Republic Act
No. 876, the court may not direct it to revise its award in a
particular way, or to revise its findings of fact or
conclusions of law or otherwise encroach upon the
independence of an arbitral tribunal in the making of a final
award.
RULE 12: RECOGNITION AND ENFORCEMENT OR
SETTING ASIDE OF AN
INTERNATIONALCOMMERCIAL ARBITRATION AWARD
Rule 12.1. Who may request recognition and enforcement
or setting aside. - Any party to an international commercial
arbitration in the Philippines may petition the proper court
to recognize and enforce or set aside an arbitral award.
Rule 12.2. When to file petition. - (A) Petition to recognize
and enforce. - The petition for enforcement and
recognition of an arbitral award may be filed anytime from
receipt of the award. If, however, a timely petition to set
aside an arbitral award is filed, the opposing party must
file therein and in opposition thereto the petition for
recognition and enforcement of the same award within the
period for filing an opposition.
(B) Petition to set aside. - The petition to set aside an
arbitral award may only be filed within three (3) months
from the time the petitioner receives a copy thereof. If a
timely request is made with the arbitral tribunal for
correction, interpretation or additional award, the three (3)
month period shall be counted from the time the petitioner
receives the resolution by the arbitral tribunal of that
request.
A petition to set aside can no longer be filed after the lapse
of the three (3) month period. The dismissal of a petition to
set aside an arbitral award for being time-barred shall not
automatically result in the approval of the petition filed
therein and in opposition thereto for recognition and
enforcement of the same award. Failure to file a petition to
set aside shall preclude a party from raising grounds to
resist enforcement of the award.
Rule 12.3. Venue. - A petition to recognize and enforce or
set aside an arbitral award may, at the option of the
petitioner, be filed with the Regional Trial Court: (a) where
arbitration proceedings were conducted; (b) where any of
the assets to be attached or levied upon is located; (c)
where the act to be enjoined will be or is being performed;
(d) where any of the parties to arbitration resides or has its
place of business; or (e) in the National Capital Judicial
Region.
Rule 12.4. Grounds to set aside or resist enforcement. -
The court may set aside or refuse the enforcement of the
arbitral award only if:
a. The party making the application furnishes
proof that:
(i). A party to the arbitration agreement
was under some incapacity, or the said
agreement is not valid under the law to
which the parties have subjected it or,
failing any indication thereof, under
Philippine law; or
(ii). The party making the application to
set aside or resist enforcement was not
given proper notice of the appointment
of an arbitrator or of the arbitral
proceedings or was otherwise unable to
present his case; or
(iii). The award deals with a dispute not
contemplated by or not falling within the
terms of the submission to arbitration, or
contains decisions on matters beyond
the scope of the submission to
arbitration; provided that, if the decisions
on matters submitted to arbitration can
be separated from those not so
submitted, only that part of the award
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 which contains decisions on matters not
submitted to arbitration may be set
aside or only that part of the award
which contains decisions on matters
submitted to arbitration may be
enforced; or
(iv). The composition of the arbitral
tribunal or the arbitral procedure was not
in accordance with the agreement of the
parties, unless such agreement was in
conflict with a provision of Philippine law
from which the parties cannot derogate,
or, failing such agreement, was not in
accordance with Philippine law;
b. The court finds that:
(i). The subject-matter of the dispute is
not capable of settlement by arbitration
under the law of the Philippines; or
(ii). The recognition or enforcement of
the award would be contrary to public
policy.
In deciding the petition, the Court shall disregard any other
ground to set aside or enforce the arbitral award other
than those enumerated above.
The petition to set-aside or a pleading resisting the
enforcement of an arbitral award on the ground that a
party was a minor or an incompetent shall be filed only on
behalf of the minor or incompetent and shall allege that (a)
the other party to arbitration had knowingly entered into a
submission or agreement with such minor or incompetent,
or (b) the submission to arbitration was made by a
guardian or guardian ad litem who was not authorized to
do so by a competent court.
Rule 12.5. Exclusive recourse against arbitral award. -
Recourse to a court against an arbitral award shall be
made only through a petition to set aside the arbitral
award and on grounds prescribed by the law that governs
international commercial arbitration. Any other recourse
from the arbitral award, such as by appeal or petition for
review or petition for certiorari or otherwise, shall be
dismissed by the court.
Rule 12.6. Form. - The application to recognize and
enforce or set aside an arbitral award, whether made
through a petition to recognize and enforce or to set aside
or as a petition to set aside the award in opposition
thereto, or through a petition to set aside or petition to
recognize and enforce in opposition thereto, shall be
verified by a person who has personal knowledge of the
facts stated therein.
When a petition to recognize and enforce an arbitral award
is pending, the application to set it aside, if not yet time-
barred, shall be made through a petition to set aside the
same award in the same proceedings.
When a timely petition to set aside an arbitral award is
filed, the opposing party may file a petition for recognition
and enforcement of the same award in opposition thereto.
Rule 12.7. Contents of petition. - (A) Petition to recognize
and enforce. - The petition to recognize and enforce or
petition to set aside in opposition thereto, or petition to set
aside or petition to recognize and enforce in opposition
thereto, shall state the following:
a. The addresses of record, or any change
thereof, of the parties to arbitration;
b. A statement that the arbitration agreement or
submission exists;
c. The names of the arbitrators and proof of their
appointment;
d. A statement that an arbitral award was issued
and when the petitioner received it; and
e. The relief sought.
Apart from other submissions, the petitioner shall attach to
the petition the following:
a. An authentic copy of the arbitration agreement;
b. An authentic copy of the arbitral award;
c. A verification and certification against forum
shopping executed by the applicant in
accordance with Sections 4 and 5 of Rule 7 of
the Rules of Court; and
d. An authentic copy or authentic copies of the
appointment of an arbitral tribunal.
(B) Petition to set aside. - The petition to set aside or
petition to set aside in opposition to a petition to recognize
and enforce an arbitral award in international commercial
arbitration shall have the same contents as a petition to
recognize and enforce or petition to recognize and enforce
in opposition to a petition to set aside an arbitral award. In
addition, the said petitions should state the grounds relied
upon to set it aside.
Further, if the ground of the petition to set aside is that the
petitioner is a minor or found incompetent by a court, there
shall be attached to the petition certified copies of
documents showing such fact. In addition, the petitioner
shall show that even if the submission or arbitration
agreement was entered into by a guardian or guardian ad
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litem, the latter was not authorized by a competent court to
sign such the submission or arbitration agreement.
In either case, if another court was previously requested to
resolve and/or has resolved, on appeal, the arbitral
tribunals preliminary determination in favor of its own
jurisdiction, the petitioner shall apprise the court before
which the petition to recognize and enforce or set aside is
pending of the status of the appeal or its resolution.
Rule 12.8. Notice. - Upon finding that the petition filed
under this Rule is sufficient both in form and in substance,
the court shall cause notice and a copy of the petition to
be delivered to the respondent directing him to file an
opposition thereto within fifteen (15) days from receipt of
the petition. In lieu of an opposition, the respondent may
file a petition to set aside in opposition to a petition to
recognize and enforce, or a petition to recognize and
enforce in opposition to a petition to set aside.
The petitioner may within fifteen (15) days from receipt of
the petition to set aside in opposition to a petition to
recognize and enforce, or from receipt of the petition to
recognize and enforce in opposition to a petition to set
aside, file a reply.
Rule 12.9. Submission of documents. - If the court finds
that the issue between the parties is mainly one of law, the
parties may be required to submit briefs of legal
arguments, not more than fifteen (15) days from receipt of
the order, sufficiently discussing the legal issues and the
legal basis for the relief prayed for by each of them.
If the court finds from the petition or petition in opposition
thereto that there are issues of fact relating to the
ground(s) relied upon for the court to set aside, it shall
require the parties within a period of not more than fifteen
(15) days from receipt of the order simultaneously to
submit the affidavits of all of their witnesses and reply
affidavits within ten (10) days from receipt of the affidavits
to be replied to. There shall be attached to the affidavits or
reply affidavits, all documents relied upon in support of the
statements of fact in such affidavits or reply affidavits.
Rule 12.10. Hearing. - If on the basis of the petition, the
opposition, the affidavits and reply affidavits of the parties,
the court finds that there is a need to conduct an oral
hearing, the court shall set the case for hearing. This case
shall have preference over other cases before the court,
except criminal cases. During the hearing, the affidavits of
witnesses shall take the place of their direct testimonies
and they shall immediately be subject to cross-
examination thereon. The court shall have full control over
the proceedings in order to ensure that the case is heard
without undue delay.
Rule 12.11. Suspension of proceedings to set aside. - The
court when asked to set aside an arbitral award may,
where appropriate and upon request by a party, suspend
the proceedings for a period of time determined by it to
give the arbitral tribunal an opportunity to resume the
arbitral proceedings or to take such other action as in the
arbitral tribunals opinion will eliminate the grounds for
setting aside. The court, in referring the case back to the
arbitral tribunal may not direct it to revise its award in a
particular way, or to revise its findings of fact or
conclusions of law or otherwise encroach upon the
independence of an arbitral tribunal in the making of a final
award.
The court when asked to set aside an arbitral award may
also, when the preliminary ruling of an arbitral tribunal
affirming its jurisdiction to act on the matter before it had
been appealed by the party aggrieved by such preliminary
ruling to the court, suspend the proceedings to set aside to
await the ruling of the court on such pending appeal or, in
the alternative, consolidate the proceedings to set aside
with the earlier appeal.
Rule 12.12. Presumption in favor of confirmation. - It is
presumed that an arbitral award was made and released
in due course and is subject to enforcement by the court,
unless the adverse party is able to establish a ground for
setting aside or not enforcing an arbitral award.
Rule 12.13. Judgment of the court. - Unless a ground to
set aside an arbitral award under Rule 12.4 above is fully
established, the court shall dismiss the petition. If, in the
same proceedings, there is a petition to recognize and
enforce the arbitral award filed in opposition to the petition
to set aside, the court shall recognize and enforce the
award.
In resolving the petition or petition in opposition thereto in
accordance with the Special ADR Rules, the court shall
either set aside or enforce the arbitral award. The court
shall not disturb the arbitral tribunals determination of
facts and/or interpretation of law.
Rule 12.14. Costs. - Unless otherwise agreed upon by the
parties in writing, at the time the case is submitted to the
court for decision, the party praying for recognition and
enforcement or setting aside of an arbitral award shall
submit a statement under oath confirming the costs he has
incurred only in the proceedings for such recognition and
enforcement or setting aside. The costs shall include the
attorneys fees the party has paid or is committed to pay to
his counsel of record.
The prevailing party shall be entitled to an award of costs,
which shall include reasonable attorneys fees of the
prevailing party against the unsuccessful party. The court
shall determine the reasonableness of the claim for
attorneys fees.
RULE 13: RECOGNITION AND ENFORCEMENT OF A
FOREIGN ARBITRAL AWARD
Rule 13.1. Who may request recognition and
enforcement. - Any party to a foreign arbitration may
petition the court to recognize and enforce a foreign
arbitral award.
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Rule 13.2. When to petition. - At any time after receipt of a
foreign arbitral award, any party to arbitration may petition
the proper Regional Trial Court to recognize and enforce
such award.
Rule 13.3. Venue. - The petition to recognize and enforce
a foreign arbitral award shall be filed, at the option of the
petitioner, with the Regional Trial Court (a) where the
assets to be attached or levied upon is located, (b) where
the act to be enjoined is being performed, (c) in the
principal place of business in the Philippines of any of the
parties, (d) if any of the parties is an individual, where any
of those individuals resides, or (e) in the National Capital
Judicial Region.
Rule 13.4. Governing law and grounds to refuse
recognition and enforcement. - The recognition and
enforcement of a foreign arbitral award shall be governed
by the 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the "New York
Convention") and this Rule. The court may, upon grounds
of comity and reciprocity, recognize and enforce a foreign
arbitral award made in a country that is not a signatory to
the New York Convention as if it were a Convention
Award.
A Philippine court shall not set aside a foreign arbitral
award but may refuse it recognition and enforcement on
any or all of the following grounds:
a. The party making the application to refuse
recognition and enforcement of the award
furnishes proof that:
(i). A party to the arbitration agreement
was under some incapacity; or the said
agreement is not valid under the law to
which the parties have subjected it or,
failing any indication thereof, under the
law of the country where the award was
made; or
(ii). The party making the application
was not given proper notice of the
appointment of an arbitrator or of the
arbitral proceedings or was otherwise
unable to present his case; or
(iii). The award deals with a dispute not
contemplated by or not falling within the
terms of the submission to arbitration, or
contains decisions on matters beyond
the scope of the submission to
arbitration; provided that, if the decisions
on matters submitted to arbitration can
be separated from those not so
submitted, only that part of the award
which contains decisions on matters not
submitted to arbitration may be set
aside; or
(iv). The composition of the arbitral
tribunal or the arbitral procedure was not
in accordance with the agreement of the
parties or, failing such agreement, was
not in accordance with the law of the
country where arbitration took place; or
(v). The award has not yet become
binding on the parties or has been set
aside or suspended by a court of the
country in which that award was made;
or
b. The court finds that:
(i). The subject-matter of the dispute is
not capable of settlement or resolution
by arbitration under Philippine law; or
(ii). The recognition or enforcement of
the award would be contrary to public
policy.
The court shall disregard any ground for opposing the
recognition and enforcement of a foreign arbitral award
other than those enumerated above.
Rule 13.5. Contents of petition. - The petition shall state
the following:
a. The addresses of the parties to arbitration;
b. In the absence of any indication in the award,
the country where the arbitral award was made
and whether such country is a signatory to the
New York Convention; and
c. The relief sought.
Apart from other submissions, the petition shall have
attached to it the following:
a. An authentic copy of the arbitration agreement;
and
b. An authentic copy of the arbitral award.
If the foreign arbitral award or agreement to arbitrate or
submission is not made in English, the petitioner shall also
attach to the petition a translation of these documents into
English. The translation shall be certified by an official or
sworn translator or by a diplomatic or consular agent.
Rule 13.6. Notice and opposition. - Upon finding that the
petition filed under this Rule is sufficient both in form and
in substance, the court shall cause notice and a copy of
the petition to be delivered to the respondent allowing him
to file an opposition thereto within thirty (30) days from
receipt of the notice and petition.
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Rule 13.7. Opposition. - The opposition shall be verified
by a person who has personal knowledge of the facts
stated therein.
Rule 13.8. Submissions. - If the court finds that the issue
between the parties is mainly one of law, the parties may
be required to submit briefs of legal arguments, not more
than thirty (30) days from receipt of the order, sufficiently
discussing the legal issues and the legal bases for the
relief prayed for by each other.
If, from a review of the petition or opposition, there are
issues of fact relating to the ground/s relied upon for the
court to refuse enforcement, the court shall, motu
proprio or upon request of any party, require the parties to
simultaneously submit the affidavits of all of their
witnesses within a period of not less than fifteen (15) days
nor more than thirty (30) days from receipt of the order.
The court may, upon the request of any party, allow the
submission of reply affidavits within a period of not less
than fifteen (15) days nor more than thirty (30) days from
receipt of the order granting said request. There shall be
attached to the affidavits or reply affidavits all documents
relied upon in support of the statements of fact in such
affidavits or reply affidavits.
Rule 13.9. Hearing. - The court shall set the case for
hearing if on the basis of the foregoing submissions there
is a need to do so. The court shall give due priority to
hearings on petitions under this Rule. During the hearing,
the affidavits of witnesses shall take the place of their
direct testimonies and they shall immediately be subject to
cross-examination. The court shall have full control over
the proceedings in order to ensure that the case is heard
without undue delay.
Rule 13.10. Adjournment/deferment of decision on
enforcement of award. - The court before which a petition
to recognize and enforce a foreign arbitral award is
pending, may adjourn or defer rendering a decision
thereon if, in the meantime, an application for the setting
aside or suspension of the award has been made with a
competent authority in the country where the award was
made. Upon application of the petitioner, the court may
also require the other party to give suitable security.
Rule 13.11. Court action. - It is presumed that a foreign
arbitral award was made and released in due course of
arbitration and is subject to enforcement by the court.
The court shall recognize and enforce a foreign arbitral
award unless a ground to refuse recognition or
enforcement of the foreign arbitral award under this rule is
fully established.
The decision of the court recognizing and enforcing a
foreign arbitral award is immediately executory.
In resolving the petition for recognition and enforcement of
a foreign arbitral award in accordance with these Special
ADR Rules, the court shall either [a] recognize and/or
enforce or [b] refuse to recognize and enforce the arbitral
award. The court shall not disturb the arbitral tribunals
determination of facts and/or interpretation of law.
Rule 13.12. Recognition and enforcement of non-
convention award. - The court shall, only upon grounds
provided by these Special ADR Rules, recognize and
enforce a foreign arbitral award made in a country not a
signatory to the New York Convention when such country
extends comity and reciprocity to awards made in the
Philippines. If that country does not extend comity and
reciprocity to awards made in the Philippines, the court
may nevertheless treat such award as a foreign judgment
enforceable as such under Rule 39, Section 48, of the
Rules of Court.
PART III
PROVISIONS SPECIFIC TO MEDIATION
RULE 14: GENERAL PROVISIONS
Rule 14.1. Application of the rules on arbitration. -
Whenever applicable and appropriate, the pertinent rules
on arbitration shall be applied in proceedings before the
court relative to a dispute subject to mediation.
RULE 15: DEPOSIT AND ENFORCEMENT OF
MEDIATED SETTLEMENT AGREEMENTS
Rule 15.1. Who makes a deposit. - Any party to a
mediation that is not court-annexed may deposit with the
court the written settlement agreement, which resulted
from that mediation.
Rule 15.2. When deposit is made. - At any time after an
agreement is reached, the written settlement agreement
may be deposited.
Rule 15.3. Venue. - The written settlement agreement
may be jointly deposited by the parties or deposited by
one party with prior notice to the other party/ies with the
Clerk of Court of the Regional Trial Court (a) where the
principal place of business in the Philippines of any of the
parties is located; (b) if any of the parties is an individual,
where any of those individuals resides; or (c) in the
National Capital Judicial Region.
Rule 15.4. Registry Book. - The Clerk of Court of each
Regional Trial Court shall keep a Registry Book that shall
chronologically list or enroll all the mediated settlement
agreements/settlement awards that are deposited with the
court as well as the names and address of the parties
thereto and the date of enrollment and shall issue a
Certificate of Deposit to the party that made the deposit.
Rule 15.5. Enforcement of mediated settlement
agreement. - Any of the parties to a mediated settlement
agreement, which was deposited with the Clerk of Court of
the Regional Trial Court, may, upon breach thereof, file a
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verified petition with the same court to enforce said
agreement.
Rule 15.6. Contents of petition. - The verified petition
shall:
a. Name and designate, as petitioner or
respondent, all parties to the mediated settlement
agreement and those who may be affected by it;
b. State the following:
(i). The addresses of the petitioner and
respondents; and
(ii). The ultimate facts that would show
that the adverse party has defaulted to
perform its obligation under said
agreement; and
c. Have attached to it the following:
(i). An authentic copy of the mediated
settlement agreement; and
(ii). Certificate of Deposit showing that
the mediated settlement agreement was
deposited with the Clerk of Court.
Rule 15.7. Opposition. - The adverse party may file an
opposition, within fifteen (15) days from receipt of notice or
service of the petition, by submitting written proof of
compliance with the mediated settlement agreement or
such other affirmative or negative defenses it may have.
Rule 15.8. Court action. - After a summary hearing, if the
court finds that the agreement is a valid mediated
settlement agreement, that there is no merit in any of the
affirmative or negative defenses raised, and the
respondent has breached that agreement, in whole or in
part, the court shall order the enforcement thereof;
otherwise, it shall dismiss the petition.
PART IV
PROVISIONS SPECIFIC TO CONSTRUCTION
ARBITRATION
RULE 16: GENERAL PROVISIONS
Rule 16.1. Application of the rules on arbitration. -
Whenever applicable and appropriate, the rules on
arbitration shall be applied in proceedings before the court
relative to a dispute subject to construction arbitration.
RULE 17: REFERRAL TO CIAC
Rule 17.1. Dismissal of action. - A Regional Trial Court
before which a construction dispute is filed shall, upon
becoming aware that the parties have entered into an
arbitration agreement, motu proprio or upon motion made
not later than the pre-trial, dismiss the case and refer the
parties to arbitration to be conducted by the Construction
Industry Arbitration Commission (CIAC), unless all parties
to arbitration, assisted by their respective counsel, submit
to the court a written agreement making the court, rather
than the CIAC, the body that would exclusively resolve the
dispute.
Rule 17.2. Form and contents of motion. - The request for
dismissal of the civil action and referral to arbitration shall
be through a verified motion that shall (a) contain a
statement showing that the dispute is a construction
dispute; and (b) be accompanied by proof of the existence
of the arbitration agreement.
If the arbitration agreement or other document evidencing
the existence of that agreement is already part of the
record, those documents need not be submitted to the
court provided that the movant has cited in the motion
particular references to the records where those
documents may be found.
The motion shall also contain a notice of hearing
addressed to all parties and shall specify the date and
time when the motion will be heard, which must not be
later than fifteen (15) days after the filing of the motion.
The movant shall ensure receipt by all parties of the
motion at least three days before the date of the hearing.
Rule 17.3. Opposition. - Upon receipt of the motion to
refer the dispute to arbitration by CIAC, the other party
may file an opposition to the motion on or before the day
such motion is to be heard. The opposition shall clearly set
forth the reasons why the court should not dismiss the
case.
Rule 17.4. Hearing. - The court shall hear the motion only
once and for the purpose of clarifying relevant factual and
legal issues.
Rule 17.5. Court action. - If the other parties fail to file
their opposition on or before the day of the hearing, the
court shall motu proprio resolve the motion only on the
basis of the facts alleged in the motion.
After hearing, the court shall dismiss the civil action and
refer the parties to arbitration if it finds, based on the
pleadings and supporting documents submitted by the
parties, that there is a valid and enforceable arbitration
agreement involving a construction dispute. Otherwise, the
court shall proceed to hear the case.
All doubts shall be resolved in favor of the existence of a
construction dispute and the arbitration agreement.
Rule 17.6. Referral immediately executory. - An order
dismissing the case and referring the dispute to arbitration
by CIAC shall be immediately executory.
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Rule 17.7. Multiple actions and parties. - The court shall
not decline to dismiss the civil action and make a referral
to arbitration by CIAC for any of the following reasons:
a. Not all of the disputes subject of the civil action
may be referred to arbitration;
b. Not all of the parties to the civil action are
bound by the arbitration agreement and referral
to arbitration would result in multiplicity of suits;
c. The issues raised in the civil action could be
speedily and efficiently resolved in its entirety by
the Court rather than in arbitration;
d. Referral to arbitration does not appear to be
the most prudent action; or
e. Dismissal of the civil action would prejudice the
rights of the parties to the civil action who are not
bound by the arbitration agreement.
The court may, however, issue an order directing the
inclusion in arbitration of those parties who are bound by
the arbitration agreement directly or by reference thereto
pursuant to Section 34 of Republic Act No. 9285.
Furthermore, the court shall issue an order directing the
case to proceed with respect to the parties not bound by
the arbitration agreement.
Rule 17.8. Referral - If the parties manifest that they have
agreed to submit all or part of their dispute pending with
the court to arbitration by CIAC, the court shall refer them
to CIAC for arbitration.
PART V
PROVISIONS SPECIFIC TO OTHER FORMS OF ADR
RULE 18: GENERAL PROVISIONS
Rule 18.1. Applicability of rules to other forms of ADR. -
This rule governs the procedure for matters brought before
the court involving the following forms of ADR:
a. Early neutral evaluation;
b. Neutral evaluation;
c. Mini-trial;
d. Mediation-arbitration;
e. A combination thereof; or
f. Any other ADR form.
Rule 18.2. Applicability of the rules on mediation. - If the
other ADR form/process is more akin to mediation (i.e., the
neutral third party merely assists the parties in reaching a
voluntary agreement), the herein rules on mediation shall
apply.
Rule 18.3. Applicability of rules on arbitration.-If the other
ADR form/process is more akin to arbitration (i.e., the
neutral third party has the power to make a binding
resolution of the dispute), the herein rules on arbitration
shall apply.
Rule 18.4. Referral. - If a dispute is already before a court,
either party may before and during pre-trial, file a motion
for the court to refer the parties to other ADR
forms/processes. At any time during court proceedings,
even after pre-trial, the parties may jointly move for
suspension of the action pursuant to Article 2030 of the
Civil Code of the Philippines where the possibility of
compromise is shown.
Rule 18.5. Submission of settlement agreement. - Either
party may submit to the court, before which the case is
pending, any settlement agreement following a neutral or
an early neutral evaluation, mini-trial or mediation-
arbitration.
PART VI
MOTION FOR RECONSIDERATION, APPEAL AND
CERTIORARI
RULE 19: MOTION FOR RECONSIDERATION, APPEAL
AND CERTIORARI
A. MOTION FOR RECONSIDERATION
Rule 19.1. Motion for reconsideration, when allowed. - A
party may ask the Regional Trial to reconsider its ruling on
the following:
a. That the arbitration agreement is inexistent,
invalid or unenforceable pursuant to Rule 3.10
(B);
b. Upholding or reversing the arbitral tribunals
jurisdiction pursuant to Rule 3.19;
c. Denying a request to refer the parties to
arbitration;
d. Granting or denying a party an interim
measure of protection;
e. Denying a petition for the appointment of an
arbitrator;
f. Refusing to grant assistance in taking
evidence;
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 g. Enjoining or refusing to enjoin a person from
divulging confidential information;
h. Confirming, vacating or correcting a domestic
arbitral award;
i. Suspending the proceedings to set aside an
international commercial arbitral award and
referring the case back to the arbitral tribunal;
j. Setting aside an international commercial
arbitral award;
k. Dismissing the petition to set aside an
international commercial arbitral award, even if
the court does not recognize and/or enforce the
same;
l. Recognizing and/or enforcing, or dismissing a
petition to recognize and/or enforce an
international commercial arbitral award;
m. Declining a request for assistance in taking
evidence;
n. Adjourning or deferring a ruling on a petition to
set aside, recognize and/or enforce an
international commercial arbitral award;
o. Recognizing and/or enforcing a foreign arbitral
award, or refusing recognition and/or
enforcement of the same; and
p. Granting or dismissing a petition to enforce a
deposited mediated settlement agreement.
No motion for reconsideration shall be allowed from the
following rulings of the Regional Trial Court:
a. A prima facie determination upholding the
existence, validity or enforceability of an
arbitration agreement pursuant to Rule 3.1 (A);
b. An order referring the dispute to arbitration;
c. An order appointing an arbitrator;
d. Any ruling on the challenge to the appointment
of an arbitrator;
e. Any order resolving the issue of the termination
of the mandate of an arbitrator; and
f. An order granting assistance in taking
evidence.
Rule 19.2. When to move for reconsideration. - A motion
for reconsideration may be filed with the Regional Trial
Court within a non-extendible period of fifteen (15) days
from receipt of the questioned ruling or order.
Rule 19.3. Contents and notice. - The motion shall be
made in writing stating the ground or grounds therefor and
shall be filed with the court and served upon the other
party or parties.
Rule 19.4. Opposition or comment. - Upon receipt of the
motion for reconsideration, the other party or parties shall
have a non-extendible period of fifteen (15) days to file his
opposition or comment.
Rule 19.5. Resolution of motion. - A motion for
reconsideration shall be resolved within thirty (30) days
from receipt of the opposition or comment or upon the
expiration of the period to file such opposition or comment.
Rule 19.6. No second motion for reconsideration. - No
party shall be allowed a second motion for
reconsideration.
B. GENERAL PROVISIONS ON APPEAL AND
CERTIORARI
Rule 19.7. No appeal or certiorari on the merits of an
arbitral award. - An agreement to refer a dispute to
arbitration shall mean that the arbitral award shall be final
and binding. Consequently, a party to an arbitration is
precluded from filing an appeal or a petition for certiorari
questioning the merits of an arbitral award.
Rule 19.8. Subject matter and governing rules. - The
remedy of an appeal through a petition for review or the
remedy of a special civil action of certiorari from a decision
of the Regional Trial Court made under the Special ADR
Rules shall be allowed in the instances, and instituted only
in the manner, provided under this Rule.
Rule 19.9. Prohibited alternative remedies. - Where the
remedies of appeal and certiorari are specifically made
available to a party under the Special ADR Rules,
recourse to one remedy shall preclude recourse to the
other.
Rule 19.10. Rule on judicial review on arbitration in the
Philippines. - As a general rule, the court can only vacate
or set aside the decision of an arbitral tribunal upon a clear
showing that the award suffers from any of the infirmities
or grounds for vacating an arbitral award under Section 24
of Republic Act No. 876 or under Rule 34 of the Model
Law in a domestic arbitration, or for setting aside an award
in an international arbitration under Article 34 of the Model
Law, or for such other grounds provided under these
Special Rules.
If the Regional Trial Court is asked to set aside an arbitral
award in a domestic or international arbitration on any
ground other than those provided in the Special ADR
Rules, the court shall entertain such ground for the setting
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aside or non-recognition of the arbitral award only if the
same amounts to a violation of public policy.
The court shall not set aside or vacate the award of the
arbitral tribunal merely on the ground that the arbitral
tribunal committed errors of fact, or of law, or of fact and
law, as the court cannot substitute its judgment for that of
the arbitral tribunal.
Rule 19.11. Rule on judicial review of foreign arbitral
award. - The court can deny recognition and enforcement
of a foreign arbitral award only upon the grounds provided
in Article V of the New York Convention, but shall have no
power to vacate or set aside a foreign arbitral award.
C. APPEALS TO THE COURT OF APPEALS
Rule 19.12. Appeal to the Court of Appeals. - An appeal to
the Court of Appeals through a petition for review under
this Special Rule shall only be allowed from the following
final orders of the Regional Trial Court:
a. Granting or denying an interim measure of
protection;
b. Denying a petition for appointment of an
arbitrator;
c. Denying a petition for assistance in taking
evidence;
d. Enjoining or refusing to enjoin a person from
divulging confidential information;
e. Confirming, vacating or correcting/modifying a
domestic arbitral award;
f. Setting aside an international commercial
arbitration award;
g. Dismissing the petition to set aside an
international commercial arbitration award even if
the court does not decide to recognize or enforce
such award;
h. Recognizing and/or enforcing an international
commercial arbitration award;
i. Dismissing a petition to enforce an international
commercial arbitration award;
j. Recognizing and/or enforcing a foreign arbitral
award;
k. Refusing recognition and/or enforcement of a
foreign arbitral award;
l. Granting or dismissing a petition to enforce a
deposited mediated settlement agreement; and
m. Reversing the ruling of the arbitral tribunal
upholding its jurisdiction.
Rule 19.13. Where to appeal. - An appeal under this Rule
shall be taken to the Court of Appeals within the period
and in the manner herein provided.
Rule 19.14. When to appeal. - The petition for review shall
be filed within fifteen (15) days from notice of the decision
of the Regional Trial Court or the denial of the petitioners
motion for reconsideration.
Rule 19.15. How appeal taken. - Appeal shall be taken by
filing a verified petition for review in seven (7) legible
copies with the Court of Appeals, with proof of service of a
copy thereof on the adverse party and on the Regional
Trial Court. The original copy of the petition intended for
the Court of Appeals shall be marked original by the
petitioner.
Upon the filing of the petition and unless otherwise
prescribed by the Court of Appeals, the petitioner shall pay
to the clerk of court of the Court of Appeals docketing fees
and other lawful fees of P3,500.00 and deposit the sum of
P500.00 for costs.
Exemption from payment of docket and other lawful fees
and the deposit for costs may be granted by the Court of
Appeals upon a verified motion setting forth valid grounds
therefor. If the Court of Appeals denies the motion, the
petitioner shall pay the docketing and other lawful fees
and deposit for costs within fifteen days from the notice of
the denial.
Rule 19.16. Contents of the Petition. - The petition for
review shall (a) state the full names of the parties to the
case, without impleading the court or agencies either as
petitioners or respondent, (b) contain a concise statement
of the facts and issues involved and the grounds relied
upon for the review, (c) be accompanied by a clearly
legible duplicate original or a certified true copy of the
decision or resolution of the Regional Trial Court appealed
from, together with certified true copies of such material
portions of the record referred to therein and other
supporting papers, and (d) contain a sworn certification
against forum shopping as provided in the Rules of Court.
The petition shall state the specific material dates showing
that it was filed within the period fixed herein.
Rule 19.17. Effect of failure to comply with requirements. -
The court shall dismiss the petition if it fails to comply with
the foregoing requirements regarding the payment of the
docket and other lawful fees, the deposit for costs, proof of
service of the petition, the contents and the documents,
which should accompany the petition.
Rule 19.18. Action on the petition. - The Court of Appeals
may require the respondent to file a comment on the
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petition, not a motion to dismiss, within ten (10) days from
notice, or dismiss the petition if it finds, upon consideration
of the grounds alleged and the legal briefs submitted by
the parties, that the petition does not appear to be prima
facie meritorious.
Rule 19.19. Contents of Comment. - The comment shall
be filed within ten (10) days from notice in seven (7)
legible copies and accompanied by clearly legible certified
true copies of such material portions of the record referred
to therein together with other supporting papers. The
comment shall (a) point out insufficiencies or inaccuracies
in petitioners statement of facts and issues, and (b) state
the reasons why the petition should be denied or
dismissed. A copy thereof shall be served on the
petitioner, and proof of such service shall be filed with the
Court of Appeals.
Rule 19.20. Due course. - If upon the filing of a comment
or such other pleading or documents as may be required
or allowed by the Court of Appeals or upon the expiration
of the period for the filing thereof, and on the basis of the
petition or the records, the Court of Appeals finds prima
facie that the Regional Trial Court has committed an error
that would warrant reversal or modification of the
judgment, final order, or resolution sought to be reviewed,
it may give due course to the petition; otherwise, it shall
dismiss the same.
Rule 19.21. Transmittal of records. - Within fifteen (15)
days from notice that the petition has been given due
course, the Court of Appeals may require the court or
agency concerned to transmit the original or a legible
certified true copy of the entire record of the proceeding
under review. The record to be transmitted may be
abridged by agreement of all parties to the proceeding.
The Court of Appeals may require or permit subsequent
correction of or addition to the record.
Rule 19.22. Effect of appeal. - The appeal shall not stay
the award, judgment, final order or resolution sought to be
reviewed unless the Court of Appeals directs otherwise
upon such terms as it may deem just.
Rule 19.23. Submission for decision. - If the petition is
given due course, the Court of Appeals may set the case
for oral argument or require the parties to submit
memoranda within a period of fifteen (15) days from
notice. The case shall be deemed submitted for decision
upon the filing of the last pleading or memorandum
required by the Court of Appeals.
The Court of Appeals shall render judgment within sixty
(60) days from the time the case is submitted for decision.
Rule 19.24. Subject of appeal restricted in certain
instance. - If the decision of the Regional Trial Court
refusing to recognize and/or enforce, vacating and/or
setting aside an arbitral award is premised on a finding of
fact, the Court of Appeals may inquire only into such fact
to determine the existence or non-existence of the specific
ground under the arbitration laws of the Philippines relied
upon by the Regional Trial Court to refuse to recognize
and/or enforce, vacate and/or set aside an award. Any
such inquiry into a question of fact shall not be resorted to
for the purpose of substituting the courts judgment for that
of the arbitral tribunal as regards the latters ruling on the
merits of the controversy.
Rule 19.25. Party appealing decision of court confirming
arbitral award required to post bond. - The Court of
Appeals shall within fifteen (15) days from receipt of the
petition require the party appealing from the decision or a
final order of the Regional Trial Court, either confirming or
enforcing an arbitral award, or denying a petition to set
aside or vacate the arbitral award to post a bond executed
in favor of the prevailing party equal to the amount of the
award.
Failure of the petitioner to post such bond shall be a
ground for the Court of Appeals to dismiss the petition.
D. SPECIAL CIVIL ACTION FOR CERTIORARI
Rule 19.26. Certiorari to the Court of Appeals. - When the
Regional Trial Court, in making a ruling under the Special
ADR Rules, has acted without or in excess of its
jurisdiction, or with grave abuse of discretion amounting to
lack or excess of jurisdiction, and there is no appeal or any
plain, speedy, and adequate remedy in the ordinary
course of law, a party may file a special civil action for
certiorari to annul or set aside a ruling of the Regional Trial
Court.
A special civil action for certiorari may be filed against the
following orders of the court.
a. Holding that the arbitration agreement is
inexistent, invalid or unenforceable;
b. Reversing the arbitral tribunals preliminary
determination upholding its jurisdiction;
c. Denying the request to refer the dispute to
arbitration;
d. Granting or refusing an interim relief;
e. Denying a petition for the appointment of an
arbitrator;
f. Confirming, vacating or correcting a domestic
arbitral award;
g. Suspending the proceedings to set aside an
international commercial arbitral award and
referring the case back to the arbitral tribunal;
h. Allowing a party to enforce an international
commercial arbitral award pending appeal;
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 i. Adjourning or deferring a ruling on whether to
set aside, recognize and or enforce an
international commercial arbitral award;
j. Allowing a party to enforce a foreign arbitral
award pending appeal; and
k. Denying a petition for assistance in taking
evidence.
Rule 19.27. Form. - The petition shall be accompanied by
a certified true copy of the questioned judgment, order or
resolution of the Regional Trial Court, copies of all
pleadings and documents relevant and pertinent thereto,
and a sworn certification of non-forum shopping as
provided in the Rules of Court.
Upon the filing of the petition and unless otherwise
prescribed by the Court of Appeals, the petitioner shall pay
to the clerk of court of the Court of Appeals docketing fees
and other lawful fees of P3,500.00 and deposit the sum of
P500.00 for costs. Exemption from payment of docket and
other lawful fees and the deposit for costs may be granted
by the Court of Appeals upon a verified motion setting
forth valid grounds therefor. If the Court of Appeals denies
the motion, the petitioner shall pay the docketing and other
lawful fees and deposit for costs within fifteen days from
the notice of the denial.
Rule 19.28. When to file petition. - The petition must be
filed with the Court of Appeals within fifteen (15) days from
notice of the judgment, order or resolution sought to be
annulled or set aside. No extension of time to file the
petition shall be allowed.
Rule 19.29. Arbitral tribunal a nominal party in the petition.
- The arbitral tribunal shall only be a nominal party in the
petition for certiorari. As nominal party, the arbitral tribunal
shall not be required to submit any pleadings or written
submissions to the court. The arbitral tribunal or an
arbitrator may, however, submit such pleadings or written
submissions if the same serves the interest of justice.
In petitions relating to the recognition and enforcement of
a foreign arbitral award, the arbitral tribunal shall not be
included even as a nominal party. However, the tribunal
may be notified of the proceedings and furnished with
court processes.
Rule 19.30. Court to dismiss petition. - The court shall
dismiss the petition if it fails to comply with Rules 19.27
and 19.28 above, or upon consideration of the ground
alleged and the legal briefs submitted by the parties, the
petition does not appear to be prima facie meritorious.
Rule 19.31. Order to comment. - If the petition is sufficient
in form and substance to justify such process, the Court of
Appeals shall immediately issue an order requiring the
respondent or respondents to comment on the petition
within a non-extendible period of fifteen (15) days from
receipt of a copy thereof. Such order shall be served on
the respondents in such manner as the court may direct,
together with a copy of the petition and any annexes
thereto.
Rule 19.32. Arbitration may continue despite petition for
certiorari. - A petition for certiorari to the court from the
action of the appointing authority or the arbitral tribunal
allowed under this Rule shall not prevent the arbitral
tribunal from continuing the proceedings and rendering its
award. Should the arbitral tribunal continue with the
proceedings, the arbitral proceedings and any award
rendered therein will be subject to the final outcome of the
pending petition for certiorari.
Rule 19.33. Prohibition against injunctions. - The Court of
Appeals shall not, during the pendency of the proceedings
before it, prohibit or enjoin the commencement of
arbitration, the constitution of the arbitral tribunal, or the
continuation of arbitration.
Rule 19.34. Proceedings after comment is filed. - After the
comment is filed, or the time for the filing thereof has
expired, the court shall render judgment granting the relief
prayed for or to which the petitioner is entitled, or denying
the same, within a non-extendible period of fifteen (15)
days.
Rule 19.35. Service and enforcement of order or
judgment. - A certified copy of the judgment rendered in
accordance with the last preceding section shall be served
upon the Regional Trial Court concerned in such manner
as the Court of Appeals may direct, and disobedience
thereto shall be punished as contempt.
E. APPEAL BY CERTIORARI TO THE SUPREME
COURT
Rule 19.36. Review discretionary. - A review by the
Supreme Court is not a matter of right, but of sound
judicial discretion, which will be granted only for serious
and compelling reasons resulting in grave prejudice to the
aggrieved party. The following, while neither controlling nor
fully measuring the court's discretion, indicate the serious
and compelling, and necessarily, restrictive nature of the
grounds that will warrant the exercise of the Supreme
Courts discretionary powers, when the Court of Appeals:
a. Failed to apply the applicable standard or test
for judicial review prescribed in these Special
ADR Rules in arriving at its decision resulting in
substantial prejudice to the aggrieved party;
b. Erred in upholding a final order or decision
despite the lack of jurisdiction of the court that
rendered such final order or decision;
c. Failed to apply any provision, principle, policy
or rule contained in these Special ADR Rules
resulting in substantial prejudice to the aggrieved
party; and
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 d. Committed an error so egregious and harmful
to a party as to amount to an undeniable excess
of jurisdiction.
The mere fact that the petitioner disagrees with the Court
of Appeals determination of questions of fact, of law or
both questions of fact and law, shall not warrant the
exercise of the Supreme Courts discretionary power. The
error imputed to the Court of Appeals must be grounded
upon any of the above prescribed grounds for review or be
closely analogous thereto.
A mere general allegation that the Court of Appeals has
committed serious and substantial error or that it has
acted with grave abuse of discretion resulting in
substantial prejudice to the petitioner without indicating
with specificity the nature of such error or abuse of
discretion and the serious prejudice suffered by the
petitioner on account thereof, shall constitute sufficient
ground for the Supreme Court to dismiss outright the
petition.
Rule 19.37. Filing of petition with Supreme Court. - A party
desiring to appeal by certiorari from a judgment or final
order or resolution of the Court of Appeals issued pursuant
to these Special ADR Rules may file with the Supreme
Court a verified petition for review on certiorari. The
petition shall raise only questions of law, which must be
distinctly set forth.
Rule 19.38. Time for filing; extension. - The petition shall
be filed within fifteen (15) days from notice of the judgment
or final order or resolution appealed from, or of the denial
of the petitioner's motion for new trial or reconsideration
filed in due time after notice of the judgment.
On motion duly filed and served, with full payment of the
docket and other lawful fees and the deposit for costs
before the expiration of the reglementary period, the
Supreme Court may for justifiable reasons grant an
extension of thirty (30) days only within which to file the
petition.
Rule 19.39. Docket and other lawful fees; proof of service
of petition. - Unless he has theretofore done so or unless
the Supreme Court orders otherwise, the petitioner shall
pay docket and other lawful fees to the clerk of court of the
Supreme Court of P3,500.00 and deposit the amount of
P500.00 for costs at the time of the filing of the petition.
Proof of service of a copy thereof on the lower court
concerned and on the adverse party shall be submitted
together with the petition.
Rule 19.40. Contents of petition. - The petition shall be
filed in eighteen (18) copies, with the original copy
intended for the court being indicated as such by the
petitioner, and shall (a) state the full name of the appealing
party as the petitioner and the adverse party as
respondent, without impleading the lower courts or judges
thereof either as petitioners or respondents; (b) indicate
the material dates showing when notice of the judgment or
final order or resolution subject thereof was received,
when a motion for new trial or reconsideration, if any, was
filed and when notice of the denial thereof was received;
(c) set forth concisely a statement of the matters involved,
and the reasons or arguments relied on for the allowance
of the petition; (d) be accompanied by a clearly legible
duplicate original, or a certified true copy of the judgment
or final order or resolution certified by the clerk of court of
the court a quo and the requisite number of plain copies
thereof, and such material portions of the record as would
support the petition; and (e) contain a sworn certification
against forum shopping.
Rule 19.41. Dismissal or denial of petition. - The failure of
the petitioner to comply with any of the foregoing
requirements regarding the payment of the docket and
other lawful fees, deposit for 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.
The Supreme Court may on its own initiative deny the
petition on the ground that the appeal is without merit, or is
prosecuted manifestly for delay, or that the questions
raised therein are too insubstantial to require
consideration.
Rule 19.42. Due course; elevation of records. - If the
petition is given due course, the Supreme Court may
require the elevation of the complete record of the case or
specified parts thereof within fifteen (15) days from notice.
PART VII
FINAL PROVISIONS
RULE 20: FILING AND DEPOSIT FEES
Rule 20.1. Filing fee in petitions or counter-petitions to
confirm or enforce, vacate or set aside arbitral award or
for the enforcement of a mediated settlement agreement. -
The filing fee for filing a petition to confirm or enforce,
vacate or set aside an arbitral award in a domestic
arbitration or in an international commercial arbitration, or
enforce a mediated settlement agreement shall be as
follows:
PhP 10,000.00 - if the award does not exceed
PhP 1,000,000.00
PhP 20,000.00 - if the award does not exceed
PhP 20,000,000.00
PhP 30,000.00 - if the award does not exceed
PhP 50,000,000.00
PhP 40,000.00 - if the award does not exceed
PhP 100,000,000.00
PhP 50,000.00 - if the award exceeds PhP
100,000,000.00
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The minimal filing fee payable in "all other actions not
involving property" shall be paid by the petitioner
seeking to enforce foreign arbitral awards under the
New York Convention in the Philippines.
Rule 20.2. Filing fee for action to enforce as a counter-
petition. - A petition to enforce an arbitral award in a
domestic arbitration or in an international commercial
arbitration submitted as a petition to enforce and/or
recognize an award in opposition to a timely petition to
vacate or set aside the arbitral award shall require the
payment of the filing fees prescribed in Rule 20.1 above.
Rule 20.3. Deposit fee for mediated settlement
agreements. - Any party to a mediated settlement
agreement who deposits it with the clerk of court shall pay
a deposit fee of P500.00.
Rule 20.4. Filing fee for other proceedings. - The filing fee
for the filing of any other proceedings, including
applications for interim relief, as authorized under these
Special Rules not covered under any of the foregoing
provisions, shall be P10,000.00.
RULE 21: COSTS
Rule 21.1. Costs. - The costs of the ADR proceedings
shall be borne by the parties equally unless otherwise
agreed upon or directed by the arbitrator or arbitral
tribunal.
Rule 21.2. On the dismissal of a petition against a ruling
of the arbitral tribunal on a preliminary question upholding
its jurisdiction. - If the Regional Trial Court dismisses the
petition against the ruling of the arbitral tribunal on a
preliminary question upholding its jurisdiction, it shall also
order the petitioner to pay the respondent all reasonable
costs and expenses incurred in opposing the petition.
"Costs" shall include reasonable attorneys fees. The court
shall award costs upon application of the respondent after
the petition is denied and the court finds, based on proof
submitted by respondent, that the amount of costs
incurred is reasonable.
Rule 21.3. On recognition and enforcement of a foreign
arbitral award. - At the time the case is submitted to the
court for decision, the party praying for recognition and
enforcement of a foreign arbitral award shall submit a
statement under oath confirming the costs he has incurred
only in the proceedings in the Philippines for such
recognition and enforcement or setting-aside. The costs
shall include attorneys fees the party has paid or is
committed to pay to his counsel of record.
The prevailing party shall be entitled to an award of costs
which shall include the reasonable attorneys fees of the
prevailing party against the unsuccessful party. The court
shall determine the reasonableness of the claim for
attorneys fees.
Rule 21.4. Costs. - At the time the case is submitted to the
court for decision, the party praying for confirmation or
vacation of an arbitral award shall submit a statement
under oath confirming the costs he has incurred only in the
proceedings for confirmation or vacation of an arbitral
award. The costs shall include the attorneys fees the party
has paid or is committed to pay to his counsel of record.
The prevailing party shall be entitled to an award of costs
with respect to the proceedings before the court, which
shall include the reasonable attorneys fees of the
prevailing party against the unsuccessful party. The court
shall determine the reasonableness of the claim for
attorneys fees.
Rule 21.5. Bill of Costs. - Unless otherwise agreed upon
by the parties in writing, at the time the case is submitted
to the court for decision, the party praying for recognition
and enforcement or for setting aside an arbitral award
shall submit a statement under oath confirming the costs
he has incurred only in the proceedings for such
recognition and enforcement or setting-aside. The costs
shall include attorneys fees the party has paid or is
committed to pay to his counsel of record.
The prevailing party shall be entitled to an award of costs,
which shall include reasonable attorneys fees of the
prevailing party against the unsuccessful party. The court
shall determine the reasonableness of the claim for
attorneys fees.
Rule 21.6. Governments exemption from payment of
fees. - The Republic of the Philippines, its agencies and
instrumentalities are exempt from paying legal fees
provided in these Special ADR Rules. Local governments
and government controlled corporation with or with or
without independent charters are not exempt from paying
such fees.
RULE 22: APPLICABILITY OF THE RULES OF COURT
Rule 22.1. Applicability of Rules of Court. - The provisions
of the Rules of Court that are applicable to the
proceedings enumerated in Rule 1.1 of these Special ADR
Rules have either been included and incorporated in these
Special ADR Rules or specifically referred to herein.
In connection with the above proceedings, the Rules of
Evidence shall be liberally construed to achieve the
objectives of the Special ADR Rules.
RULE 23: SEPARABILITY
Rule 23.1. Separability Clause. - If, for any reason, any
part of the Special ADR Rules shall be held
unconstitutional or invalid, other Rules or provisions hereof
which are not affected thereby, shall continue to be in full
force and effect.
RULE 24: TRANSITORY PROVISIONS
116
Rule 24.1. Transitory Provision. - Considering its
procedural character, the Special ADR Rules shall be
applicable to all pending arbitration, mediation or other
ADR forms covered by the ADR Act, unless the parties
agree otherwise. The Special ADR Rules, however, may
not prejudice or impair vested rights in accordance with
law.
RULE 25: ONLINE DISPUTE RESOLUTION
Rule 25.1. Applicability of the Special ADR Rules to
Online Dispute Resolution. - Whenever applicable and
appropriate, the Special ADR Rules shall govern the
procedure for matters brought before the court involving
Online Dispute Resolution.
Rule 25.2. Scope of Online Dispute Resolution. - Online
Dispute Resolution shall refer to all electronic forms of
ADR including the use of the internet and other web or
computed based technologies for facilitating ADR.
RULE 26: EFFECTIVITY
Rule 26.1. Effectivity. - The Special ADR Rules shall take
effect fifteen (15) days after its complete publication in two
(2) newspapers of general circulation.
RULE A: GUIDELINES FOR THE RESOLUTION OF
ISSUES RELATED TO ARBITRATION OF LOANS
SECURED BY COLLATERAL
Rule A.1. Applicability of an arbitration agreement in a
contract of loan applies to the accessory contract securing
the loan. - An arbitration agreement in a contract of loan
extends to and covers the accessory contract securing the
loan such as a pledge or a mortgage executed by the
borrower in favor of the lender under that contract of loan.
Rule A.2. Foreclosure of pledge or extra-judicial
foreclosure of mortgage not precluded by arbitration. - The
commencement of the arbitral proceeding under the
contract of loan containing an arbitration agreement shall
not preclude the lender from availing himself of the right to
obtain satisfaction of the loan under the accessory
contract by foreclosure of the thing pledged or by extra-
judicial foreclosure of the collateral under the real estate
mortgage in accordance with Act No. 3135.
The lender may likewise institute foreclosure proceedings
against the collateral securing the loan prior to the
commencement of the arbitral proceeding.
By agreeing to refer any dispute under the contract of loan
to arbitration, the lender who is secured by an accessory
contract of real estate mortgage shall be deemed to have
waived his right to obtain satisfaction of the loan by judicial
foreclosure.
Rule A.3. Remedy of the borrower against an action taken
by the lender against the collateral before the constitution
of the arbitral tribunal. - The borrower providing security for
the payment of his loan who is aggrieved by the action
taken by the lender against the collateral securing the loan
may, if such action against the collateral is taken before
the arbitral tribunal is constituted, apply with the
appropriate court for interim relief against any such action
of the lender. Such interim relief may be obtained only in a
special proceeding for that purpose, against the action
taken by the lender against the collateral, pending the
constitution of the arbitral tribunal. Any determination
made by the court in that special proceeding pertaining to
the merits of the controversy, including the right of the
lender to proceed against the collateral, shall be only
provisional in nature.
After the arbitral tribunal is constituted, the court shall stay
its proceedings and defer to the jurisdiction of the arbitral
tribunal over the entire controversy including any question
regarding the right of the lender to proceed against the
collateral.
Rule A.4. Remedy of borrower against action taken by the
lender against the collateral after the arbitral tribunal has
been constituted. - After the arbitral tribunal is constituted,
the borrower providing security for the payment of his loan
who is aggrieved by the action taken by the lender against
the collateral securing the loan may apply to the arbitral
tribunal for relief, including a claim for damages, against
such action of the lender. An application to the court may
also be made by the borrower against any action taken by
the lender against the collateral securing the loan but only
if the arbitral tribunal cannot act effectively to prevent an
irreparable injury to the rights of such borrower during the
pendency of the arbitral proceeding.
An arbitration agreement in a contract of loan precludes
the borrower therein providing security for the loan from
filing and/or proceeding with any action in court to prevent
the lender from foreclosing the pledge or extra-judicially
foreclosing the mortgage. If any such action is filed in
court, the lender shall have the right provided in the
Special ADR Rules to have such action stayed on account
of the arbitration agreement.
Rule A.5. Relief that may be granted by the arbitral
tribunal. - The arbitral tribunal, in aid of the arbitral
proceeding before it, may upon submission of adequate
security, suspend or enjoin the lender from proceeding
against the collateral securing the loan pending final
determination by the arbitral tribunal of the dispute brought
to it for decision under such contract of loan.
The arbitral tribunal shall have the authority to resolve the
issue of the validity of the foreclosure of the thing pledged
or of the extrajudicial foreclosure of the collateral under
the real estate mortgage if the same has not yet been
foreclosed or confirm the validity of such foreclosure if
made before the rendition of the arbitral award and had
not been enjoined.
117
Rule A.6. Arbitration involving a third-party provider of
security. - An arbitration agreement contained in a contract
of loan between the lender and the borrower extends to
and covers an accessory contract securing the loan, such
as a pledge, mortgage, guaranty or suretyship, executed
by a person other than the borrower only if such third-party
securing the loan has agreed in the accessory contract,
either directly or by reference, to be bound by such
arbitration agreement.
Unless otherwise expressly agreed upon by the third-party
securing the loan, his agreement to be bound by the
arbitration agreement in the contract of loan shall pertain
to disputes arising from or in connection with the
relationship between the lender and the borrower as well
as the relationship between the lender and such third-
party including the right of the lender to proceed against
the collateral securing the loan, but shall exclude disputes
pertaining to the relationship exclusively between the
borrower and the provider of security such as that
involving a claim by the provider of security for
indemnification against the borrower.
In this multi-party arbitration among the lender, the
borrower and the third party securing the loan, the parties
may agree to submit to arbitration before a sole arbitrator
or a panel of three arbitrators to be appointed either by an
Appointing Authority designated by the parties in the
arbitration agreement or by a default Appointing Authority
under the law.
In default of an agreement on the manner of appointing
arbitrators or of constituting the arbitral tribunal in such
multi-party arbitration, the dispute shall be resolved by a
panel of three arbitrators to be designated by the
Appointing Authority under the law. But even in default of
an agreement on the manner of appointing an arbitrator or
constituting an arbitral tribunal in a multi-party arbitration, if
the borrower and the third party securing the loan agree to
designate a common arbitrator, arbitration shall be
decided by a panel of three arbitrators: one to be
designated by the lender; the other to be designated jointly
by the borrower and the provider of security who have
agreed to designate the same arbitrator; and a third
arbitrator who shall serve as the chairperson of the arbitral
panel to be designated by the two party-designated
arbitrators.
Tuna Processing, Inc. v. Philippine Kingford, Inc. Feb 29,
2012
Can a foreign corporation not licensed to do business
in the Philippines, but which collects royalties from entities in
the Philippines, sue here to enforce a foreign arbitral award?
In this Petition for Review on Certiorari under Rule
45,[1] petitioner Tuna Processing, Inc. (TPI), a foreign
corporation not licensed to do business in the Philippines, prays
that the Resolution[2] dated 21 November 2008 of the Regional
Trial Court (RTC) of Makati City be declared void and the case
be remanded to the RTC for further proceedings. In the assailed
Resolution, the RTC dismissed petitioners Petition for
Confirmation, Recognition, and Enforcement of Foreign
Arbitral Award[3] against respondent Philippine Kingford, Inc.
(Kingford), a corporation duly organized and existing under the
laws of the Philippines,[4] on the ground that petitioner lacked
legal capacity to sue.[5]
The Antecedents
On 14 January 2003, Kanemitsu Yamaoka (hereinafter
referred to as the licensor), co-patentee of U.S. Patent No.
5,484,619, Philippine Letters Patent No. 31138, and Indonesian
Patent No. ID0003911 (collectively referred to as the Yamaoka
Patent),[6] and five (5) Philippine tuna processors, namely, Angel
Seafood Corporation, East Asia Fish Co., Inc., Mommy Gina
Tuna Resources, Santa Cruz Seafoods, Inc., and respondent
Kingford (collectively referred to as the sponsors/licensees)
[7]
entered into a Memorandum of Agreement (MOA), [8] pertinent
provisions of which read:
1. Background and objectives. The
Licensor, co-owner of U.S.Patent No.
5,484,619, Philippine Patent No. 31138,
and Indonesian Patent No. ID0003911 xxx
wishes to form an alliance with Sponsors
for purposes of enforcing his three
aforementioned patents, granting licenses
under those patents, and collecting
royalties.
The Sponsors wish to be licensed under the
aforementioned patents in order to practice
the processes claimed in those patents in
the United States, the Philippines, and
Indonesia, enforce those patents and collect
royalties in conjunction with Licensor.
xxx
4. Establishment of Tuna Processors, Inc. The
parties hereto agree to the establishment
of Tuna Processors, Inc. (TPI), a
118
 corporation established in the State of (B) For breach of the MOA in failing to
California, in order to implement the cooperate with CLAIMANT TPI in fulfilling
objectives of this Agreement. the objectives of the MOA, RESPONDENT
5. Bank account. TPI shall open and maintain KINGFORD shall pay CLAIMANT the
bank accounts in the United States, which total sum of TWO HUNDRED SEVENTY
will be used exclusively to deposit funds ONE THOUSAND FOUR HUNDRED
that it will collect and to disburse cash it NINETY DOLLARS AND TWENTY
will be obligated to spend in connection CENTS ($271,490.20)[;][14] and
with the implementation of this
Agreement. (C) For violation of THE LANHAM
ACT and infringement of the YAMAOKA
6. Ownership of TPI. TPI shall be owned by 619 PATENT, RESPONDENT
the Sponsors and Licensor. Licensor shall KINGFORD shall pay CLAIMANT the
be assigned one share of TPI for the total sum of ONE MILLION TWO
purpose of being elected as member of the HUNDRED FIFTY THOUSAND
board of directors. The remaining shares DOLLARS AND NO CENTS
of TPI shall be held by the Sponsors ($1,250,000.00). xxx
according to their respective equity
shares. [9] xxx[15]

xxx
To enforce the award, petitioner TPI filed on 10

The parties likewise executed a Supplemental Memorandum of October 2007 a Petition for Confirmation, Recognition, and

Agreement[10] dated 15 January 2003 and an Agreement to Enforcement of Foreign Arbitral Award before the RTC of

Amend Memorandum of Agreement[11] dated 14 July 2003. Makati City. The petition was raffled to Branch 150 presided by

Judge Elmo M. Alameda.

Due to a series of events not mentioned in the petition,

the licensees, including respondent Kingford, withdrew from At Branch 150, respondent Kingford filed a Motion to
[16]
petitioner TPI and correspondingly reneged on their obligations. Dismiss. After the court denied the motion for lack of merit,
[17]
[12]
Petitioner submitted the dispute for arbitration before the respondent sought for the inhibition of Judge Alameda and

International Centre for Dispute Resolution in the State of
California, United States and won the case against respondent.
[13]
Pertinent portions of the award read:
moved for the reconsideration of the order denying the motion.
[18]
Judge Alameda inhibited himself notwithstanding [t]he
unfounded allegations and unsubstantiated assertions in the

motion.[19] Judge Cedrick O. Ruiz of Branch 61, to which the

13.1 Within thirty (30) days from the date of
case was re-raffled, in turn, granted respondents Motion for
transmittal of this Award to the Parties,
pursuant to the terms of this award, the total Reconsideration and dismissed the petition on the ground that
sum to be paid by RESPONDENT
KINGFORD to CLAIMANT TPI, is the the petitioner lacked legal capacity to sue in the Philippines. [20]
sum of ONE MILLION SEVEN
HUNDRED FIFTY THOUSAND EIGHT
HUNDRED FORTY SIX DOLLARS AND Petitioner TPI now seeks to nullify, in this
TEN CENTS ($1,750,846.10).
(A) For breach of the MOA by not paying instant Petition for Review on Certiorari under Rule 45, the
past due assessments, RESPONDENT
KINGFORD shall pay CLAIMANT the order of the trial court dismissing its Petition for Confirmation,
total sum of TWO HUNDRED TWENTY
NINE THOUSAND THREE HUNDRED Recognition, and Enforcement of Foreign Arbitral Award.
AND FIFTY FIVE DOLLARS AND
NINETY CENTS ($229,355.90) which is
20% of MOA assessments since September Issue
1, 2005[;]

119
 The core issue in this case is whether or not the

court a quo was correct in so dismissing the petition on the The petitioner counters, however, that it is entitled to

ground of petitioners lack of legal capacity to sue. seek for the recognition and enforcement of the subject foreign

arbitral award in accordance with Republic Act No. 9285

Our Ruling (Alternative Dispute Resolution Act of 2004),[22] the Convention

on the Recognition and Enforcement of Foreign Arbitral Awards

The petition is impressed with merit. drafted during the United Nations Conference on International

Commercial Arbitration in 1958 (New York Convention), and the

The Corporation Code of the Philippines expressly UNCITRAL Model Law on International Commercial
[23]
provides: Arbitration (Model Law), as none of these specifically

requires that the party seeking for the enforcement should have
Sec. 133. Doing business without a
license. - No foreign corporation transacting legal capacity to sue. It anchors its argument on the following:
business in the Philippines without a license, or
its successors or assigns, shall be permitted to
In the present case, enforcement has been
maintain or intervene in any action, suit or
effectively refused on a ground not found in
proceeding in any court or administrative
the [Alternative Dispute Resolution Act
agency of the Philippines; but such corporation
of 2004], New York Convention, or Model
may be sued or proceeded against before
Law. It is for this reason that TPI has brought
Philippine courts or administrative tribunals on
this matter before this most Honorable Court,
any valid cause of action recognized under
as it [i]s imperative to clarify whether the
Philippine laws.
Philippines international obligations and State
policy to strengthen arbitration as a means of
It is pursuant to the aforequoted provision that the court a dispute resolution may be defeated by
quo dismissed the petition. Thus: misplaced technical considerations not found
Herein plaintiff TPIs Petition, etc. in the relevant laws.[24]
acknowledges that it is a foreign corporation
Simply put, how do we reconcile the provisions of
established in the State of California and was
given the exclusive right to license or the Corporation Code of the Philippines on one hand, and
sublicense the Yamaoka Patent and was
assigned the exclusive right to enforce the said the Alternative Dispute Resolution Act of 2004, the New York
patent and collect corresponding royalties in
the Philippines. TPI likewise admits that it Convention and the Model Law on the other?
does not have a license to do business in the
Philippines.
In several cases, this Court had the occasion to discuss
There is no doubt, therefore, in the
mind of this Court that TPI has been doing the nature and applicability of the Corporation Code of the
business in the Philippines, but sans a license
to do so issued by the concerned government Philippines, a general law, viz-a-viz other special laws. Thus,
agency of the Republic of the Philippines, in Koruga v. Arcenas, Jr.,[25] this Court rejected the application of
when it collected royalties from five (5)
Philippine tuna processors[,] namely[,] Angel the Corporation Code and applied the New Central Bank Act. It
Seafood Corporation, East Asia Fish Co., Inc.,
Mommy Gina Tuna Resources, Santa Cruz ratiocinated:
Seafoods, Inc. and respondent Philippine
Kingford, Inc. This being the real situation,
Korugas invocation of the provisions
TPI cannot be permitted to maintain or
of the Corporation Code is misplaced. In an
intervene in any action, suit or proceedings in
earlier case with similar antecedents, we ruled
any court or administrative agency of the
that:
Philippines. A priori, the Petition, etc. extant of
The Corporation
the plaintiff TPI should be dismissed for it
Code, however, is a general
does not have the legal personality to sue in the
law applying to all types of
Philippines.[21]
corporations, while the New
120
 Central Bank Act regulates
specifically banks and other
financial institutions,
including the dissolution and
liquidation thereof. As
between a general and special
law, the latter shall
prevail generalia specialibus
non derogant. (Emphasis
supplied)[26]
Further, in the recent case of Hacienda Luisita, Incorporated v.
Presidential Agrarian Reform Council,[27] this Court held:
Without doubt, the Corporation Code
is the general law providing for the formation,
organization and regulation of private
corporations. On the other hand, RA 6657 is
the special law on agrarian reform. As between
a general and special law, the latter shall
prevailgeneralia specialibus non derogant.[28]
Following the same principle, the Alternative Dispute
Resolution Act of 2004 shall apply in this case as the Act, as its
title - An Act to Institutionalize the Use of an Alternative Dispute
Resolution System in the Philippines and to Establish the Office
for Alternative Dispute Resolution, and for Other Purposes
- would suggest, is a law especially enacted to actively promote
party autonomy in the resolution of disputes or the freedom of
the party to make their own arrangements to resolve their
disputes.[29] It specifically provides exclusive grounds available
to the party opposing an application for recognition and
enforcement of the arbitral award.[30]
Inasmuch as the Alternative Dispute Resolution Act of
2004, a municipal law, applies in the instant petition, we do not
see the need to discuss compliance with international obligations
under the New York Convention and the Model Law. After all,
both already form part of the law.
In particular, the Alternative Dispute Resolution Act of
2004 incorporated the New York Convention in the Act by
specifically providing:
SEC. 42. Application of the New
York Convention. - The New York Convention
shall govern the recognition and enforcement
of arbitral awards covered by the said
Convention.
xxx
SEC. 45. Rejection of a Foreign
Arbitral Award. - A party to a foreign
arbitration proceeding may oppose an
application for recognition and enforcement of
the arbitral award in accordance with the
procedural rules to be promulgated by the
Supreme Court only on those grounds
enumerated under Article V of the New York
Convention. Any other ground raised shall be
disregarded by the regional trial court.
It also expressly adopted the Model Law, to wit:
Sec. 19. Adoption of the Model Law
on International Commercial
Arbitration. International commercial
arbitration shall be governed by the Model
Law on International Commercial Arbitration
(the Model Law) adopted by the United
Nations Commission on International Trade
Law on June 21, 1985 xxx.
Now, does a foreign corporation not licensed to do
business in the Philippines have legal capacity to sue under the
provisions of the Alternative Dispute Resolution Act of 2004?We
answer in the affirmative.
Sec. 45 of the Alternative Dispute Resolution Act of
2004 provides that the opposing party in an application for
recognition and enforcement of the arbitral award may raise
only those grounds that were enumerated under Article V of
the New York Convention, to wit:
Article V
1. Recognition and enforcement of the award
may be refused, at the request of the party
against whom it is invoked, only if that party
furnishes to the competent authority where
the recognition and enforcement is sought,
proof that:
(a) The parties to the agreement referred to in
article II were, under the law applicable to
them, under some incapacity, or the said
agreement is not valid under the law to which
121
 the parties have subjected it or, failing any
indication thereon, under the law of the
country where the award was made; or
(b) The party against whom the award is
invoked was not given proper notice of the
appointment of the arbitrator or of the
arbitration proceedings or was otherwise
unable to present his case; or
(c) The award deals with a difference not
contemplated by or not falling within the
terms of the submission to arbitration, or it
contains decisions on matters beyond the
scope of the submission to arbitration,
provided that, if the decisions on matters
submitted to arbitration can be separated from
those not so submitted, that part of the award
which contains decisions on matters
submitted to arbitration may be recognized
and enforced; or
(d) The composition of the arbitral authority
or the arbitral procedure was not in
accordance with the agreement of the parties,
or, failing such agreement, was not in
accordance with the law of the country where
the arbitration took place; or
(e) The award has not yet become binding on
the parties, or has been set aside or suspended
by a competent authority of the country in
which, or under the law of which, that award
was made.
2. Recognition and enforcement of an arbitral
award may also be refused if the competent
authority in the country where recognition
and enforcement is sought finds that:
(a) The subject matter of the difference is not
capable of settlement by arbitration under the
law of that country; or
(b) The recognition or enforcement of the
award would be contrary to the public policy
of that country.
Clearly, not one of these exclusive grounds touched on the
capacity to sue of the party seeking the recognition and
enforcement of the award.
Pertinent provisions of the Special Rules of Court on
Alternative Dispute Resolution,[31] which was promulgated by
the Supreme Court, likewise support this position.
Rule 13.1 of the Special Rules provides that [a]ny
party to a foreign arbitration may petition the court to recognize
and enforce a foreign arbitral award. The contents of such
[32]
petition are enumerated in Rule 13.5. Capacity to sue is not
included. Oppositely, in the Rule on local arbitral awards or
arbitrations in instances where the place of arbitration is in the
Philippines,[33] it is specifically required that a petition to
determine any question concerning the existence, validity and
enforceability of such arbitration agreement [34]available to the
parties before the commencement of arbitration and/or a petition
for judicial relief from the ruling of the arbitral tribunal on a
preliminary question upholding or declining its
jurisdiction[35] after arbitration has already commenced should
state [t]he facts showing that the persons named as petitioner or
respondent have legal capacity to sue or be sued. [36]
Indeed, it is in the best interest of justice that in the
enforecement of a foreign arbitralaward, we deny availment
by the losing party of the rule that bars foreign corporations not
licensed to do business in the
Philippines from maintaining a suit in our courts. When a party
enters into a contract containing a foreign arbitration clause and,
as in this case, in factsubmits itself to arbitration, it becomes
bound by the contract, by the arbitration and by the result of
arbitration, conceding thereby the capacity of the other party to
enter into the contract, participate in the arbitration and cause
the implementation of the result. Although not on all fours with
the instant case, also worthy to consider is the
wisdom of then Associate Justice Flerida Ruth P.
Romero in her Dissenting Opinion in Asset Privatization Trust v.
Court of Appeals,[37] to wit:
xxx Arbitration, as an alternative
mode of settlement, is gaining adherents in
legal and judicial circles here and abroad. If
its tested mechanism can simply be ignored
by an aggrieved party, one who, it must be
stressed, voluntarily and actively participated
in the arbitration proceedings from the very
beginning, it will destroy the very essence of
mutuality inherent in consensual contracts.[38]
Clearly, on the matter of capacity to sue, a foreign
arbitral award should be respected not because it is favored over
122
domestic laws and procedures, but because Republic Act No.
9285 has certainly erased any conflict of law question.
Finally, even assuming, only for the sake of argument,
that the court a quo correctly observed that the Model Law, not
the New York Convention, governs the subject arbitral award,
[39]
petitioner may still seek recognition and enforcement of the
award in Philippine court, since the Model Law prescribes
substantially identical exclusive grounds for refusing recognition
or enforcement.[40]
Premises considered, petitioner TPI, although not
licensed to do business in the Philippines, may seek recognition
and enforcement of the foreign arbitral award in accordance
with the provisions of the Alternative Dispute Resolution Act of
2004.
II
The remaining arguments of respondent Kingford are
likewise unmeritorious.
First. There is no need to consider respondents
contention that petitioner TPI improperly raised a question of
fact when it posited that its act of entering into a MOA should
not be considered doing business in the Philippines for the
purpose of determining capacity to sue. We reiterate that the
foreign corporations capacity to sue in the Philippines is not
material insofar as the recognition and enforcement of a foreign
arbitral award is concerned.
Second. Respondent cannot fault petitioner for not
filing a motion for reconsideration of the assailed Resolution
dated 21 November 2008 dismissing the case. We have, time
and again, ruled that the prior filing of a motion for
reconsideration is not required in certiorari under Rule 45.[41]
Third. While we agree that petitioner failed to observe
the principle of hierarchy of courts, which, under ordinary
circumstances, warrants the outright dismissal of the case, [42]we
opt to relax the rules following the pronouncement in Chua v.
Ang,[43] to wit:
[I]t must be remembered that [the
principle of hierarchy of courts] generally
applies to cases involving conflicting factual
allegations. Cases which depend on disputed
facts for decision cannot be brought
immediately before us as we are not triers of
facts.[44] A strict application of this rule may
be excused when the reason behind the rule is
not present in a case, as in the present case,
where the issues are not factual but purely
legal. In these types of questions, this Court
has the ultimate say so that we merely
abbreviate the review process if we, because
of the unique circumstances of a case, choose
to hear and decide the legal issues outright. [45]
Moreover, the novelty and the paramount importance of the
issue herein raised should be seriously considered. [46] Surely,
there is a need to take cognizance of the case not only to guide
the bench and the bar, but if only to strengthen arbitration as a
means of dispute resolution, and uphold the policy of the State
embodied in the Alternative Dispute Resolution Act of 2004, to
wit:
Sec. 2. Declaration of Policy. - It is
hereby declared the policy of the State to
actively promote party autonomy in the
resolution of disputes or the freedom of the
party to make their own arrangements to
resolve their disputes. Towards this end, the
State shall encourage and actively promote
the use of Alternative Dispute Resolution
(ADR) as an important means to achieve
speedy and impartial justice and declog court
dockets. xxx
Fourth. As regards the issue on the validity and
enforceability of the foreign arbitral award, we leave its
determination to the court a quo where its recognition and
enforcement is being sought.
123
 Fifth. Respondent claims that petitioner failed to
furnish the court of origin a copy of the motion for time to file
petition for review on certiorari before the petition was filed
[47]
with this Court. We, however, find petitioners reply in
order. Thus:
26. Admittedly, reference to Branch
67 in petitioner TPIs Motion for Time to File
a Petition for Review on Certiorari under
Rule 45 is a typographical error. As correctly
pointed out by respondent Kingford, the order
sought to be assailed originated from
Regional Trial Court, Makati City, Branch 61.
27. xxx Upon confirmation with the
Regional Trial Court, Makati City, Branch 61,
a copy of petitioner TPIs motion was received
by the Metropolitan Trial Court, Makati City,
Branch 67. On 8 January 2009, the motion
was forwarded to the Regional Trial Court,
Makati City, Branch 61.[48]
All considered, petitioner TPI, although a foreign
corporation not licensed to do business in the Philippines, is not,
for that reason alone, precluded from filing the Petition for
Confirmation, Recognition, and Enforcement of Foreign
Arbitral Award before a Philippine court.
WHEREFORE, the Resolution dated 21 November
2008 of the Regional Trial Court, Branch 61, Makati City in
Special Proceedings No. M-6533 is
hereby REVERSED and SET ASIDE. The case
is REMANDED to Branch 61 for further proceedings.
SO ORDERED.
Cargill, Inc. v. San Fernando Regala Trading Inc. Jan 31,
2011
Before us is a petition for review on certiorari seeking to
reverse and set aside the Decision [1] dated July 31, 2006 and the
Resolution[2] dated November 13, 2006 of the Court of Appeals
(CA) in CA G.R. SP No. 50304.
The factual antecedents are as follows:
On June 18, 1998, respondent San Fernando Regala Trading,
Inc. filed with the Regional Trial Court (RTC) of Makati City a
Complaint for Rescission of Contract with Damages [3]against
petitioner Cargill Philippines, Inc. In its Complaint, respondent
alleged that it was engaged in buying and selling of molasses
and petitioner was one of its various sources from whom it
purchased molasses. Respondent alleged that it entered into a
contract dated July 11, 1996 with petitioner, wherein it was
agreed upon that respondent would purchase from petitioner
12,000 metric tons of Thailand origin cane blackstrap molasses
at the price of US$192 per metric ton; that the delivery of the
molasses was to be made in January/February 1997 and payment
was to be made by means of an Irrevocable Letter of Credit
payable at sight, to be opened by September 15, 1996; that
sometime prior to September 15, 1996, the parties agreed that
instead of January/February 1997, the delivery would be made
in April/May 1997 and that payment would be by an Irrevocable
Letter of Credit payable at sight, to be opened upon petitioner's
advice. Petitioner, as seller, failed to comply with its obligations
under the contract, despite demands from respondent, thus, the
latter prayed for rescission of the contract and payment of
damages.
On July 24, 1998, petitioner filed a Motion to Dismiss/Suspend
Proceedings and To Refer Controversy to Voluntary Arbitration,
[4]
wherein it argued that the alleged contract between the parties,
dated July 11, 1996, was never consummated because
respondent never returned the proposed agreement bearing its
written acceptance or conformity nor did respondent open the
Irrevocable Letter of Credit at sight. Petitioner contended that
the controversy between the parties was whether or not the
alleged contract between the parties was legally in existence and
the RTC was not the proper forum to ventilate such issue. It
claimed that the contract contained an arbitration clause, to wit:
124

ARBITRATION
Any dispute which the Buyer and Seller may
not be able to settle by mutual agreement
shall be settled by arbitration in the City
of New York before the American Arbitration
Association. The Arbitration Award shall be
final and binding on both parties.[5]
that respondent must first comply with the arbitration clause
before resorting to court, thus, the RTC must either dismiss the
case or suspend the proceedings and direct the parties to proceed
with arbitration, pursuant to Sections 6[6] and 7[7] of Republic Act
(R.A.) No. 876, or the Arbitration Law.
Respondent filed an Opposition, wherein it argued that the RTC
has jurisdiction over the action for rescission of contract and
could not be changed by the subject arbitration clause. It cited
cases wherein arbitration clauses, such as the subject clause in
the contract, had been struck down as void for being contrary to
public policy since it provided that the arbitration award shall be
final and binding on both parties, thus, ousting the courts of
jurisdiction.
In its Reply, petitioner maintained that the cited decisions were
already inapplicable, having been rendered prior to the
effectivity of the New Civil Code in 1950 and the Arbitration
Law in 1953.
In its Rejoinder, respondent argued that the arbitration clause
relied upon by petitioner is invalid and unenforceable,
considering that the requirements imposed by the provisions of
the Arbitration Law had not been complied with.
By way of Sur-Rejoinder, petitioner contended that respondent
had even clarified that the issue boiled down to whether the
arbitration clause contained in the contract subject of the
complaint is valid and enforceable; that the arbitration clause did
not violate any of the cited provisions of the Arbitration Law.
[8]
On September 17, 1998, the RTC rendered an Order, the
dispositive portion of which reads:
Premises considered, defendant's Motion To
Dismiss/Suspend Proceedings and To Refer
Controversy To Voluntary Arbitration is
hereby DENIED. Defendant is directed to file
its answer within ten (10) days from receipt of
a copy of this order.[9]
In denying the motion, the RTC found that there was no clear
basis for petitioner's plea to dismiss the case, pursuant to Section
7 of the Arbitration Law. The RTC said that the provision
directed the court concerned only to stay the action or
proceeding brought upon an issue arising out of an agreement
providing for the arbitration thereof, but did not impose the
sanction of dismissal. However, the RTC did not find the
suspension of the proceedings warranted, since the Arbitration
Law contemplates an arbitration proceeding that must be
conducted in the Philippines under the jurisdiction and control
of the RTC; and before an arbitrator who resides in the country;
and that the arbitral award is subject to court approval,
disapproval and modification, and that there must be an appeal
from the judgment of the RTC. The RTC found that the
arbitration clause in question contravened these procedures, i.e.,
the arbitration clause contemplated an arbitration proceeding
in New York before a non-resident arbitrator (American
Arbitration Association); that the arbitral award shall be final
and binding on both parties. The RTC said that to apply Section
7 of the Arbitration Law to such an agreement would result in
disregarding the other sections of the same law and rendered
them useless and mere surplusages.
Petitioner filed its Motion for Reconsideration, which the RTC
denied in an Order[10] dated November 25, 1998.
Petitioner filed a petition for certiorari with the CA raising the
sole issue that the RTC acted in excess of jurisdiction or with
grave abuse of discretion in refusing to dismiss or at least
suspend the proceedings a quo, despite the fact that the party's
agreement to arbitrate had not been complied with.
Respondent filed its Comment and Reply. The parties were then
required to file their respective Memoranda.
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On July 31, 2006, the CA rendered its assailed Decision denying Hence, this petition.

the petition and affirming the RTC Orders.

In denying the petition, the CA found that stipulation providing Petitioner alleges that the CA committed an error of

for arbitration in contractual obligation is both valid and law in ruling that arbitration cannot proceed despite the fact that:

constitutional; that arbitration as an alternative mode of dispute (a) it had ruled, in its assailed decision, that the arbitration

resolution has long been accepted in our jurisdiction and clause is valid, enforceable and binding on the parties; (b) the

expressly provided for in the Civil Code; that R.A. No. 876 (the case of Gonzales v. Climax Mining Ltd.[11] is inapplicable here;

Arbitration Law) also expressly authorized the arbitration of (c) parties are generally allowed, under the Rules of Court, to

domestic disputes. The CA found error in the RTC's holding that adopt several defenses, alternatively or hypothetically, even if

Section 7 of R.A. No. 876 was inapplicable to arbitration clause such

simply because the clause failed to comply with the

requirements prescribed by the law. The CA found that there

defenses are inconsistent with each other; and (d) the complaint
was nothing in the Civil Code, or R.A. No. 876, that require that
filed by respondent with the trial court is premature.
arbitration proceedings must be conducted only in

the Philippines and the arbitrators should be Philippine

Petitioner alleges that the CA adopted inconsistent positions
residents. It also found that the RTC ruling effectively
when it found the arbitration clause between the parties as valid
invalidated not only the disputed arbitration clause, but all other
and enforceable and yet in the same breath decreed that the
agreements which provide for foreign arbitration. The CA did
arbitration cannot proceed because petitioner assailed the
not find illegal or against public policy the arbitration clause so
existence of the entire agreement containing the arbitration
as to render it null and void or ineffectual.
clause. Petitioner claims the inapplicability of the
Notwithstanding such findings, the CA still held that the case
cited Gonzales case decided in 2005, because in the present
cannot be brought under the Arbitration Law for the purpose of
case, it was respondent who had filed the complaint for
suspending the proceedings before the RTC, since in its Motion
rescission and damages with the RTC, which based its cause of
to Dismiss/Suspend proceedings, petitioner alleged, as one of
action against petitioner on the alleged agreement dated July 11,
the grounds thereof,that the subject contract between the parties
2006 between the parties; and that the same agreement
did not exist or it was invalid; that the said contract bearing the
contained the arbitration clause sought to be enforced by
arbitration clause was never consummated by the parties, thus, it
petitioner in this case. Thus, whether petitioner assails the
was proper that such issue be first resolved by the court through
genuineness and due execution of the agreement, the fact
an appropriate trial; that the issue involved a question of fact
remains that the agreement sued upon provides for an arbitration
that the RTC should first resolve. Arbitration is not proper when
clause; that respondent cannot use the provisions favorable to
one of the parties repudiated the existence or validity of the
him and completely disregard those that are unfavorable, such as
contract.
the arbitration clause.

Petitioner's motion for reconsideration was denied in a

Petitioner contends that as the defendant in the RTC, it presented
Resolution dated November 13, 2006.
two alternative defenses, i.e., the parties had not entered into any

agreement upon which respondent as plaintiff can sue upon; and,

126
assuming that such agreement existed, there was an arbitration pay damages; that such issue constitutes a judicial question or

clause that should be enforced, thus, the dispute must first be one that requires the exercise of judicial function and cannot be

submitted to arbitration before an action can be instituted in the subject of arbitration.

court. Petitioner argues that under Section 1(j) of Rule 16 of the

Rules of Court,included as a ground to dismiss a complaint is Respondent contends that Section 8 of the Rules of Court, which

when a condition precedent for filing the complaint has not been allowed a defendant to adopt in the same action several

complied with; and that submission to arbitration when such has defenses, alternatively or hypothetically, even if such defenses

been agreed upon is one such condition precedent. Petitioner are inconsistent with each other refers to allegations in the

submits that the proceedings in the RTC must be dismissed, or at pleadings, such as complaint, counterclaim, cross-claim, third-

least suspended, and the parties be ordered to proceed with party complaint, answer, but not to a motion to dismiss. Finally,

arbitration. respondent claims that petitioner's argument is premised on the

[12]
On March 12, 2007, petitioner filed a Manifestation saying existence of a contract with respondent containing a provision

that the CA's rationale in declining to order arbitration based on for arbitration. However, its reliance on the contract, which it

the 2005 Gonzales ruling had been modified upon a motion for repudiates, is inappropriate.

reconsideration decided in 2007; that the CA decision lost its In its Reply, petitioner insists that respondent filed an action for

legal basis, because it had been ruled that the arbitration rescission and damages on the basis of the contract, thus,

agreement can be implemented notwithstanding that one of the respondent admitted the existence of all the provisions contained

parties thereto repudiated the contract which contained such thereunder, including the arbitration clause; that if respondent

agreement based on the doctrine of separability. relies on said contract for its cause of action against petitioner, it

In its Comment, respondent argues must also consider itself bound by the rest of the terms and

that certiorari under Rule 65 is not the remedy against an order conditions contained thereunder notwithstanding that respondent

denying a Motion to Dismiss/Suspend Proceedings and To Refer may find some provisions to be adverse to its position; that

Controversy to Voluntary Arbitration. It claims that the respondents citation of the Gonzales case, decided in 2005, to

Arbitration Law which petitioner invoked as basis for its Motion show that the validity of the contract cannot be the subject of the

prescribed, under its Section 29, a remedy, i.e., appeal by a arbitration proceeding and that it is the RTC which has the
petition for review on certiorari under Rule 45. Respondent jurisdiction to resolve the situation between the parties herein, is

contends that the Gonzales case, which was decided in 2007, is not correct since in the resolution of the Gonzales' motion for

inapplicable in this case, especially as to the doctrine of reconsideration in 2007, it had been ruled that an arbitration

separability enunciated therein. Respondent argues that even if agreement is effective notwithstanding the fact that one of the

the existence of the contract and the arbitration clause is parties thereto repudiated the main contract which contained it.

conceded, the decisions of the RTC and the CA declining We first address the procedural issue raised by respondent that

referral of the dispute between the parties to arbitration would petitioners petition for certiorari under Rule 65 filed in the CA

still be correct. This is so because respondent's complaint filed against an RTC Order denying a Motion to Dismiss/Suspend

in Civil Case No. 98-1376 presents the principal issue of Proceedings and to Refer Controversy to Voluntary Arbitration

whether under the facts alleged in the complaint, respondent is was a wrong remedy invoking Section 29 of R.A. No.

entitled to rescind its contract with petitioner and for the latter to 876, which provides:

127
 Section 29.
x x x An appeal may be taken from an order
made in a proceeding under this Act, or from
a judgment entered upon an award
through certiorari proceedings, but such
appeals shall be limited to question of law. x
x x.
To support its argument, respondent cites the case of Gonzales v.
Climax Mining Ltd.[13](Gonzales case), wherein we ruled the
impropriety of a petition for certiorari under Rule 65 as a mode
of appeal from an RTC Order directing the parties to arbitration.
We find the cited case not in point.
In the Gonzales case, Climax-Arimco filed before the RTC of
Makati a petition to compel arbitration under R.A. No. 876,
pursuant to the arbitration clause found in the Addendum
Contract it entered with Gonzales. Judge Oscar Pimentel of the
RTC of Makati then directed the parties to arbitration
proceedings. Gonzales filed a petition for certiorari with
Us contending that Judge Pimentel acted with grave abuse of
discretion in immediately ordering the parties to proceed with
arbitration despite the proper, valid and timely raised argument
in his Answer with counterclaim that the Addendum Contract
containing the arbitration clause was null and void. Climax-
Arimco assailed the mode of review availed of by Gonzales,
citing Section 29 of R.A. No. 876 contending
that certiorari under Rule 65 can be availed of only if there was
no appeal or any adequate remedy in the ordinary course of law;
that R.A. No. 876 provides for an appeal from such order. We
then ruled that Gonzales' petition for certiorarishould be
dismissed as it was filed in lieu of an appeal by certiorari which
was the prescribed remedy under R.A. No. 876 and the petition
was filed far beyond the reglementary period.
We found that Gonzales petition for certiorari raises a question
of law, but not a question of jurisdiction; that Judge Pimentel
acted in accordance with the procedure prescribed in R.A. No.
876 when he ordered Gonzales to proceed with arbitration and
appointed a sole arbitrator after making the determination that
there was indeed an arbitration agreement. It had been held that
as long as a court acts within its jurisdiction and does not
gravely abuse its discretion in the exercise thereof, any supposed
error committed by it will amount to nothing more than an error
of judgment reviewable by a timely appeal and not assailable by
a special civil action of certiorari.[14]
In this case, petitioner raises before the CA the issue that the
respondent Judge acted in excess of jurisdiction or with grave
abuse of discretion in refusing to dismiss, or at least suspend, the
proceedings a quo, despite the fact that the partys agreement to
arbitrate had not been complied with. Notably, the RTC found
the existence of the arbitration clause, since it said in its decision
that hardly disputed is the fact that the arbitration clause in
question contravenes several provisions of the Arbitration Law x
x x and to apply Section 7 of the Arbitration Law to such an
agreement would result in the disregard of the afore-cited
sections of the Arbitration Law and render them useless and
mere surplusages. However, notwithstanding the finding that an
arbitration agreement existed, the RTC denied petitioner's
motion and directed petitioner to file an answer.
In La Naval Drug Corporation v. Court of Appeals,
[15]
it was held that R.A. No. 876 explicitly confines the courts
authority only to the determination of whether or not there is an
agreement in writing providing for arbitration. In the
affirmative, the statute ordains that the court shall issue an order
summarily directing the parties to proceed with the arbitration in
accordance with the terms thereof. If the court, upon the other
hand, finds that no such agreement exists, the proceedings shall
be dismissed.
In issuing the Order which denied petitioner's Motion
to Dismiss/Suspend Proceedings and to Refer Controversy to
Voluntary Arbitration, the RTC went beyond its authority of
determining only the issue of whether or not there is an
agreement in writing providing for arbitration by directing
128
petitioner to file an answer, instead of ordering the parties to The CA ruled that arbitration cannot be ordered in this case,

proceed to arbitration. In so doing, it acted in excess of its since petitioner alleged that the contract between the parties did

jurisdiction and since there is no plain, speedy, and adequate not exist or was invalid and arbitration is not proper when one

remedy in the ordinary course of law, petitioners resort to a of the parties repudiates the existence or validity of the

petition for certiorari is the proper remedy. contract. Thus, said the CA:
Notwithstanding our ruling on the validity
We now proceed to the substantive issue of whether and enforceability of the assailed arbitration
clause providing for foreign arbitration, it is
the CA erred in finding that this case cannot be brought under
our considered opinion that the case at bench
the arbitration law for the purpose of suspending the still cannot be brought under the Arbitration
Law for the purpose of suspending the
proceedings in the RTC. proceedings before the trial court. We note
that in its Motion to Dismiss/Suspend
We find merit in the petition. Proceedings, etc, petitioner Cargill alleged, as
Arbitration, as an alternative mode of settling disputes, one of the grounds thereof, that the alleged
contract between the parties do not legally
has long been recognized and accepted in our jurisdiction. exist or is invalid. As posited by petitioner, it
is their contention that the said contract,
[16]
R.A. No. 876[17] authorizes arbitration of domestic bearing the arbitration clause, was never
consummated by the parties. That being the
disputes. Foreign arbitration, as a system of settling commercial case, it is but proper that such issue be first
disputes of an international character, is likewise recognized. resolved by the court through an appropriate
trial. The issue involves a question of fact that
[18]
The enactment of R.A. No. 9285 on April 2, 2004 further the trial court should first resolve.

institutionalized the use of alternative dispute resolution Arbitration is not proper when one of the
[19] parties repudiates the existence or validity
systems, including arbitration, in the settlement of disputes.
of the contract. Apropos is Gonzales v.
Climax Mining Ltd., 452 SCRA 607,
(G.R.No.161957), where the Supreme
A contract is required for arbitration to take place and Court held that:
to be binding.[20] Submission to arbitration is a contract [21] and a The question
clause in a contract providing that all matters in dispute between of validity of the
contract containing the
the parties shall be referred to arbitration is a contract. [22] The agreement to submit to
arbitration will affect
provision to submit to arbitration any dispute arising therefrom the applicability of the
arbitration clause
and the relationship of the parties is part of the contract and is itself. A party cannot
itself a contract.[23] rely on the contract
and claim rights or
In this case, the contract sued upon by respondent obligations under it
and at the same time
provides for an arbitration clause, to wit: impugn its existence or
validity. Indeed,
litigants are enjoined
ARBITRATION from taking
inconsistent positions....
Any dispute which the Buyer and Seller may
not be able to settle by mutual agreement Consequently, the petitioner herein cannot
shall be settled by arbitration in the City of claim that the contract was never
New York before the American Arbitration consummated and, at the same time,
Association, The Arbitration Award shall be invokes the arbitration clause provided for
final and binding on both parties. under the contract which it alleges to be
non-existent or invalid. Petitioner claims
that private respondent's complaint lacks a
cause of action due to the absence of any
valid contract between the parties.
Apparently, the arbitration clause is being
129
 invoked merely as a fallback position. The
petitioner must first adduce evidence in
support of its claim that there is no valid
contract between them and should the court
a quo find the claim to be meritorious, the
parties may then be spared the rigors and
expenses that arbitration in a foreign land
would surely entail.[24]
"container" contract, does not affect the
validity of the arbitration agreement.
Irrespective of the fact that the main contract
is invalid, the arbitration clause/agreement
still remains valid and enforceable.[27]
Respondent argues that the separability doctrine is not

applicable in petitioner's case, since in the Gonzales case,

However, the Gonzales case,[25] which the CA relied upon for
Climax-Arimco sought to enforce the arbitration clause of its
not ordering arbitration, had been modified upon a motion for
contract with Gonzales and the former's move was premised on
reconsideration in this wise:
the existence of a valid contract; while Gonzales, who resisted
x x x The adjudication of the petition in the move of Climax-Arimco for arbitration, did not deny the
G.R. No. 167994 effectively modifies part of
the Decision dated 28 February 2005 in existence of the contract but merely assailed the validity thereof
G.R. No. 161957. Hence, we now hold that
the validity of the contract containing the on the ground of fraud and oppression. Respondent claims that
agreement to submit to arbitration does
in the case before Us, petitioner who is the party insistent on
not affect the applicability of the
arbitration clause itself. A contrary ruling arbitration also claimed in their Motion to Dismiss/Suspend
would suggest that a party's mere
repudiation of the main contract is Proceedings that the contract sought by respondent to be
sufficient to avoid arbitration. That is
exactly the situation that the separability rescinded did not exist or was not consummated; thus, there is
doctrine, as well as jurisprudence applying
no room for the application of the separability doctrine, since
it, seeks to avoid. We add that when it was
declared in G.R. No. 161957 that the case there is no container or main contract or an arbitration clause to
should not be brought for arbitration, it should
be clarified that the case referred to is the case speak of.
actually filed by Gonzales before the DENR
Panel of Arbitrators, which was for the We are not persuaded.
nullification of the main contract on the Applying the Gonzales ruling, an arbitration
ground of fraud, as it had already been
determined that the case should have been agreement which forms part of the main contract shall not be
brought before the regular courts involving as
it did judicial issues.[26] regarded as invalid or non-existent just because the main

contract is invalid or did not come into existence, since the

In so ruling that the validity of the contract containing the
arbitration agreement shall be treated as a separate agreement
arbitration agreement does not affect the applicability of the
independent of the main contract. To reiterate. a contrary ruling
arbitration clause itself, we then applied the doctrine of
would suggest that a party's mere repudiation of the main
separability, thus:
The doctrine of separability, or contract is sufficient to avoid arbitration and that is exactly the
severability as other writers call it, enunciates situation that the separability doctrine sought to avoid. Thus, we
that an arbitration agreement is independent
of the main contract. The arbitration find that even the party who has repudiated the main contract is
agreement is to be treated as a separate
agreement and the arbitration agreement does not prevented from enforcing its arbitration clause.
not automatically terminate when the contract
Moreover, it is worthy to note that respondent filed a
of which it is a part comes to an end.
complaint for rescission of contract and damages with the RTC.
The separability of the arbitration agreement
is especially significant to the determination In so doing, respondent alleged that a contract exists between
of whether the invalidity of the main contract
also nullifies the arbitration clause. Indeed, respondent and petitioner. It is that contract which provides for
the doctrine denotes that the invalidity of the an arbitration clause which states that any dispute which the
main contract, also referred to as the

130
Buyer and Seller may not be able to settle by mutual agreement
shall be settled before the City of New York by the American
Arbitration Association. The arbitration agreement clearly
expressed the parties' intention that any dispute between them as
buyer and seller should be referred to arbitration. It is for the
arbitrator and not the courts to decide whether a contract
between the parties exists or is valid.
Respondent contends that assuming that the existence of the
contract and the arbitration clause is conceded, the CA's decision
declining referral of the parties' dispute to arbitration is still
correct. It claims that its complaint in the RTC presents the issue
of whether under the facts alleged, it is entitled to rescind the
contract with damages; and that issue constitutes a judicial
question or one that requires the exercise of judicial function and
cannot be the subject of an arbitration proceeding. Respondent
cites our ruling in Gonzales, wherein we held that a panel of
arbitrator is bereft of jurisdiction over the complaint for
declaration of nullity/or termination of the subject contracts on
the grounds of fraud and oppression attendant to the execution
of the addendum contract and the other contracts emanating
from it, and that the complaint should have been filed with the
regular courts as it involved issues which are judicial in nature.
Such argument is misplaced and respondent cannot rely on
the Gonzales case to support its argument.
In Gonzales, petitioner Gonzales filed a complaint before the
Panel of Arbitrators, Region II, Mines and Geosciences Bureau,
of the Department of Environment and Natural Resources
(DENR) against respondents Climax- Mining Ltd, Climax-
Arimco and Australasian Philippines Mining Inc, seeking the
declaration of nullity or termination of the addendum contract
and the other contracts emanating from it on the grounds of
fraud and oppression. The Panel dismissed the complaint for
lack of jurisdiction. However, the Panel, upon petitioner's
motion for reconsideration, ruled that it had jurisdiction over the
dispute maintaining that it was a mining dispute, since the
subject complaint arose from a contract between the parties
which involved the exploration and exploitation of minerals over
the disputed area. Respondents assailed the order of the Panel of
Arbitrators via a petition for certiorari before the CA. The CA
granted the petition and declared that the Panel of Arbitrators did
not have jurisdiction over the complaint, since its jurisdiction
was limited to the resolution of mining disputes, such as those
which raised a question of fact or matter requiring the technical
knowledge and experience of mining authorities and not when
the complaint alleged fraud and oppression which called for the
interpretation and application of laws. The CA further ruled that
the petition should have been settled through arbitration under
R.A. No. 876 the Arbitration Law as provided under the
addendum contract.
On a review on certiorari, we affirmed the CAs finding that the
Panel of Arbitrators who, under R.A. No. 7942 of the Philippine
Mining Act of 1995, has exclusive and original jurisdiction to
hear and decide mining disputes, such as mining areas, mineral
agreements, FTAAs or permits and surface owners, occupants
and claimholders/concessionaires, is bereft of jurisdiction over
the complaint for declaration of nullity of the addendum
contract; thus, the Panels' jurisdiction is limited only to those
mining disputes which raised question of facts or matters
requiring the technical knowledge and experience of mining
authorities. We then said:
In Pearson v. Intermediate
Appellate Court, this Court observed that the
trend has been to make the adjudication of
mining cases a purely administrative matter.
Decisions of the Supreme Court on mining
disputes have recognized a distinction
between (1) the primary powers granted by
pertinent provisions of law to the then
Secretary of Agriculture and Natural
Resources (and the bureau directors) of an
executive or administrative nature, such as
granting of license, permits, lease and
contracts, or approving, rejecting, reinstating
or canceling applications, or deciding
conflicting applications, and (2) controversies
or disagreements of civil or contractual nature
between litigants which are questions of a
judicial nature that may be adjudicated only
by the courts of justice. This distinction is
carried on even in Rep. Act No. 7942.[28]
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 We found that since the complaint filed before the WHEREFORE, the petition is GRANTED. The

DENR Panel of Arbitrators charged respondents with Decision dated July 31, 2006 and the Resolution

disregarding and ignoring the addendum contract, and acting in dated November 13, 2006 of the Court of Appeals in CA-G.R.

a fraudulent and oppressive manner against petitioner, the SP No. 50304 are REVERSED and SET ASIDE. The parties

complaint filed before the Panel was not a dispute involving are hereby ORDERED to SUBMIT themselves to the

rights to mining areas, or was it a dispute involving claimholders arbitration of their dispute, pursuant to their July 11,

or concessionaires, but essentially judicial issues. We then said 1996 agreement.

SO ORDERED.
that the Panel of Arbitrators did not have jurisdiction over such
Department of Foreign Affairs v. Falcon Sept. 1, 2010
issue, since it does not involve the application of technical

knowledge and expertise relating to mining. It is in this context

Before the Court is a Petition for Certiorari and prohibition
that we said that:
under Rule 65 of the Rules of Court with a prayer for the
Arbitration before the Panel of Arbitrators issuance of a temporary restraining order and/or a writ of
is proper only when there is a disagreement
between the parties as to some provisions of preliminary injunction filed by petitioners Department of
the contract between them, which needs the
interpretation and the application of that Foreign Affairs (DFA) and Bangko Sentral ng Pilipinas
particular knowledge and expertise
(BSP). Petitioners pray that the Court declare as null and void
possessed by members of that Panel. It is
not proper when one of the parties the Order[1] dated February 14, 2007 of respondent Judge Franco
repudiates the existence or validity of such
contract or agreement on the ground of T. Falcon (Judge Falcon) in Civil Case No. 71079, which
fraud or oppression as in this case.The
validity of the contract cannot be subject of granted the application for preliminary injunction filed by
arbitration proceedings. Allegations of fraud respondent BCA International Corporation (BCA). Likewise,
and duress in the execution of a contract are
matters within the jurisdiction of the petitioners seek to prevent respondent Judge Falcon from
ordinary courts of law. These questions are
legal in nature and require the application implementing the corresponding Writ of Preliminary Injunction
and interpretation of laws and jurisprudence
which is necessarily a judicial function. [29] dated February 23, 2007[2] issued pursuant to the aforesaid

Order.

In fact, We even clarified in our resolution on Gonzales motion

The facts of this case, as culled from the records, are as follows:
for reconsideration that when we declared that the case should

not be brought for arbitration, it should be clarified that the case

Being a member state of the International Civil Aviation
referred to is the case actually filed by Gonzales before the
Organization (ICAO),[3] the Philippines has to comply with the
DENR Panel of Arbitrators, which was for the nullification of
commitments and standards set forth in ICAO Document No.
the main contract on the ground of fraud, as it had already been
9303[4] which requires the ICAO member states to issue machine
determined that the case should have been brought before the
readable travel documents (MRTDs)[5] by April 2010.
regular courts involving as it did judicial issues. We made such

clarification in our resolution of the motion for reconsideration

Thus, in line with the DFAs mandate to improve the passport
after ruling that the parties in that case can proceed to arbitration
and visa issuance system, as well as the storage and retrieval of
under the Arbitration Law, as provided under the Arbitration
its related application records, and pursuant to our governments
Clause in their Addendum Contract.
ICAO commitments, the DFA secured the approval of the

132

President of the Philippines, as Chairman of the Board of the
National Economic and Development Authority (NEDA), for the
implementation of the Machine Readable Passport and Visa
Project (the MRP/V Project) under the Build-Operate-and-
Transfer (BOT) scheme, provided for by Republic Act No. 6957,
as amended by Republic Act No. 7718 (the BOT Law), and its
Implementing Rules and Regulations (IRR). Thus, a Pre-
qualification, Bids and Awards Committee (PBAC) published an
invitation to pre-qualify and bid for the supply of the needed
machine readable passports and visas, and conducted the public
bidding for the MRP/V Project on January 10, 2000. Several
bidders responded and BCA was among those that pre-qualified
and submitted its technical and financial proposals. On June 29,
2000, the PBAC found BCAs bid to be the sole complying bid;
hence, it permitted the DFA to engage in direct negotiations with
BCA. On even date, the PBAC recommended to the DFA
Secretary the award of the MRP/V Project to BCA on a BOT
arrangement.
In compliance with the Notice of Award dated September 29,
2000 and Section 11.3, Rule 11 of the IRR of the BOT Law,
[6]
BCA incorporated a project company, the Philippine Passport
Corporation (PPC) to undertake and implement the MRP/V
Project.
On February 8, 2001, a Build-Operate-Transfer
Agreement[7] (BOT Agreement) between the DFA and PPC was
signed by DFA Acting Secretary Lauro L. Baja, Jr. and PPC
President Bonifacio Sumbilla. Under the BOT Agreement, the
MRP/V Project was defined as follows:
Section 1.02 MRP/V
Project refers to all the activities and
services undertaken in the fulfillment of the
Machine Readable Passport and Visa Project
as defined in the Request for Proposals
(RFP), a copy of which is hereto attached as
Annex A, including but not limited to
project financing, systems development,
installation and maintenance in the
Philippines and Foreign Service Posts
(FSPs), training of DFA personnel, provision
of all project consumables (related to the
production of passports and visas, such as
printer supplies, etc.), scanning of
application and citizenship documents,
creation of data bases, issuance of machine
readable passports and visas, and site
preparation in the Central Facility and
Regional Consular Offices (RCOs)
nationwide.[8]
On April 5, 2002, former DFA Secretary Teofisto T.
Guingona and Bonifacio Sumbilla, this time as BCA President,
signed an Amended BOT Agreement [9] in order to reflect the
change in the designation of the parties and to harmonize
Section 11.3 with Section 11.8[10]of the IRR of the BOT
Law. The Amended BOT Agreement was entered into by the
DFA and BCA with the conformity of PPC.
The two BOT Agreements (the original version signed
on February 8, 2001 and the amended version signed April 5,
2002) contain substantially the same provisions except for seven
additional paragraphs in the whereas clauses and two new
provisions Section 9.05 on Performance and Warranty Securities
and Section 20.15 on Miscellaneous Provisions. The two
additional provisions are quoted below:
Section 9.05. The PPC has posted
in favor of the DFA the performance
security required for Phase 1 of the MRP/V
Project and shall be deemed, for all intents
and purposes, to be full compliance by BCA
with the provisions of this Article 9.
xxxx
Section 20.15 It is clearly and
expressly understood that BCA may assign,
cede and transfer all of its rights and
obligations under this Amended BOT
Agreement to PPC, as fully as if PPC is the
original signatory to this Amended BOT
Agreement, provided however that BCA
shall nonetheless be jointly and severally
liable with PPC for the performance of all
the obligations and liabilities under this
Amended BOT Agreement.[11]
133
 Also modified in the Amended BOT Agreement was
the Project Completion date of the MRP/V Project which set the
completion of the implementation phase of the project within 18
to 23 months from the date of effectivity of the Amended BOT
Agreement as opposed to the previous period found in the
original BOT Agreement which set the completion within 18 to
23 months from receipt of the NTP (Notice to Proceed) in
accordance with the Project Master Plan.
On April 12, 2002, an Assignment Agreement[12] was
executed by BCA and PPC, whereby BCA assigned and ceded
its rights, title, interest and benefits arising from the Amended
BOT Agreement to PPC.
As set out in Article 8 of the original and the Amended
BOT Agreement, the MRP/V Project was divided into six
phases:
Phase 1. Project Planning
Phase The Project Proponent [BCA] shall
prepare detailed plans and specifications in
accordance with Annex A of this [Amended]
BOT Agreement within three (3) months
from issuance of the NTP (Notice to
Proceed) [from the date of effectivity of this
Amended BOT Agreement]. This phase
shall be considered complete upon the
review, acceptance and approval by the DFA
of these plans and the resulting Master Plan,
including the Master Schedule, the business
process specifications, the acceptance
criteria, among other plans.
xxxx
The DFA must approve all detailed plans as
a condition precedent to the issuance of the
CA [Certificate of Acceptance] for Phase 1.
Phase 2. Implementation of the
MRP/V Project at the Central
Facility Within six (6) months from
issuance of the CA for Phase 1, the
PROJECT PROPONENT [BCA] shall
complete the implementation of the MRP/V
Project in the DFA Central Facility, and
establish the network design between the
DFA Central Facility, the ten (10) RCOs
[Regional Consular Offices] and the eighty
(80) FSPs [Foreign Service Posts].
xxxx
Phase 3. Implementation of the
MRP/V Project at the Regional Consular
OfficesThis phase represents the replication
of the systems as approved from the Central
Facility to the RCOs throughout the country,
as identified in the RFP [Request for
Proposal]. The approved systems are those
implemented, evaluated, and finally
approved by DFA as described in Phase
1. The Project Proponent [BCA] will be
permitted to begin site preparation and the
scanning and database building operations in
all offices as soon as the plans are agreed
upon and accepted. This includes site
preparation and database building operations
in these Phase-3 offices.
Within six (6) months from issuance of CA
for Phase 2, the Project Proponent [BCA]
shall complete site preparation and
implementation of the approved systems in
the ten (10) RCOs, including a fully
functional network connection between all
equipment at the Central Facility and the
RCOs.
Phase 4. Full Implementation,
including all Foreign Service Posts Within
three (3) to eight (8) months from issuance
of the CA for Phase-3, the Project Proponent
[BCA] shall complete all preparations and
fully implement the approved systems in the
eighty (80) FSPs, including a fully
functional network connection between all
equipment at the Central Facility and the
FSPs. Upon satisfactory completion of
Phase 4, a CA shall be issued by the DFA.
Phase 5. In Service
Phase Operation and maintenance of the
complete MRP/V Facility to provide
machine readable passports and visas in all
designated locations around the world.
Phase
6. Transition/Turnover Transition/Turnove
r to the DFA of all operations and
equipment, to include an orderly transfer of
ownership of all hardware, application
system software and its source code and/or
licenses (subject to Section 5.02 [H]),
peripherals, leasehold improvements,
physical and computer security
improvements, Automated Fingerprint
Identification Systems, and all other MRP/V
facilities shall commence at least six (6)
months prior to the end of the [Amended]
BOT Agreement. The transition will include
the training of DFA personnel who will be
taking over the responsibilities of system
134
 operation and maintenance from the Project
Proponent [BCA]. The Project Proponent Secretary Juanita Amatong to then DFA Secretary Delia Albert
[BCA] shall bear all costs related to this
stating, among others, that BCA may not be able to infuse more
transfer.[13] (Words in brackets appear in the
Amended BOT Agreement) capital into PPC to use for the completion of the MRP/V Project.

To place matters in the proper perspective, it should be Thus, on February 22, 2005, DFA sent a letter [16] to

pointed out that both the DFA and BCA impute breach of the BCA, through its project company PPC, invoking BCAs

Amended BOT Agreement against each other. financial warranty under Section 5.02(A) of the Amended BOT

Agreement.[17] The DFA required BCA to submit (a) proof of

According to the DFA, delays in the completion of the adequate capitalization (i.e., full or substantial payment of stock

phases permeated the MRP/V Project due to the submission of subscriptions); (b) a bank guarantee indicating the availability of

deficient documents as well as intervening issues regarding a credit facility of P700 million; and (c) audited financial

BCA/PPCs supposed financial incapacity to fully implement the statements for the years 2001 to 2004.

project.
In reply to DFAs letter, BCA, through PPC, informed the former

On the other hand, BCA contends that the DFA failed of its position that its financial capacity was already passed upon

to perform its reciprocal obligation to issue to BCA a Certificate during the prequalification process and that the Amended BOT

of Acceptance of Phase 1 within 14 working days of operation Agreement did not call for any additional financial requirements

purportedly required by Section 14.04 of the Amended BOT for the implementation of the MRP/V Project. Nonetheless,

Agreement. BCA bewailed that it took almost three years for the BCA submitted its financial statements for the years 2001 and

DFA to issue the said Certificate allegedly because every 2002 and requested for additional time within which to comply

appointee to the position of DFA Secretary wanted to review the with the other financial requirements which the DFA insisted on.
[18]
award of the project to BCA. BCA further alleged that it was the

DFAs refusal to approve the location of the DFA Central Facility

which prevented BCA from proceeding with Phase 2 of the According to the DFA, BCAs financial warranty is a

MRP/V Project. continuing warranty which requires that it shall have the
necessary capitalization to finance the MRP/V Project in its

Later, the DFA sought the opinion of the Department entirety and not on a per phase basis as BCA contends. Only

of Finance (DOF) and the Department of Justice (DOJ) upon sufficient proof of its financial capability to complete and

regarding the appropriate legal actions in connection with BCAs implement the whole project will the DFAs obligation to choose

alleged delays in the completion of the MRP/V Project. In a and approve the location of its Central Facility arise. The DFA

Letter dated February 21, 2005,[14] the DOJ opined that the DFA asserted that its approval of a Central Facility site was not

should issue a final demand upon BCA to make good on its ministerial and upon its review, BCAs proposed site for the

obligations, specifically on the warranties and responsibilities Central Facility was purportedly unacceptable in terms of

regarding the necessary capitalization and the required financing security and facilities. Moreover, the DFA allegedly received

to carry out the MRP/V Project. The DOJ used as basis for said conflicting official letters and notices [19] from BCA and PPC

recommendation, the Letter dated April 19, 2004 [15] of DOF regarding the true ownership and control of PPC. The DFA

135
implied that the disputes among the shareholders of PPC and
On December 14, 2005, BCA sent a letter [24] to the DFA
between PPC and BCA appeared to be part of the reason for the
demanding that it immediately reconsider and revoke its
hampered implementation of the MRP/V Project.
previous notice of termination, otherwise, BCA would be

compelled to declare the DFA in default pursuant to the

BCA, in turn, submitted various letters and documents to prove
Amended BOT Agreement. When the DFA failed to respond to
its financial capability to complete the MRP/V Project.
[20]
said letter, BCA issued its own Notice of Default dated
However, the DFA claimed these documents were
December 22, 2005[25] against the DFA, stating that if the default
unsatisfactory or of dubious authenticity. Then on August 1,
is not remedied within 90 days, BCA will be constrained to
2005, BCA terminated its Assignment Agreement with PPC and
terminate the MRP/V Project and hold the DFA liable for
notified the DFA that it would directly implement the MRP/V
damages.
Project.[21] BCA further claims that the termination of the

Assignment Agreement was upon the instance, or with the

BCAs request for mutual discussion under Section 19.01 of the
conformity, of the DFA, a claim which the DFA disputed.
Amended BOT Agreement[26] was purportedly ignored by the

DFA and left the dispute unresolved through amicable means

On December 9, 2005, the DFA sent a Notice of
within 90 days. Consequently, BCA filed its Request for
Termination[22] to BCA and PPC due to their alleged failure to
Arbitration dated April 7, 2006[27] with the Philippine Dispute
submit proof of financial capability to complete the entire
Resolution Center, Inc. (PDRCI), pursuant to Section 19.02 of
MRP/V Project in accordance with the financial warranty under
the Amended BOT Agreement which provides:
Section 5.02(A) of the Amended BOT Agreement. The Notice

states: Section 19.02 Failure to Settle

Amicably If the Dispute cannot be settled
amicably within ninety (90) days by mutual
After a careful evaluation and
discussion as contemplated under Section
consideration of the matter, including the
19.01 herein, the Dispute shall be settled
reasons cited in your letters dated March 3,
with finality by an arbitrage tribunal
May 3, and June 20, 2005, and upon the
operating under International Law,
recommendation of the Office of the
hereinafter referred to as the Tribunal, under
Solicitor General (OSG), the Department is
the UNCITRAL Arbitration Rules contained
of the view that your continuing default in
in Resolution 31/98 adopted by the United
complying with the requisite bank guarantee
Nations General Assembly on December 15,
and/or credit facility, despite repeated notice
1976, and entitled Arbitration Rules on the
and demand, is legally unjustified.
United Nations Commission on the
International Trade Law. The DFA and the
In light of the foregoing
BCA undertake to abide by and implement
considerations and upon the instruction of
the arbitration award. The place of
the Secretary of Foreign Affairs, the
arbitration shall be Pasay City, Philippines,
Department hereby formally TERMINATE
or such other place as may mutually be
(sic) the Subject Amended BOT Agreement
agreed upon by both parties. The arbitration
dated 5 April 2005 (sic)[23] effective 09
proceeding shall be conducted in the English
December 2005. Further, and as a
language.[28]
consequence of this termination, the
Department formally DEMAND (sic) that
you pay within ten (10) days from receipt
hereof, liquidated damages equivalent to the As alleged in BCAs Request for Arbitration, PDRCI is a non-
corresponding performance security bond
that you had posted for the MRP/V Project. stock, non-profit organization composed of independent

Please be guided accordingly. arbitrators who operate under its own Administrative Guidelines

and Rules of Arbitration as well as under the United Nations

136
Commission on the International Trade Law (UNCITRAL)
Model Law on International Commercial Arbitration and other
applicable laws and rules. According to BCA, PDRCI can act as
an arbitration center from whose pool of accredited arbitrators
both the DFA and BCA may select their own nominee to become
a member of the arbitral tribunal which will render the
arbitration award.
BCAs Request for Arbitration filed with the PDRCI sought the
following reliefs:
1. A judgment nullifying and
setting aside the Notice of Termination dated
December 9, 2005 of Respondent [DFA],
including its demand to Claimant [BCA] to
pay liquidated damages equivalent to the
corresponding performance security bond
posted by Claimant [BCA];
2. A judgment (a) confirming the
Notice of Default dated December 22, 2005
issued by Claimant [BCA] to Respondent
[DFA]; and (b) ordering Respondent [DFA]
to perform its obligation under the Amended
BOT Agreement dated April 5, 2002 by
approving the site of the Central Facility at
the Star Mall Complex on Shaw Boulevard,
Mandaluyong City, within five days from
receipt of the Arbitral Award; and
3. A judgment ordering respondent
[DFA] to pay damages to Claimant [BCA],
reasonably estimated at P50,000,000.00 as
of this date, representing lost business
opportunities; financing fees, costs and
commissions; travel expenses; legal fees and
expenses; and costs of arbitration, including
the fees of the arbitrator/s.[29]
PDRCI, through a letter dated April 26, 2006,
[30]
invited the DFA to submit its Answer to the Request for
Arbitration within 30 days from receipt of said letter and also
requested both the DFA and BCA to nominate their chosen
arbitrator within the same period of time.
Initially, the DFA, through a letter dated May 22, 2006,
[31]
requested for an extension of time to file its answer, without
prejudice to jurisdictional and other defenses and objections
available to it under the law. Subsequently, however, in a letter
dated May 29, 2006,[32] the DFA declined the request for
arbitration before the PDRCI. While it expressed its willingness
to resort to arbitration, the DFA pointed out that under Section
19.02 of the Amended BOT Agreement, there is no mention of a
specific body or institution that was previously authorized by the
parties to settle their dispute. The DFA further claimed that the
arbitration of the dispute should be had before an ad
hoc arbitration body, and not before the PDRCI which has as its
accredited arbitrators, two of BCAs counsels of
record. Likewise, the DFA insisted that PPC, allegedly an
indispensable party in the instant case, should also participate in
the arbitration.
The DFA then sought the opinion of the DOJ on the Notice of
Termination dated December 9, 2005 that it sent to BCA with
regard to the MRP/V Project.
In DOJ Opinion No. 35 (2006) dated May 31, 2006, [33] the DOJ
concurred with the steps taken by the DFA, stating that there
was basis in law and in fact for the termination of the MRP/V
Project. Moreover, the DOJ recommended the immediate
implementation of the project (presumably by a different
contractor) at the soonest possible time.
Thereafter, the DFA and the BSP entered into a Memorandum of
Agreement for the latter to provide the former passports
compliant with international standards. The BSP then solicited
bids for the supply, delivery, installation and commissioning of a
system for the production of Electronic Passport Booklets or e-
Passports.[34]
For BCA, the BSPs invitation to bid for the supply and purchase
of e-Passports (the e-Passport Project) would only further delay
the arbitration it requested from the DFA.Moreover, this new e-
Passport Project by the BSP and the DFA would render BCAs
137
remedies moot inasmuch as the e-Passport Project would then be project together with a third party to defeat the reliefs BCA

replacing the MRP/V Project which BCA was carrying out for sought in its Request for Arbitration, thus causing BCA to suffer

the DFA. grave and irreparable injury from the loss of substantial

investments in connection with the implementation of the

Thus, BCA filed a Petition for Interim Relief [35] under Section 28 MRP/V Project.

of the Alternative Dispute Resolution Act of 2004 (R.A. No.

9285),[36] with the Regional Trial Court (RTC) of Pasig City, Thereafter, the DFA filed an Opposition (to the Application for

Branch 71, presided over by respondent Judge Falcon. In that Temporary Restraining Order and/or Writ of Preliminary

RTC petition, BCA prayed for the following: Injunction) dated January 18, 2007, [38] alleging that BCA has no

cause of action against it as the contract between them is for

WHEREFORE, BCA respectfully prays that
this Honorable Court, before the constitution machine readable passports and visas which is not the same as
of the arbitral tribunal in PDRCI Case No.
the contract it has with the BSP for the supply of electronic
30-2006/BGF, grant petitioner interim relief
in the following manner: passports. The DFA also pointed out that the Filipino people and

(a) upon filing of this Petition, immediately the governments international standing would suffer great
issue an order temporarily restraining
Respondents [DFA and BSP], their agents, damage if a TRO would be issued to stop the e-Passport
representatives, awardees, suppliers and Project. The DFA mainly anchored its opposition on Republic
assigns (i) from awarding a new contract to
implement the Project, or any similar Act No. 8975, which prohibits trial courts from issuing a TRO,
electronic passport or visa project; or (ii) if
such contract has been awarded, from preliminary injunction or mandatory injunction against the
implementing such Project or similar
projects until further orders from this bidding or awarding of a contract or project of the national
Honorable Court; government.
(b) after notice and hearing, issue a writ of
preliminary injunction ordering Respondents
[DFA and BSP], their agents, On January 23, 2007, after summarily hearing the parties oral
representatives, awardees, suppliers and
arguments on BCAs application for the issuance of a TRO, the
assigns to desist (i) from awarding a new
contract to implement the Project or any trial court ordered the issuance of a TRO restraining the DFA
similar electronic passport or visa project; or
(ii) if such contract has been awarded, from and the BSP, their agents, representatives, awardees, suppliers
implementing such Project or similar
projects, and to maintain the status quo and assigns from awarding a new contract to implement the
ante pending the resolution on the merits of Project or any similar electronic passport or visa project, or if
BCAs Request for Arbitration; and
such contract has been awarded, from implementing such or
(c) render judgment affirming
the interim relief granted to BCA until the similar projects.[39] The trial court also set for hearing BCAs
dispute between the parties shall have been
resolved with finality. application for preliminary injunction.

BCA also prays for such other relief, just

and equitable under the premises.[37] Consequently, the DFA filed a Motion for Reconsideration [40] of

the January 23, 2007 Order.The BSP, in turn, also sought to lift

BCA alleged, in support for its application for a Temporary the TRO and to dismiss the petition. In its Urgent Omnibus

Restraining Order (TRO), that unless the DFA and the BSP were Motion dated February 1, 2007,[41] the BSP asserted that BCA is

immediately restrained, they would proceed to undertake the not entitled to an injunction, as it does not have a clear right

138
which ought to be protected, and that the trial court has no
jurisdiction to enjoin the implementation of the e-Passport
Project which, the BSP alleged, is a national government project
under Republic Act No. 8975.
In the hearings set for BCAs application for preliminary
injunction, BCA presented as witnesses, Mr. Bonifacio
Sumbilla, its President, Mr. Celestino Mercader, Jr. from the
Independent Verification and Validation Contractor
commissioned by the DFA under the Amended BOT Agreement,
and DFA Assistant Secretary Domingo Lucenario, Jr. as adverse
party witness.
The DFA and the BSP did not present any witness during the
hearings for BCAs application for preliminary
injunction. According to the DFA and the BSP, the trial court did
not have any jurisdiction over the case considering that BCA did
not pay the correct docket fees and that only the Supreme Court
could issue a TRO on the bidding for a national government
project like the e-Passport Project pursuant to the provisions of
Republic Act No. 8975.Under Section 3 of Republic Act No.
8975, the RTC could only issue a TRO against a national
government project if it involves a matter of extreme urgency
involving a constitutional issue, such that unless a TRO is
issued, grave injustice and irreparable injury will arise.
Thereafter, BCA filed an Omnibus Comment [on Opposition and
Supplemental Opposition (To the Application for Temporary
Restraining Order and/or Writ of Preliminary Injunction)] and
Opposition [to Motion for Reconsideration (To the Temporary
Restraining Order dated January 23, 2007)] and Urgent Omnibus
Motion [(i) To Lift Temporary Restraining Order; and (ii) To
Dismiss the Petition] dated January 31, 2007. [42] The DFA and
the BSP filed their separate Replies (to BCAs Omnibus
Comment) dated February 9, 2007[43] and February 13, 2007,
[44]
respectively.
On February 14, 2007, the trial court issued an Order granting
BCAs application for preliminary injunction, to wit:
WHEREFORE, in view of the
above, the court resolves that it has
jurisdiction over the instant petition and to
issue the provisional remedy prayed for, and
therefore, hereby GRANTS petitioners
[BCAs] application for preliminary
injunction. Accordingly, upon posting a
bond in the amount of Ten Million Pesos
(P10,000,000.00), let a writ of preliminary
injunction issue ordering respondents [DFA
and BSP], their agents, representatives,
awardees, suppliers and assigns to desist (i)
from awarding a new contract to implement
the project or any similar electronic passport
or visa project or (ii) if such contract has
been awarded from implementing such
project or similar projects.
The motion to dismiss is denied
for lack of merit. The motions for
reconsideration and to lift temporary
restraining Order are now moot and
academic by reason of the expiration of the
TRO.[45]
On February 16, 2007, BCA filed an Amended Petition,
[46]
wherein paragraphs 3.3(b) and 4.3 were modified to add
language to the effect that unless petitioners were enjoined from
awarding the e-Passport Project, BCA would be deprived of its
constitutionally-protected right to perform its contractual
obligations under the original and amended BOT Agreements
without due process of law. Subsequently, on February 26, 2007,
the DFA and the BSP received the Writ of Preliminary
Injunction dated February 23, 2007.
Hence, on March 2, 2007, the DFA and the BSP filed the instant
Petition for Certiorari[47]and prohibition under Rule 65 of the
Rules of Court with a prayer for the issuance of a temporary
restraining order and/or a writ of preliminary injunction,
imputing grave abuse of discretion on the trial court when it
granted interim relief to BCA and issued the assailed Order
139
dated February 14, 2007 and the writ of preliminary injunction dated June 4, 2007, praying that the TRO issued on March 12,

dated February 23, 2007. 2007 be lifted and that the petition be denied.

The DFA and the BSP later filed an Urgent Motion for Issuance In a Resolution dated September 10, 2007, [53] the Court denied

of a Temporary Restraining Order and/or Writ of Preliminary BCAs Urgent Omnibus Motion and gave due course to the
[48]
Injunction dated March 5, 2007. instant petition. The parties were directed to file their respective

memoranda within 30 days from notice of the Courts September

On March 12, 2007, the Court required BCA to file its comment 10, 2007 Resolution.

on the said petition within ten days from notice and granted the

Office of the Solicitor Generals urgent motion for issuance of a Petitioners DFA and BSP submit the following issues for our
[49]
TRO and/or writ of preliminary injunction, thus:
consideration:

After deliberating on the petition

for certiorari and prohibition with temporary ISSUES
restraining order and/or writ of preliminary
injunction assailing the Order dated 14 I
February 2007 of the Regional Trial Court,
Branch 71, Pasig City, in Civil Case No. WHETHER OR NOT THE RESPONDENT
71079, the Court, without necessarily giving JUDGE GRAVELY ABUSED HIS
due course thereto, resolves to require DISCRETION AMOUNTING TO LACK
respondents to COMMENTthereon (not to OR EXCESS OF JURISDICTION WHEN
file a motion to dismiss) within ten (10) HE ISSUED THE ASSAILED ORDER,
days from notice. WHICH EFFECTIVELY ENJOINED THE
IMPLEMENTATION OF THE E-
The Court further resolves PASSPORT PROJECT -- A NATIONAL
to GRANT the Office of the Solicitor GOVERNMENT PROJECT UNDER
Generals urgent motion for issuance of a REPUBLIC ACT NO. 8975.
temporary restraining order and/or writ of
preliminary injunction dated 05 March 2007 II
and ISSUE a TEMPORARY
RESTRAINING ORDER, as prayed for, WHETHER OR NOT THE RESPONDENT
enjoining respondents from implementing JUDGE ACTED WITH GRAVE ABUSE
the assailed Order dated 14 February 2007 OF DISCRETION AMOUNTING TO
and the Writ of Preliminary Injunction dated LACK OR EXCESS OF JURISDICTION
23 February 2007, issued by respondent IN GRANTING RESPONDENT
Judge Franco T. Falcon in Civil Case No. BCAS INTERIM RELIEF INASMUCH AS:
71079 entitled BCA International
Corporation vs. Department of Foreign (I) RESPOND
Affairs and Bangko Sentral ng Pilipinas, and ENT BCA
from conducting further proceedings in said HAS NOT
case until further orders from this Court. ESTABLISHE
D A CLEAR
RIGHT THAT
CAN BE
BCA filed on April 2, 2007 its Comment with Urgent Motion to PROTECTED
BY AN
Lift TRO,[50] to which the DFA and the BSP filed their Reply INJUNCTION
; AND
dated August 14, 2007.[51]
(II) RESPONDE
NT BCA HAS
In a Resolution dated June 4, 2007, [52] the Court denied BCAs NOT SHOWN
THAT IT
motion to lift TRO. BCA filed another Urgent Omnibus Motion WILL
SUSTAIN
dated August 17, 2007, for the reconsideration of the Resolution
140
 GRAVE AND The policy on the hierarchy of courts,
IRREPARAB which petitioners indeed failed to observe, is
LE INJURY not an iron-clad rule. For indeed the Court
THAT MUST has full discretionary power to take
BE cognizance and assume jurisdiction of
PROTECTED special civil actions
BY AN for certiorari and mandamus filed directly
INJUNCTION with it for exceptionally compelling
. ON THE reasons or if warranted by the nature of
CONTRARY, the issues clearly and specifically raised in
IT IS THE the petition.[56] (Emphases ours.)
FILIPINO
PEOPLE,
WHO
The Court deems it proper to adopt a similarly liberal attitude in
PETITIONER
S PROTECT, the present case in consideration of the transcendental
THAT WILL importance of an issue raised herein. This is the first time that
SUSTAIN
SERIOUS the Court is confronted with the question of whether an
AND information and communication technology project, which does
SEVERE
INJURY BY not conform to our traditional notion of the term infrastructure,
THE is covered by the prohibition on the issuance of court injunctions
INJUNCTION
found in Republic Act No. 8975, which is entitled An Act to
.[54]
Ensure the Expeditious Implementation and Completion of
Government Infrastructure Projects by Prohibiting Lower Courts
At the outset, we dispose of the procedural objections from Issuing Temporary Restraining Orders, Preliminary
of BCA to the petition, to wit: (a) petitioners did not follow the Injunctions or Preliminary Mandatory Injunctions, Providing
Penalties for Violations Thereof, and for Other Purposes. Taking
hierarchy of courts by filing their petition directly with this
into account the current trend of computerization and
Court, without filing a motion for reconsideration with the RTC
modernization of administrative and service systems of
and without filing a petition first with the Court of Appeals; (b) government offices, departments and agencies, the resolution of
the person who verified the petition for the DFA did not have this issue for the guidance of the bench and bar, as well as the
personal knowledge of the facts of the case and whose general public, is both timely and imperative.

appointment to his position was highly irregular; and (c) the

verification by the Assistant Governor and General Counsel of Anent BCAs claim that Mr. Edsel T. Custodio (who

the BSP of only selected paragraphs of the petition was with the verified the Petition on behalf of the DFA) did not have personal

purported intent to mislead this Court. knowledge of the facts of the case and was appointed to his

position as Acting Secretary under purportedly irregular

Although the direct filing of petitions circumstances, we find that BCA failed to sufficiently prove

for certiorari with the Supreme Court is discouraged when such allegations. In any event, we have previously held that

litigants may still resort to remedies with the lower courts, we [d]epending on the nature of the allegations in the petition, the

have in the past overlooked the failure of a party to strictly verification may be based either purely on personal knowledge,

adhere to the hierarchy of courts on highly meritorious or entirely on authentic records, or on both sources. [57]The

grounds. Most recently, we relaxed the rule on court hierarchy in alleged lack of personal knowledge of Mr. Custodio (which, as

the case of Roque, Jr. v. Commission on Elections, [55] wherein we we already stated, BCA failed to prove) would not necessarily

held: render the verification defective for he could have verified the

petition purely on the basis of authentic records.

141
 implementation of the e-Passport Project. According to

As for the assertion that the partial verification of petitioners, this violated the clear prohibition under Republic

Assistant Governor and General Counsel Juan de Zuniga, Jr. was Act No. 8975 regarding the issuance of TROs and preliminary

for the purpose of misleading this Court, BCA likewise failed to injunctions against national government projects, such as the e-

adduce evidence on this point. Good faith is always presumed. Passport Project.

Paragraph 3 of Mr. Zunigas verification indicates that his partial

verification is due to the fact that he is verifying only the The prohibition invoked by petitioners is found in

allegations in the petition peculiar to the BSP. We see no reason Section 3 of Republic Act No. 8975, which reads:

to doubt that this is the true reason for his partial or selective
verification.
In sum, BCA failed to successfully rebut the
presumption that the official acts (of Mr. Custodio and Mr.
Zuniga) were done in good faith and in the regular performance
of official duty.[58] Even assuming the verifications of the
petition suffered from some defect, we have time and again
Section 3. Prohibition on the
Issuance of Temporary Restraining Orders,
Preliminary Injunctions and Preliminary
Mandatory Injunctions. No court, except the
Supreme Court, shall issue any temporary
restraining order, preliminary injunction or
preliminary mandatory injunction against
the government, or any of its subdivisions,
officials or any person or entity, whether
public or private, acting under the
governments direction, to restrain, prohibit
or compel the following acts:

ruled that [t]he ends of justice are better served when cases are (a) Acquisition, clearance
determined on the merits after all parties are given full and development of the
right-of-way and/or site
opportunity to ventilate their causes and defenses rather than on or location of any
national government
technicality or some procedural imperfections. [59] In other words, project;
the Court may suspend or even disregard rules when the (b) Bidding or awarding of
demands of justice so require.[60] contract/project of the
national government as
defined under Section 2
hereof;
We now come to the substantive issues involved in
(c) Commencement,
this case.
prosecution, execution,
implementation,
On whether operation of any such
the trial court contract or project;
had
jurisdiction to (d) Termination or
issue a writ of rescission of any such
preliminary contract/project; and
injunction in
the present (e) The undertaking or
case authorization of any
other lawful activity
necessary for such
contract/project.
In their petition, the DFA and the BSP argue that
This prohibition shall apply in all cases,
respondent Judge Falcon gravely abused his discretion
disputes or controversies instituted by a
amounting to lack or excess of jurisdiction when he issued the private party, including but not limited to
cases filed by bidders or those claiming to
assailed orders, which effectively enjoined the bidding and/or have rights through such bidders involving
such contract/project. This prohibition shall
142
 not apply when the matter is of extreme
urgency involving a constitutional issue, As petitioners themselves pointed out, there are three
such that unless a temporary restraining
types of national government projects enumerated in Section
order is issued, grave injustice and
irreparable injury will arise. The applicant 2(a), to wit:
shall file a bond, in an amount to be fixed by
the court, which bond shall accrue in favor
of the government if the court should finally (a) current and future national
decide that the applicant was not entitled to government infrastructure
the relief sought. projects, engineering works and
service contracts, including
If after due hearing the court finds that the projects undertaken by
award of the contract is null and void, the government-owned and controlled
court may, if appropriate under the corporations;
circumstances, award the contract to the
qualified and winning bidder or order a (b) all projects covered by R.A.
rebidding of the same, without prejudice to No. 6975, as amended by R.A.
any liability that the guilty party may incur No. 7718, or the Build-Operate-
under existing laws. and-Transfer ( BOT) Law; and

(c) other related and necessary

activities, such as site acquisition,
From the foregoing, it is indubitable that no court, supply and/or installation of
equipment and materials,
aside from the Supreme Court, may enjoin a national
implementation, construction,
government project unless the matter is one of extreme urgency completion, operation,
maintenance, improvement repair
involving a constitutional issue such that unless the act and rehabilitation, regardless of
the source of funding.
complained of is enjoined, grave injustice or irreparable injury

would arise.
Under Section 2(a) of the BOT Law as amended by

Republic Act No. 7718,[61]private sector infrastructure or

What then are the national government projects over
development projects are those normally financed and
which the lower courts are without jurisdiction to issue the
operated by the public sector but which will now be wholly
injunctive relief as mandated by Republic Act No. 8975?
or partly implemented by the private sector, including but

not limited to, power plants, highways, ports, airports, canals,

Section 2(a) of Republic Act No. 8975 provides:
dams, hydropower projects, water supply, irrigation,
Section 2. Definition of Terms. telecommunications, railroads and railways, transport systems,

(a) National government projects land reclamation projects, industrial estates or townships,
shall refer to all current and future national
government infrastructure, engineering housing, government buildings, tourism projects, markets,
works and service contracts, including
slaughterhouses, warehouses, solid waste
projects undertaken by government-owned
and -controlled corporations, all projects management, information technology networks and database
covered by Republic Act No. 6975, as
amended by Republic Act No. 7718, infrastructure, education and health facilities, sewerage,
otherwise known as the Build-Operate-and-
Transfer Law, and other related and drainage, dredging, and other infrastructure and development
necessary activities, such as site acquisition, projects as may be authorized by the appropriate agency.
supply and/or installation of equipment and
materials, implementation, construction,
completion, operation, maintenance,
improvement, repair and rehabilitation, In contrast, Republic Act No. 9184,[62] also known as the
regardless of the source of funding.
Government Procurement Reform Act, defines infrastructure

projects in Section 5(k) thereof in this manner:

143

(k) Infrastructure Projects -
include the construction, improvement,
rehabilitation, demolition, repair, restoration
or maintenance of roads and bridges,
railways, airports, seaports, communication
facilities, civil works components of
information technology projects,
irrigation, flood control and drainage, water
supply, sanitation, sewerage and solid waste
management systems, shore protection,
energy/power and electrification facilities,
national buildings, school buildings, hospital
buildings and other related construction
projects of the government. (Emphasis
supplied.)
In the present petition, the DFA and the BSP contend
that the bidding for the supply, delivery, installation and
commissioning of a system for the production of Electronic
Passport Booklets, is a national government project within the
definition of Section 2 of Republic Act No. 8975. Petitioners
also point to the Senate deliberations on Senate Bill No.
2038[63] (later Republic Act No. 8975) which allegedly show the
legislatives intent to expand the scope and definition of national
government projects to cover not only the infrastructure projects
enumerated in Presidential Decree No. 1818, but also future
projects that may likewise be considered national government
infrastructure projects, like the e-Passport Project, to wit:
Senator Cayetano. x x x Mr. President, the
present bill, the Senate Bill No. 2038, is
actually an improvement of P.D. No. 1818
and definitely not a repudiation of what I
have earlier said, as my good friend clearly
stated. But this is really an effort to improve
both the scope and definition of the term
government projects and to ensure that
lower court judges obey and observe this
prohibition on the issuance of TROs on
infrastructure projects of the government.
xxxx
Senator Cayetano. That is why, Mr.
President, I did try to explain why I would
accept the proposed amendment, meaning
the totality of the repeal of P.D. 1818 which
is not found in the original version of the
bill, because of my earlier explanation that
the definition of the term government
infrastructure project covers all of those
enumerated in Section 1 of P.D. No. 1818.
And the reason for that, as we know, is we
do not know what else could be considered
government infrastructure project in the next
10 or 20 years.
x x x So, using the Latin maxim of
expression unius est exclusion alterius,
which means what is expressly mentioned is
tantamount to an express exclusion of the
others, that is the reason we did not include
particularly an enumeration of certain
activities of the government found in
Section 1 of P.D. No. 1818. Because to do
that, it may be a good excuse for a brilliant
lawyer to say Well, you know, since it does
not cover this particular activity, ergo, the
Regional Trial Court may issue TRO.
Using the foregoing discussions to establish that the intent of the
framers of the law was to broaden the scope and definition of
national government projects and national infrastructure
projects, the DFA and the BSP submit that the said scope and
definition had since evolved to include the e-Passport
Project. They assert that the concept of infrastructure must now
refer to any and all elements that provide support, framework, or
structure for a given system or organization, including
information technology, such as the e-Passport Project.
Interestingly, petitioners represented to the trial court that the e-
Passport Project is a BOT project but in their petition with this
Court, petitioners simply claim that the e-Passport Project is a
national government project under Section 2 of Republic Act
No. 8975. This circumstance is significant, since relying on the
claim that the e-Passport Project is a BOT project, the trial court
ruled in this wise:
The prohibition against issuance of TRO
and/or writ of preliminary injunction under
RA 8975 applies only to national
government infrastructure project
covered by the BOT Law, (RA 8975, Sec
3[b] in relation to Sec. 2).
The national government projects covered
under the BOT are enumerated under Sec.
2 of RA6957, as amended, otherwise known
as the BOT Law. Notably, it includes
144
 information technology networks and
database infrastructure. expressly made for the purposes of the statute containing such

definition.[67]
In relation to information technology
projects, infrastructure projects refer to
the civil works components thereof. (R.A.
No. 9184 [2003], Sec. 5[c]{sic}).[64] There is no legal or rational basis to apply the definition of the

Respondent BSPs request for bid, for the
supply, delivery, installation and
commissioning of a system for the
production of Electronic Passport Booklets
appears to be beyond the scope of the term
civil works. Respondents did not present
evidence to prove otherwise. [65](Emphases
ours.)
term infrastructure project in one statute to another statute
enacted years before and which already defined the types of
projects it covers. Rather, a reading of the two statutes involved
will readily show that there is a legislative intent to treat
information technology projects differently under the BOT Law

and the Government Procurement Reform Act.

From the foregoing, it can be gleaned that the trial court

In the BOT Law as amended by Republic Act No. 7718, the
accepted BCAs reasoning that, assuming the e-Passport Project
national infrastructure and development projects covered by said
is a project under the BOT Law, Section 2 of the BOT Law must
law are enumerated in Section 2(a) as follows:
be read in conjunction with Section 5(c) of Republic Act No.

9184 or the Government Procurement Reform Act to the effect SEC. 2. Definition of Terms. - The
that only the civil works component of information technology following terms used in this Act shall have
the meanings stated below:
projects are to be considered infrastructure. Thus, only said civil
(a) P
works component of an information technology project cannot rivate sector
infrastructure or
be the subject of a TRO or writ of injunction issued by a lower development projects -
court. The general description
of infrastructure or
development projects
normally financed and
Although the Court finds that the trial court had jurisdiction to operated by the public
sector but which will
issue the writ of preliminary injunction, we cannot uphold the
now be wholly or partly
theory of BCA and the trial court that the definition of the term implemented by the
private sector, including
infrastructure project in Republic Act No. 9184 should be but not limited to, power
plants, highways, ports,
applied to the BOT Law. airports, canals, dams,
hydropower projects,
water supply, irrigation,
Section 5 of Republic Act No. 9184 prefaces the definition of telecommunications,
railroads and railways,
the terms therein, including the term infrastructure project, with transport systems, land
reclamation projects,
the following phrase: For purposes of this Act, the following industrial estates of
terms or words and phrases shall mean or be understood as townships, housing,
government buildings,
follows x x x. tourism projects,
markets,
slaughterhouses,
warehouses, solid waste
This Court has stated that the definition of a term in a statute is management, informati
not conclusive as to the meaning of the same term as used on technology
networks and database
elsewhere.[66] This is evident when the legislative definition is infrastructure,

145
education and health exceeding fifty percent
facilities, sewerage, (50%) of the project
drainage, dredging, and cost, and the balance to
other infrastructure and be provided by the
development projects as project proponent.
may be authorized by (Emphasis supplied.)
the appropriate agency
pursuant to this Act.
Such projects shall be
undertaken through A similar provision appears in the Revised IRR of the BOT Law
contractual
as amended, to wit:
arrangements as defined
hereunder and such
other variations as may SECTION 1.3 - DEFINITION OF
be approved by the TERMS
President of the
Philippines. For purposes of these Implementing Rules
and Regulations, the terms and phrases
For the hereunder shall be understood as follows:
construction stage of
these infrastructure xxxx
projects, the project
proponent may obtain v. Private
financing from foreign Sector Infrastructure
and/or domestic sources or Development
and/or engage the Projects - The general
services of a foreign description of
and/or Filipino infrastructure or
contractor: Provided, Development Projects
That, in case an normally financed, and
infrastructure or a operated by the public
development facility's sector but which will
operation requires a now be wholly or partly
public utility franchise, financed, constructed
the facility operator and operated by the
must be a Filipino or if a private sector, including
corporation, it must be but not limited to, power
duly registered with the plants, highways, ports,
Securities and Exchange airports, canals, dams,
Commission and owned hydropower projects,
up to at least sixty water supply, irrigation,
percent (60%) by telecommunications,
Filipinos: Provided, railroad and railways,
further, That in the case transport systems, land
of foreign contractors, reclamation projects,
Filipino labor shall be industrial estates or
employed or hired in the townships, housing,
different phases of government buildings,
construction where tourism projects, public
Filipino skills are markets,
available: Provided, slaughterhouses,
finally, That projects warehouses, solid waste
which would have management, informatio
difficulty in sourcing n technology networks
funds may be financed and database
partly from direct infrastructure, education
government and health facilities,
appropriations and/or sewerage, drainage,
from Official dredging, and other
Development Assistance infrastructure and
(ODA) of foreign development projects as
governments or may otherwise be
institutions not authorized by the
146
 appropriate
Agency/LGU pursuant projects. In fact, the MRP/V Project awarded to BCA under the
to the Act or these
BOT Law appears to include both civil works (i.e., site
Revised IRR. Such
projects shall be preparation of the Central Facility, regional DFA offices and
undertaken through
Contractual foreign service posts) and non-civil works aspects
Arrangements as defined
herein, including such (i.e., development, installation and maintenance in the
other variations as may Philippines and foreign service posts of a computerized passport
be approved by the
President of the and visa issuance system, including creation of databases,
Philippines.
storage and retrieval systems, training of personnel and
xxxx
provision of consumables).
SECTION 2.2 -
ELIGIBLE TYPES OF PROJECTS
In contrast, under Republic Act No. 9184 or the Government
The Construction, rehabilitation,
improvement, betterment, expansion, Procurement Reform Act, which contemplates projects to be
modernization, operation, financing and
funded by public funds, the term infrastructure project was
maintenance of the following types of
projects which are normally financed and limited to only the civil works component of information
operated by the public sector which will
now be wholly or partly financed, technology projects. The non-civil works component of
constructed and operated by the private
sector, including other infrastructure and information technology projects would be treated as an
development projects as may be authorized acquisition of goods or consulting services as the case may be.
by the appropriate agencies, may be
proposed under the provisions of the Act and
these Revised IRR, provided however that
such projects have a cost recovery This limited definition of infrastructure project in relation to
component which covers at least 50% of the
Project Cost, or as determined by the information technology projects under Republic Act No. 9184 is
Approving Body: significant since the IRR of Republic Act No. 9184 has some
xxxx provisions that are particular to infrastructure projects and other

h. Information provisions that are applicable only to procurement of goods or

technology (IT) and data
consulting services.[68]
base infrastructure,
including modernization
of IT, geo-spatial
resource mapping and Implicitly, the civil works component of information technology
cadastral survey for
resource accounting and projects are subject to the provisions on infrastructure projects
planning. (Underscoring
while the technological and other components would be covered
supplied.)
by the provisions on procurement of goods or consulting

services as the circumstances may warrant.

Undeniably, under the BOT Law, wherein the projects are to be

privately funded, the entire information technology project,

When Congress adopted a limited definition of what is to be
including the civil works component and the technological
considered infrastructure in relation to information technology
aspect thereof, is considered an infrastructure or development
projects under the Government Procurement Reform Act,
project and treated similarly as traditional infrastructure
legislators are presumed to have taken into account previous
projects. All the rules applicable to traditional infrastructure
laws concerning infrastructure projects (the BOT Law and
projects are also applicable to information technology

147
Republic Act No. 8975) and deliberately adopted the limited The foregoing provision in the IRR can be taken as an

definition. We can further presume that Congress had written administrative interpretation that the provisions of Republic Act

into law a different treatment for information technology No. 9184 are inapplicable to a BOT project except only insofar

projects financed by public funds vis-a-vis privately funded as such portions of the BOT project that are financed by the

projects for a valid legislative purpose. government.

The idea that the definitions of terms found in the Government Taking into account the different treatment of information

Procurement Reform Act were not meant to be applied to technology projects under the BOT Law and the Government

projects under the BOT Law is further reinforced by the Procurement Reform Act, petitioners contention the trial court

following provision in the IRR of the Government Procurement had no jurisdiction to issue a writ of preliminary injunction in

Reform Act: the instant case would have been correct if the e-Passport Project

was a project under the BOT Law as they represented to the trial
Section 1. Purpose and General Coverage
court.
This Implementing Rules and Regulations
(IRR) Part A, hereinafter called IRR-A, is
promulgated pursuant to Section 75 of However, petitioners presented no proof that the e-Passport
Republic Act No. 9184 (R.A. 9184),
otherwise known as the Government Project was a BOT project. On the contrary, evidence adduced
Procurement Reform Act (GPRA), for the
purpose of prescribing the necessary rules by both sides tended to show that the e-Passport Project was a
and regulations for the modernization, procurement contract under Republic Act No. 9184.
standardization, and regulation of the
procurement activities of the
government. This IRR-A shall cover all
fully domestically-funded procurement The BSPs on-line request for expression of interest and to bid
activities from procurement planning up to
contract implementation and for the e-Passport Project[69]from the BSP website and the
termination, except for the following: newspaper clipping[70] of the same request expressly stated that
a) Acquisition of real property which shall [t]he two stage bidding procedure under Section 30.4 of the
be governed by Republic Act No. 8974
(R.A. 8974), entitled An Act to Facilitate the Implementing Rules and Regulation (sic) Part-A of Republic Act
Acquisition of Right-of-Way Site or
No. 9184 relative to the bidding and award of the contract shall
Location for National Government
Infrastructure Projects and for Other apply. During the testimony of DFA Assistant Secretary
Purposes, and other applicable laws; and
Domingo Lucenario, Jr. before the trial court, he admitted that
b) Private sector infrastructure or
development projects and other the e-Passport Project is a BSP procurement project and that it is
procurement covered by Republic Act No. the BSP that will pay the suppliers.[71] In petitioners
7718 (R.A. 7718), entitled An Act
Authorizing the Financing, Construction, Manifestation dated July 29, 2008 [72]
and the Erratum [73]
thereto,
Operation and Maintenance of
Infrastructure Projects by the Private petitioners informed the Court that a contract for the supply of a
Sector, and for Other Purposes, as
amended: Provided, however, That for the complete package of systems design, technology, hardware,
portions financed by the Government, the software, and peripherals, maintenance and technical support,
provisions of this IRR-A shall apply.
ecovers and datapage security laminates for the centralized
The IRR-B for foreign-funded procurement
activities shall be the subject of a subsequent production and personalization of Machine Readable Electronic
issuance. (Emphases supplied.)
Passport was awarded to Francois Charles Oberthur

148
Fiduciaire. In the Notice of Award dated July 2, 2008 [74] attached
to petitioners pleading, it was stated that the failure of the
contractor/supplier to submit the required performance bond
would be sufficient ground for the imposition of administrative
penalty under Section 69 of the IRR-A of Republic Act No.
9184.
Being a government procurement contract under Republic Act
No. 9184, only the civil works component of the e-Passport
Project would be considered an infrastructure project that may
not be the subject of a lower court-issued writ of injunction
under Republic Act No. 8975.
Could the e-Passport Project be considered as engineering works
or a service contract or as related and necessary activities under
Republic Act No. 8975 which may not be enjoined?
We hold in the negative. Under Republic Act No. 8975, a service
contract refers to infrastructure contracts entered into by any
department, office or agency of the national government with
private entities and nongovernment organizations for services
related or incidental to the functions and operations of the
department, office or agency concerned. On the other hand, the
phrase other related and necessary activities obviously refers to
activities related to a government infrastructure, engineering
works, service contract or project under the BOT Law. In other
words, to be considered a service contract or related activity,
petitioners must show that the e-Passport Project is an
infrastructure project or necessarily related to an infrastructure
project. This, petitioners failed to do for they saw fit not to
present any evidence on the details of the e-Passport Project
before the trial court and this Court.There is nothing on record to
indicate that the e-Passport Project has a civil works component
or is necessarily related to an infrastructure project.
Indeed, the reference to Section 30.4 [75] of the IRR of Republic
Act No. 9184 (a provision specific to the procurement of goods)
in the BSPs request for interest and to bid confirms that the e-
Passport Project is a procurement of goods and not an
infrastructure project. Thus, within the context of Republic Act
No. 9184 which is the governing law for the e-Passport Project
the said Project is not an infrastructure project that is protected
from lower court issued injunctions under Republic Act No.
8975, which, to reiterate, has for its purpose the expeditious and
efficient implementation and completion of government
infrastructure projects.
We note that under Section 28, Republic Act No. 9285
or the Alternative Dispute Resolution Act of 2004, [76] the grant of
an interim measure of protection by the proper court before the
constitution of an arbitral tribunal is allowed:
Sec. 28. Grant of Interim Measure
of Protection. (a) It is not incompatible with
an arbitration agreement for a party to
request, before constitution of the tribunal,
from a Court an interim measure of
protection and for the Court to grant such
measure. After constitution of the arbitral
tribunal and during arbitral proceedings, a
request for an interim measure of protection,
or modification thereof, may be made with
the arbitral tribunal or to the extent that the
arbitral tribunal has no power to act or is
unable to act effectively, the request may be
made with the Court. The arbitral tribunal is
deemed constituted when the sole arbitrator
or the third arbitrator, who has been
nominated, has accepted the nomination and
written communication of said nomination
and acceptance has been received by the
party making the request.
(a) The following rules
on interim or provisional
relief shall be observed:
(1) A
ny party may request
that provisional relief be
granted against the
adverse party.
(2) Su
ch relief may be granted:
149
(i) to transmitted by
prev reasonable means to the
ent Court or arbitral tribunal
irrep as the case may be and
arabl the party against whom
e the relief is sought,
loss describing in appropriate
or detail the precise relief,
injur the party against whom
y; the relief is requested,
the grounds for the
(ii) to relief, and the evidence
prov supporting the request.
ide
secu (5) T
rity he order shall be binding
for upon the parties.
the
perf (6) Ei
orm ther party may apply
ance with the Court for
of assistance in
any implementing or
obli enforcing an interim
gatio measure ordered by an
n; arbitral tribunal.

(iii) to (7) A
prod party who does not
uce comply with the order
or shall be liable for all
pres damages resulting from
erve noncompliance,
any including all expenses
evid and reasonable attorneys
ence fees, paid in obtaining
; or the orders judicial
(iv) to enforcement.
com
pel
any
othe Section 3(h) of the same statute provides that the
r
"Court" as referred to in Article 6 of the Model Law shall mean
appr
opri a Regional Trial Court.
ate
act
or
omis Republic Act No. 9285 is a general law applicable to
sion. all matters and controversies to be resolved through alternative
(3) T dispute resolution methods. This law allows a Regional Trial
he order granting
provisional relief may Court to grant interim or provisional relief, including
be conditioned upon the
provision of security or preliminary injunction, to parties in an arbitration case prior to
any act or omission the constitution of the arbitral tribunal. This general statute,
specified in the order.
however, must give way to a special law governing national
(4) In
terim or provisional government projects, Republic Act No. 8975 which prohibits
relief is requested by
courts, except the Supreme Court, from issuing TROs and writs
written application

150
of preliminary injunction in cases involving national right under the Amended BOT Agreement since BCA had

government projects. previously assigned all its rights and obligations under the said

Agreement to PPC.

However, as discussed above, the prohibition in

Republic Act No. 8975 is inoperative in this case, since BCA, on the other hand, claims that the Amended

petitioners failed to prove that the e-Passport Project is national BOT Agreement also contemplated the supply and/or delivery of

government project as defined therein. Thus, the trial court had e-Passports with the integrated circuit technology in the future

jurisdiction to issue a writ of preliminary injunction against the and not only the machine readable passport with the 2D optical

e-Passport Project. bar code technology. Also, it is BCAs assertion that the

integrated circuit technology is only optional under the ICAO

On whether
the trial issuances. On the matter of its assignment of its rights to PPC,
courts
BCA counters that it had already terminated (purportedly at
issuance of a
writ of DFAs request) the assignment agreement in favor of PPC and
injunction
was proper that even assuming the termination was not valid, the Amended

BOT Agreement expressly stated that BCA shall remain

Given the above ruling that the trial court had solidarily liable with its assignee, PPC.

jurisdiction to issue a writ of injunction and going to the second

issue raised by petitioners, we answer the question: Was the trial Most of these factual allegations and counter-

courts issuance of a writ of injunction warranted under the allegations already touch upon the merits of the main

circumstances of this case? controversy between the DFA and BCA, i.e., the validity and

propriety of the termination of the Amended BOT Agreement

Petitioners attack on the propriety of the trial courts (the MRP/V Project) between the DFA and BCA. The Court

issuance of a writ of injunction is two-pronged: (a) BCA deems it best to refrain from ruling on these matters since they

purportedly has no clear right to the injunctive relief sought; and should be litigated in the appropriate arbitration or court

(b) BCA will suffer no grave and irreparable injury even if the proceedings between or among the concerned parties.

injunctive relief were not granted.

One preliminary point, however, that must be settled

To support their claim that BCA has no clear right to here is whether BCA retains a right to seek relief against the

injunctive relief, petitioners mainly allege that the MRP/V DFA under the Amended BOT Agreement in view of BCAs

Project and the e-Passport Project are not the same previous assignment of its rights to PPC. Without preempting

project.Moreover, the MRP/V Project purportedly involves a any factual finding that the appropriate court or arbitral tribunal

technology (the 2D optical bar code) that has been rendered on the matter of the validity of the assignment agreement with

obsolete by the latest ICAO developments while the e-Passport PPC or its termination, we agree with BCA that it remained a

Project will comply with the latest ICAO standards (the party to the Amended BOT Agreement, notwithstanding the

contactless integrated circuit).Parenthetically, and not as a main execution of the assignment agreement in favor of PPC, for it

argument, petitioners imply that BCA has no clear contractual was stipulated in the Amended BOT Agreement that BCA would

151
be solidarily liable with its assignee. For convenient reference,
we reproduce the relevant provision of the Amended BOT
Agreement here:
Section 20.15. It is clearly and
expressly understood that BCA may assign,
cede and transfer all of its rights and
obligations under this Amended BOT
Agreement to PPC [Philippine Passport
Corporation], as fully as if PPC is the
original signatory to this Amended BOT
Agreement, provided however that BCA
shall nonetheless be jointly and severally
liable with PPC for the performance of all
the obligations and liabilities under this
Amended BOT Agreement. (Emphasis
supplied.)
Furthermore, a review of the records shows that the
DFA continued to address its correspondence regarding the
MRP/V Project to both BCA and PPC, even after the execution
of the assignment agreement. Indeed, the DFAs Notice of
Termination dated December 9, 2005 was addressed to Mr.
Bonifacio Sumbilla as President of both BCA and PPC and
referred to the Amended BOT Agreement executed between the
Department of Foreign Affairs (DFA), on one hand, and the
BCA International Corporation and/or the Philippine Passport
Corporation (BCA/PPC). At the very least, the DFA is estopped
from questioning the personality of BCA to bring suit in relation
to the Amended BOT Agreement since the DFA continued to
deal with both BCA and PPC even after the signing of the
assignment agreement. In any event, if the DFA truly believes
that PPC is an indispensable party to the action, the DFA may
take necessary steps to implead PPC but this should not
prejudice the right of BCA to file suit or to seek relief for causes
of action it may have against the DFA or the BSP, for
undertaking the e-Passport Project on behalf of the DFA.
With respect to petitioners contention that BCA will
suffer no grave and irreparable injury so as to justify the grant of
injunctive relief, the Court finds that this particular argument
merits consideration.
The BOT Law as amended by Republic Act No. 7718,
provides:
SEC. 7. Contract Termination. - In the
event that a project is revoked, cancelled
or terminated by the Government
through no fault of the project
proponent or by mutual agreement,
the Government shall compensate the said
project proponent for its actual
expenses incurred in the project plus a
reasonable rate of return thereon not
exceeding that stated in the contract as of the
date of such revocation, cancellation or
termination: Provided, That the interest of
the Government in this instances shall be
duly insured with the Government Service
Insurance System [GSIS] or any other
insurance entity duly accredited by the
Office of the Insurance
Commissioner: Provided, finally, That the
cost of the insurance coverage shall be
included in the terms and conditions of the
bidding referred to above.
In the event that the government
defaults on certain major obligations in the
contract and such failure is not remediable
or if remediable shall remain unremedied for
an unreasonable length of time, the project
proponent/contractor may, by prior notice
to the concerned national government
agency or local government unit specifying
the turn-over date, terminate the contract.
The project proponent/contractor shall be
reasonably compensated by the
Government for equivalent or
proportionate contract cost as defined in
the contract. (Emphases supplied.)
In addition, the Amended BOT Agreement, which is
the law between and among the parties to it, pertinently
provides:
Section 17.01 Default In case a
party commits an act constituting an
event of default, the non-defaulting party
may terminate this Amended BOT
Agreement by serving a written notice to
the defaulting party specifying the grounds
for termination and giving the defaulting
party a period of ninety (90) days within
which to rectify the default. If the default is
not remedied within this period to the
satisfaction of the non-defaulting party, then
the latter will serve upon the former a
152
written notice of termination indicating the and privileges,
effective date of termination. as well as the
obligations,
Section 17.02 Proponents duties and
Default If this Amended BOT Agreement responsibilitie
is terminated by reason of the BCAs s hereunder;
default, the DFA shall have the following provided,
options: however, that
the DFA shall
A. Allow the at all times
BCAs unpaid and its sole
creditors who option, have
hold a lien on the right to
the MRP/V invoke and
Facility to exercise any
foreclose on other remedy
the MRP/V which may be
Facility. The available to
right of the the DFA under
BCAs unpaid any applicable
creditors to laws, rules
foreclose on and/or
the MRP/V regulations
Facility shall which may be
be valid for in effect at any
the duration of time and from
the effectivity time to time.
of this The DFA shall
Amended cooperate with
BOT the creditors
Agreement; with a view to
or, facilitating the
choice of a
B. Allow the Substitute
BCAs unpaid BCA, who
creditors who shall take-over
hold a lien on the operation,
the MRP/V maintenance
Facility to and
designate a management
substitute of the MRP/V
BCA for the Project, within
MRP/V three (3)
Project, months from
provided the the BCAs
designated receipt of the
substitute notice of
BCA is termination
qualified from the DFA.
under existing The
laws and Substituted
acceptable to BCA shall
the DFA. This have all the
substitute rights and
BCA shall obligations of
hereinafter be the previous
referred to as BCA as
the Substitute contained in
BCA. The this Amended
Substitute BOT
BCA shall Agreement; or
assume all the
BCAs rights

153
 C. Take-over prio
the MRP/V r to
Facility and com
assume all pleti
attendant on o
liabilities f the
thereof. impl
eme
D. In all cases ntati
of on
termination of
due to the the
default of the MR
BCA, it shall P/V
pay DFA Proj
liquidated ect,
damages equi dam
valent to the ages
applicable the shall
(sic) be
Performance paid
Security. equi
vale
Section 17.03 DFAs Default If nt to
this Amended BOT Agreement is terminated the
by the BCA by reason of the DFAs valu
Default, the DFA shall: e of
com
A. Be plet
obligated to ed
take over the impl
MRP/V eme
Facility on an ntati
as is, where is on,
basis, and min
shall forthwith us
assume the
attendant aggr
liabilities egat
thereof; and e
amo
B. Pay unt
liquidated of
damages to the
the BCA atte
equivalent to nda
the following nt
amounts, liabi
which may be lities
charged to the assu
insurance med
proceeds by
referred to in the
Article 12: DFA
,
(1) In plus
the ten
even perc
t of ent
ter (10
min %)
atio ther
n eof.

154
The Impl
amo eme
unt ntati
of on
such shall
com mea
pens n the
ation aggr
shall egat
be e of
deter all
mine reas
d as onab
of le
the costs
date and
of expe
the nses
notic incu
e of rred
term by
inati the
on BC
and A in
shall conn
beco ectio
me n
due with
and , in
dem relat
anda ion
ble to
ninet and/
y or
(90) by
days reas
after on
the of
date the
of MR
this P/V
notic Proj
e of ect,
term excl
inati udin
on. g all
Und inter
er est
this and
Ame capit
nded alize
BOT d
Agre inter
eme est,
nt, as
the certi
term fied
Valu by a
e of repu
the table
Com and
plete inde
d pend

155
 ent Proj
acco ect,
unti just
ng com
firm pens
to be atio
appo n
inted shall
by be
the paid
BC equi
A vale
and nt to
subj the
ect pres
to ent
the valu
appr e of
oval the
by net
the inco
DFA me
, whic
such h
appr the
oval BC
shall A
not expe
be cts
unre to
ason earn
ably or
with reali
held. ze
duri
(2) In ng
the the
even une
t of xpir
ter ed
min or
atio rem
n aini
afte ng
r ter
com m of
pleti this
on Ame
of nde
desi d
gn, BO
deve T
lop Agr
men eem
t, ent
and usin
inst g the
allat inter
ion nal
of rate
the of
MR retur
P/V n on

156
 equit
y even if we hypothetically accept BCAs contention that the DFA
(IRR
terminated the Amended BOT Agreement without any default or
e)
defi wrongdoing on BCAs part, it is not indubitable that BCA is
ned
in entitled to injunctive relief.
the
fina The BOT Law expressly allows the government to
ncial terminate a BOT agreement, even without fault on the part of the
proj
ectio project proponent, subject to the payment of the actual expenses
ns of
the incurred by the proponent plus a reasonable rate of return.
BC
A
and Under the BOT Law and the Amended BOT
agre
ed Agreement, in the event of default on the part of the government
upon
by (in this case, the DFA) or on the part of the proponent, the non-
the
defaulting party is allowed to terminate the agreement, again
parti
es, subject to proper compensation in the manner set forth in the
whic
h is agreement.
attac
hed Time and again, this Court has held that to be entitled to
heret injunctive relief the party seeking such relief must be able to
o
and show grave, irreparable injury that is not capable of
mad
e as compensation.
an
integ
ral In Lopez v. Court of Appeals, [77] we held:
part
of
this Generally, injunction is a
Ame preservative remedy for the protection of
nded one's substantive right or interest. It is not a
BOT cause of action in itself but merely a
Agre provisional remedy, an adjunct to a main
eme suit. It is resorted to only when there is a
nt as pressing necessity to avoid injurious
Sche consequences which cannot be remedied
dule under any standard compensation.The
1. application of the injunctive writ rests upon
(Em the existence of an emergency or of a special
phas reason before the main case can be regularly
es heard. The essential conditions for granting
supp such temporary injunctive relief are that the
lied. complaint alleges facts which appear to be
) sufficient to constitute a proper basis for
injunction and that on the entire showing
from the contending parties, the injunction is
reasonably necessary to protect the legal
The validity of the DFAs termination of the Amended rights of the plaintiff pending the litigation.
BOT Agreement and the determination of the party or parties in Two requisites are necessary if a preliminary
injunction is to issue, namely, the existence
default are issues properly threshed out in arbitration of a right to be protected and the facts
against which the injunction is to be directed
proceedings as provided for by the agreement itself. However, are violative of said right. In particular, for a

157
 writ of preliminary injunction to issue, the
existence of the right and the violation must is a termination by the DFA alone without fault on the part of
appear in the allegation of the
BCA or a termination due to default on the part of either party,
complaint and a preliminary injunction is
proper only when the plaintiff (private the BOT Law and the Amended BOT Agreement lay down the
respondent herein) appears to be entitled
to the relief demanded in his complaint. measure of compensation to be paid under the appropriate
(Emphases supplied.)
circumstances.

We reiterated this point in Transfield Philippines, Inc. v. Luzon Significantly, in BCAs Request for Arbitration with the PDRCI,
Hydro Corporation,[78]where we likewise opined: it prayed for, among others, a judgment ordering respondent

[DFA] to pay damages to Claimant [BCA], reasonably estimated

Before a writ of preliminary injunction may
be issued, there must be a clear showing by at P50,000,000.00 as of [the date of the Request for Arbitration],
the complaint that there exists a right to be
protected and that the acts against which the representing lost business opportunities; financing fees, costs
writ is to be directed are violative of the said
right. It must be shown that the invasion of and commissions; travel expenses; legal fees and expenses; and
the right sought to be protected is material costs of arbitration, including the fees of the arbitrator/s. [80] All
and substantial, that the right of complainant
is clear and unmistakable and that there is an the purported damages that BCA claims to have suffered by
urgent and paramount necessity for the writ
to prevent serious damage. Moreover, an virtue of the DFAs termination of the Amended BOT Agreement
injunctive remedy may only be resorted
are plainly determinable in pecuniary terms and can be
to when there is a pressing necessity to
avoid injurious consequences which reasonably estimated according to BCAs own words.
cannot be remedied under any standard
compensation. (Emphasis supplied.)
Indeed, the right of BCA, a party which may or may not have

As the Court explained previously in Philippine Airlines, Inc. v. been in default on its BOT contract, to have the termination of

National Labor Relations Commission[79]: its BOT contract reversed is not guaranteed by the BOT

Law. Even assuming BCAs innocence of any breach of contract,

An injury is considered irreparable if it is all the law provides is that BCA should be adequately
of such constant and frequent recurrence that
no fair and reasonable redress can be had compensated for its losses in case of contract termination by the
therefor in a court of law, or where there is
no standard by which their amount can government.
be measured with reasonable accuracy,
that is, it is not susceptible of There is one point that none of the parties has highlighted but is
mathematical computation. It is worthy of discussion. In seeking to enjoin the government from
considered irreparable injury when it
cannot be adequately compensated in awarding or implementing a machine readable passport project
damages due to the nature of the injury
itself or the nature of the right or or any similar electronic passport or visa project and praying for
property injured or when there exists no
the maintenance of the status quo ante pending the resolution on
certain pecuniary standard for the
measurement of damages. (Emphases the merits of BCAs Request for Arbitration, BCA effectively
supplied.)
seeks to enjoin the termination of the Amended BOT Agreement

for the MRP/V Project.

It is still contentious whether this is a case of termination by the

DFA alone or both the DFA and BCA. The DFA contends that
There is no doubt that the MRP/V Project is a project covered by
BCA, by sending its own Notice of Default, likewise terminated
the BOT Law and, in turn, considered a national government
or abandoned the Amended BOT Agreement. Still, whether this
158
project under Republic Act No. 8795. Under Section 3(d) of that tantamount to a violation of its right against deprivation of

statute, trial courts are prohibited from issuing a TRO or writ of property without due process of law under Article III, Section 1

preliminary injunction against the government to restrain or of the Constitution. We are unconvinced.

prohibit the termination or rescission of any such national

government project/contract. Article III, Section 1 of the Constitution provides [n]o person

shall be deprived of life, liberty, or property without due process

The rationale for this provision is easy to understand. For if a of law, nor shall any person be denied the equal protection of the

project proponent that the government believes to be in default laws. Ordinarily, this constitutional provision has been applied

is allowed to enjoin the termination of its contract on the ground to the exercise by the State of its sovereign powers such as, its

that it is contesting the validity of said termination, then the legislative power,[81] police power,[82] or its power of eminent

government will be unable to enter into a new contract with any domain.[83]

other party while the controversy is pending

litigation. Obviously, a courts grant of injunctive relief in such In the instant case, the State action being assailed is the DFAs

an instance is prejudicial to public interest since government termination of the Amended BOT Agreement with

would be indefinitely hampered in its duty to provide vital BCA. Although the said agreement involves a public service that

public goods and services in order to preserve the private the DFA is mandated to provide and, therefore, is imbued with

proprietary rights of the project proponent. On the other hand, public interest, the relationship of DFA to BCA is primarily

should it turn out that the project proponent was not at fault, the contractual and their dispute involves the adjudication of

BOT Law itself presupposes that the project proponent can be contractual rights. The propriety of the DFAs acts, in relation to

adequately compensated for the termination of the the termination of the Amended BOT Agreement, should be

contract. Although BCA did not specifically pray for the trial gauged against the provisions of the contract itself and the

court to enjoin the termination of the Amended BOT Agreement applicable statutes to such contract. These contractual and

and thus, there is no direct violation of Republic Act No. 8795, a statutory provisions outline what constitutes due process in the

grant of injunctive relief as prayed for by BCA will indirectly present case. In all, BCA failed to demonstrate that there is a

contravene the same statute. constitutional issue involved in this case, much less a
constitutional issue of extreme urgency.

Verily, there is valid reason for the law to deny preliminary

injunctive relief to those who seek to contest the governments As for the DFAs purported failure to appropriate sufficient

termination of a national government contract. The only amounts in its budget to pay for liquidated damages to BCA, this

circumstance under which a court may grant injunctive relief is argument does not support BCAs position that it will suffer

the existence of a matter ofextreme urgency involving a grave and irreparable injury if it is denied injunctive relief. The

constitutional issue, such that unless a TRO or injunctive writ is DFAs liability to BCA for damages is contingent on BCA

issued, grave injustice and irreparable injury will result. proving that it is entitled to such damages in the proper

Now, BCA likewise claims that unless it is granted injunctive proceedings. The DFA has no obligation to set aside funds to

relief, it would suffer grave and irreparable injury since the pay for liquidated damages, or any other kind of damages, to

bidding out and award of the e-Passport Project would be BCA until there is a final and executory judgment in favor of

159
BCA. It is illogical and impractical for the DFA to set aside a injunction) ancillary to its Request for Arbitration in PDRCI

significant portion of its budget for an event that may never Case No. 30-2006/BGF. BCA specifically prayed that the trial

happen when such idle funds should be spent on providing court grant it interim relief pending the constitution of the

necessary services to the populace. For if it turns out at the end arbitral tribunal in the said PDRCI case. Unfortunately, during

of the arbitration proceedings that it is BCA alone that is in the pendency of this case, PDRCI Case No. 30-2006/BGF was

default, it would be the one liable for liquidated damages to the dismissed by the PDRCI for lack of jurisdiction, in view of the

DFA under the terms of the Amended BOT Agreement. lack of agreement between the parties to arbitrate before the

With respect to BCAs allegation that the e-Passport Project is PDRCI.[84] In Philippine National Bank v. Ritratto Group, Inc.,
[85]
grossly disadvantageous to the Filipino people since it is the we held:

government that will be spending for the project unlike the

A writ of preliminary injunction is an
MRP/V Project which would have been privately funded, the ancillary or preventive remedy that may
only be resorted to by a litigant to protect or
same is immaterial to the issue at hand. If it is true that the
preserve his rights or interests and for no
award of the e-Passport Project is inimical to the public good or other purpose during the pendency of the
principal action. The dismissal of the
tainted with some anomaly, it is indeed a cause for grave principal action thus results in the denial
of the prayer for the issuance of the
concern but it is a matter that must be investigated and litigated writ. x x x. (Emphasis supplied.)
in the proper forum. It has no bearing on the issue of whether

BCA would suffer grave and irreparable injury such that it is

In view of intervening circumstances, BCA can no longer be
entitled to injunctive relief from the courts.
granted injunctive relief and the civil case before the trial court

should be accordingly dismissed. However, this is without

In all, we agree with petitioners DFA and BSP that the trial
prejudice to the parties litigating the main controversy in
courts issuance of a writ of preliminary injunction, despite the
arbitration proceedings, in accordance with the provisions of the
lack of sufficient legal justification for the same, is tantamount
Amended BOT Agreement, which should proceed with dispatch.
to grave abuse of discretion.

It does not escape the attention of the Court that the delay in the
To be very clear, the present decision touches only on the twin
submission of this controversy to arbitration was caused by the
issues of (a) the jurisdiction of the trial court to issue a writ of
ambiguity in Section 19.02 of the Amended BOT Agreement
preliminary injunction as an interim relief under the factual
regarding the proper body to which a dispute between the parties
milieu of this case; and (b) the entitlement of BCA to injunctive
may be submitted and the failure of the parties to agree on such
relief. The merits of the DFA and BCAs dispute regarding the
an arbitral tribunal. However, this Court cannot allow this
termination of the Amended BOT Agreement must be threshed
impasse to continue indefinitely. The parties involved must sit
out in the proper arbitration proceedings. The civil case pending
down together in good faith and finally come to an
before the trial court is purely for the grant of interim relief since
understanding regarding the constitution of an arbitral tribunal
the main case is to be the subject of arbitration proceedings.
mutually acceptable to them.

BCAs petition for interim relief before the trial court is

WHEREFORE, the instant petition is hereby GRANTED. The
essentially a petition for a provisional remedy (i.e., preliminary
assailed Order dated February 14, 2007 of the Regional Trial

160
 balance of additive
Court of Pasig in Civil Case No. 71079 and the Writ of works;
4. P2,865,615.
Preliminary Injunction dated February 23, 2007
10 for extended
are REVERSED and SET ASIDE.Furthermore, Civil Case No. overhead expenses;
5. P1,395,364.
71079 is hereby DISMISSED. 01 for materials cost
adjustment and trade
contractors' utilities
No pronouncement as to costs. expenses;
6. P4,835,933.
95 for interest charges
SO ORDERED. on unpaid overdue
billings on labor cost
adjustment and change
William Colangco Construction Corporation v. Ray Burton orders.
Development Corporation Aug. 9 2010
or for a total of Fifty Three Million Six
Hundred Sixty-Seven Thousand Two
This resolves the Petition for Review on Certiorari under Rule Hundred Nineteen and 45/xx
(P53,667,219.45) and interest charges based
45 of the Rules of Court, praying that the Decision [1] of the on the prevailing bank rates on the foregoing
Court of Appeals (CA) dated December 19, 2003, holding that amount from March 1, 2002 and until such
time as the same shall be fully paid.
the Construction Industry Arbitration Commission (CIAC) had
On April 12, 2002, petitioner RBDC filed a
no jurisdiction over the dispute between herein parties, and the Motion to Dismiss the aforesaid complaint on
the ground of lack of jurisdiction. It is
CA Resolution[2] dated May 24, 2004, denying herein petitioner's
petitioner's contention that the CIAC acquires
motion for reconsideration, be reversed and set aside. jurisdiction over disputes arising from or
connected with construction contracts only
when the parties to the contract agree to
submit the same to voluntary arbitration. In
The undisputed facts, as accurately narrated in the CA Decision, the contract between petitioner and private
are as follows. respondent, petitioner claimed that only
On July 20, 1995, petitioner Ray disputes by reason of differences in
Burton Development Corporation [herein interpretation of the contract documents shall
respondent] (RBDC for brevity) and private be deemed subject to arbitration.
respondent William Golangco Construction
Corporation [herein petitioner] (WGCC) Private respondent filed a Comment and
entered into a Contract for the construction of Opposition to the aforesaid Motion dated
the Elizabeth Place (Office/Residential April 15, 2002. Private respondent averred
Condominium). that the claims set forth in the complaint
require contract interpretation and are thus
On March 18, 2002, private respondent cognizable by the CIAC pursuant to the
WGCC filed a complaint with a request for arbitration clause in the construction contract
arbitration with the Construction Industry between the parties. Moreover, even
Arbitration Commission (hereinafter referred assuming that the claims do not involve
to as CIAC). In its complaint, private differing contract interpretation, they are still
respondent prayed that CIAC render cognizable by the CIAC as the arbitration
judgment ordering petitioner to pay private clause mandates their direct filing therewith.
respondent the amount of, to wit:
On May 6, 2002, the CIAC rendered an Order
1. P24,703,13 the pertinent portion of which reads as
2.44 for the unpaid follows:
balance on the contract
price; The Commission has
2. P10,602,67 taken note of the
0.25 for the unpaid foregoing arguments of
balance on the labor cost the parties. After due
adjustment; deliberations, the
3. P9,264,503. Commission resolved to
70 for the unpaid DENY Respondent's

161
motion on the following
grounds:
[1] Clause 17.2 of Art.
XVII of the Contract
Agreement explicitly
provides that any
dispute arising under the
construction contract
shall be submitted to the
Construction Arbitration
Authority created by the
Government. Even
without this provision,
the bare agreement to
submit a construction
dispute to arbitration
vests in the Commission
original and exclusive
jurisdiction by virtue of
Sec. 4 of Executive
Order No. 1008,
whether or not a dispute
involves a collection of
sum of money or
contract interpretation as
long as the same arises
from, or in connection
with, contracts entered
into by the parties
involved. The Supreme
Court jurisprudence on
Tesco vs. Vera case
referred to by
respondent is no longer
controlling as the same
was based on the old
provision of Article III,
Sec. 1 of the CIAC
Rules which has long
been amended.
[2] The issue raised by
Respondent in its
Motion to Dismiss is
similar to the issue set
forth in CA-G.R. Sp.
No. 67367, Continental
Cement Corporation vs.
CIAC and EEI
Corporation, where the
appellate court upheld
the ruling of the CIAC
thereon that since the
parties agreed to submit
to arbitration any
dispute, the same does
not exclude disputes
relating to claims for
payment in as much as
the said dispute
originates from
execution of the
works. As such, the
subject dispute falls
within the original and
exclusive jurisdiction of
the CIAC.
WHEREFORE, in
view of the foregoing,
Respondent's Motion to
Dismiss is DENIED for
lack of
merit. Respondent is
given anew an
inextendible period of
ten (10) days from
receipt hereof within
which to file its Answer
and nominees for the
Arbitral Tribunal. If
Respondent shall fail to
comply within the
prescribed period, the
Commission shall
proceed with arbitration
in accordance with its
Rules. x x x
Thereafter, petitioner filed a Motion to
Suspend Proceedings praying that the CIAC
order a suspension of the proceedings in Case
No. 13-2002 until the resolution of the
negotiations between the parties, and
consequently, that the period to file an
Answer be held in abeyance.
Private respondent filed an Opposition to the
aforesaid Motion and a Counter-Motion to
Declare respondent to Have Refused to
Arbitrate and to Proceed with Arbitration Ex
Parte.
On May 24, 2002 the CIAC issued an Order,
the pertinent portion of which reads:
In view of the
foregoing, Respondent's
(petitioner's) Motion to
Suspend Proceedings
is DENIED. Accordingl
y, respondent is hereby
given a non-extendible
period of five (5) days
from receipt thereof
within which to submit
its Answer and
nominees for the
Arbitral Tribunal. In
default thereof,
claimant's (private
respondent's) Counter-
Motion is deemed
granted and arbitration
162
 shall proceed in COVERED BY CLAUSE 17.1 OF
accordance with the ARTICLE XVII INVOLVING
CIAC Rules Governing CONTRACT INTERPRETATION.
Construction
Arbitration. xxxx

SO ORDERED. x x x III.
THE COURT OF APPEALS ERRED
On June 3, 2002, petitioner RBDC filed GRAVELY IN FAILING TO DISCERN
[with the Court of Appeals (CA)] a petition THAT CLAUSE 17.2 OF ARTICLE XVII
for Certiorari and Prohibition with prayer for CANNOT BE TREATED AS BEING
the issuance of a temporary restraining order LIMITED TO DISPUTES ARISING
and a writ of preliminary FROM INTERPRETATION OF THE
injunction. Petitioner contended that CIAC CONTRACT.
acted without or in excess of its jurisdiction
when it issued the questioned order despite xxxx
the clear showing that there is lack of
jurisdiction on the issue submitted by private IV.
respondent for arbitration.[3] THE COURT OF APPEALS ERRED
GRAVELY IN NOT RULING THAT
On December 19, 2003, the CA rendered the assailed Decision RBDC IS ESTOPPED FROM
DISPUTING THE JURISDICTION OF
granting the petition for certiorari, ruling that the CIAC had no
THE CIAC.
jurisdiction over the subject matter of the case because the
xxxx
parties agreed that only disputes regarding differences in
V.
interpretation of the contract documents shall be submitted for FINALLY, THE COURT OF APPEALS
arbitration, while the allegations in the complaint make out a COMMITTED GRAVE ABUSE OF
DISCRETION IN REFUSING TO PAY
case for collection of sum of money. Petitioner moved for HEED TO THE DECLARATION IN
EXECUTIVE ORDER NO. 1008 THAT
reconsideration of said ruling, but the same was denied in a THE POLICY OF THE STATE IS IN
FAVOR OF ARBITRATION OF
Resolution dated May 24, 2004. CONSTRUCTION DISPUTES, WHICH
POLICY HAS BEEN REINFORCED
FURTHER BY THE RECENT PASSAGE
OF THE ALTERNATIVE DISPUTE
Hence, this petition where it is alleged that: RESOLUTION ACT OF 2004(R.A. NO.
9285).[4]
I.
THE COURT OF APPEALS ACTED The petition is meritorious.
WITH GRAVE ABUSE OF DISCRETION
IN FAILING TO DISMISS PRIVATE The aforementioned issues boil down to (1) whether the CA
RESPONDENT RBDC'S PETITION IN
CA-G.R. SP NO. 70959 OUTRIGHT IN acted with grave abuse of discretion in failing to dismiss the
VIEW OF RBDC'S FAILURE TO FILE A petition for certiorari filed by herein respondent, in view of the
MOTION FOR RECONSIDERATION OF
THE CIAC'S ORDER, AS WELL AS FOR latter's failure to file a motion for reconsideration of the assailed
RBDC'S FAILURE TO ATTACH TO THE
PETITION THE RELEVANT CIAC Order and for failure to attach to the petition the relevant
PLEADINGS IN CIAC CASE NO. 13-
pleadings in CIAC Case No. 13-2002; and (2) whether the CA
2002, IN VIOLATION OF THE
REQUIREMENT UNDER RULE 65, gravely erred in not upholding the jurisdiction of the CIAC over
SECTIONS 1 AND 2, PARAGRAPH 2
THEREOF, AND RULE 46, SECTION 3, the subject complaint.
PARAGRAPH 2 THEREOF.
Petitioner is correct that it was grave error for the CA
II. to have given due course to respondent's petition
THE COURT OF APPEALS ERRED
GRAVELY IN NOT RULING THAT THE for certiorari despite its failure to attach copies of relevant
CIAC HAS JURISDICTION OVER
WGCC'S CLAIMS, WHICH ARE IN THE pleadings in CIAC Case No. 13-2002. In Tagle v. Equitable PCI
NATURE OF ARBITRABLE DISPUTES
163

Bank,[5] the party filing the petition for certiorari before the CA
failed to attach the Motion to Stop Writ of Possession and the
Order denying the same. On the ground of non-compliance with
the rules, the CA dismissed said petition for certiorari. When the
case was elevated to this Court via a petition for certiorari, the
same was likewise dismissed. In said case, the Court
emphasized the importance of complying with the formal
requirements for filing a petition for certiorari and held as
follows:
x x x Sec. 1, Rule 65, in relation to
Sec. 3, Rule 46, of the Revised Rules of
Court. Sec. 1 of Rule 65 reads:
SECTION
1. Petition for certiorari.
When any tribunal, board or
officer exercising judicial or
quasi-judicial functions has
acted without or in excess of
its or his jurisdiction, or with
grave abuse of discretion
amounting to lack or excess
of [its or his] jurisdiction, and
there is no appeal, or any
plain, speedy, and adequate
remedy in the ordinary course
of law, a person aggrieved
thereby may file a verified
petition in the proper court,
alleging the facts with
certainty and praying that
judgment be rendered
annulling or modifying the
proceedings of such tribunal,
board or officer, and granting
such incidental reliefs as law
and justice may require.
The petition shall
be accompanied by a
certified true copy of the
judgment, order or resolution
subject thereof, copies of all
pleadings and documents
relevant and pertinent
thereto, and a sworn
certification of non-forum
shopping as provided in the
third paragraph of Section 3,
Rule 46. (Emphasis supplied.)
And Sec. 3 of Rule 46 provides:
SEC. 3. Contents
and filing of petition; effect of
non-compliance with
requirements. The petition
shall contain the full names
and actual addresses of all the
petitioners and respondents, a
concise statement of the
matters involved, the factual
background of the case, and
the grounds relied upon for
the relief prayed for.
In actions filed
under Rule 65, the petition
shall further indicate the
material dates showing when
notice of the judgment or
final order or resolution
subject thereof was received,
when a motion for new trial
or reconsideration, if any, was
filed and when notice of the
denial thereof was received.
It shall be filed in
seven (7) clearly legible
copies together with proof of
service thereof on the
respondent with the original
copy intended for the court
indicated as such by the
petitioner and shall be
accompanied by a clearly
legible duplicate original or
certified true copy of the
judgment, order, resolution,
or ruling subject thereof,
such material portions of the
record as are referred to
therein, and other documents
relevant or pertinent thereto.
The certification shall be
accomplished by the proper
clerk of court or by his duly-
authorized representative, or
by the proper officer of the
court, tribunal, agency or
office involved or by his duly
authorized representative.
The other requisite number of
copies of the petition shall be
accompanied by clearly
legible plain copies of all
documents attached to the
original.
xxxx
The failure of the
petitioner to comply with any
of the foregoing requirements
shall be sufficient ground for
the dismissal of the petition.
(Emphasis supplied.)
164
 The afore-quoted provisions are plain and
unmistakable. Failure to comply with the of Executive Order No. 1008, also known as the Construction
requirement that the petition be accompanied
Industry Arbitration Law, the CIAC has original and exclusive
by a duplicate original or certified true copy
of the judgment, order, resolution or ruling jurisdiction over disputes arising from, or connected with,
being challenged is sufficient ground for the
dismissal of said petition. Consequently, it contracts entered into by parties involved in construction in the
cannot be said that the Court of Appeals
acted with grave abuse of discretion Philippines and all that is needed for the CIAC to acquire
amounting to lack or excess of jurisdiction jurisdiction is for the parties to agree to submit the same to
in dismissing the petition xx x for non-
compliance with Sec. 1, Rule 65, in voluntary arbitration. Nevertheless, respondent insists that the
relation to Sec. 3, Rule 46, of the Revised
Rules of Court.[6] only disputes it agreed to submit to voluntary arbitration are

those arising from interpretation of contract documents. It

argued that the claims alleged in petitioner's complaint are not

In the present case, herein petitioner (private
disputes arising from interpretation of contract documents;
respondent below) strongly argued against the CA's granting due
hence, the CIAC cannot assume jurisdiction over the case.
course to the petition, pointing out that pertinent pleadings such
Respondent's contention is tenuous.
as the Complaint before the CIAC, herein respondent's Motion
The contract between herein parties contained an
to Dismiss, herein petitioner's Comment and Opposition (Re:
arbitration clause which reads as follows:
Motion to Dismiss), and the Motion to Suspend Proceedings,

have not been attached to the petition. Herein respondent 17.1.1. Any dispute arising in the course of
[7] the execution of this Contract by reason of
(petitioner before the CA) argued in its Reply before the CA
differences in interpretation of the Contract
that it did not deem such pleadings or documents germane to the Documents which the OWNER and the
CONTRACTOR are unable to resolve
petition. However, in the CA Resolution[8] dated July 4, 2002, between themselves, shall be submitted by
either party for resolution or
the appellate court itself revealed the necessity of such decision, x x x to a Board of Arbitrators
documents by ordering the submission of copies of pleadings composed of three (3) members, to be
chosen as follows:
relevant to the petition. Indeed, such pleadings are necessary for
One (1) member each
a judicious resolution of the issues raised in the petition and shall be chosen by the
OWNER and the
should have been attached thereto. As mandated by the rules, the CONTRACTOR. The
failure to do so is sufficient ground for the dismissal of the said two (2) members, in
turn, shall select a third
petition. The CA did not give any convincing reason why the member acceptable to
both of them. The
rule regarding requirements for filing a petition should be decision of the Board of
Arbitrators shall be
relaxed in favor of herein respondent. Therefore, it was error for
rendered within fifteen
the CA to have given due course to the petition (15) days from the first
meeting of the
for certiorari despite herein respondent's failure to comply with Board.The decision of
the Board of Arbitrators
the requirements set forth in Section 1, Rule 65, in relation to when reached through
Section 3, Rule 46, of the Revised Rules of Court. the affirmative vote of at
least two (2) of its
Even on the main issue regarding the CIAC's members shall be final
and binding upon the
jurisdiction, the CA erred in ruling that said arbitration body had OWNER and the
CONTRACTOR.
no jurisdiction over the complaint filed by herein

petitioner. There is no question that, as provided under Section 4 17.2 Matters not otherwise provided for
in this Contract or by special agreement of
165
 the parties shall be governed by the
provisions of the Construction Arbitration
Law of the Philippines. As a last resort, any
dispute which is not resolved by the Board
of Arbitrators shall be submitted to the
Construction Arbitration Authority created
by the government.[9]
In gist, the foregoing provisions mean that herein
parties agreed to submit disputes arising by reason of differences
in interpretation of the contract to a Board of Arbitrators the
composition of which is mutually agreed upon by the parties,
and, as a last resort, any other dispute which had not been
resolved by the Board of Arbitrators shall be submitted to the
Construction Arbitration Authority created by the government,
which is no other than the CIAC. Moreover, other matters not
dealt with by provisions of the contract or by special agreements
shall be governed by provisions of the Construction Industry
Arbitration Law, or Executive Order No. 1008.
The Court finds that petitioner's claims that it is
entitled to payment for several items under their contract, which
claims are, in turn, refuted by respondent, involves a dispute
arising from differences in interpretation of the contract. Verily,
the matter of ascertaining the duties and obligations of the
parties under their contract all involve interpretation of the
provisions of the contract. Therefore, if the parties cannot see
eye to eye regarding each others obligations, i.e., the extent of
work to be expected from each of the parties and the valuation
thereof, this is properly a dispute arising from differences in the
interpretation of the contract.
Note, further, that in respondent's letter[10] dated
February 14, 2000, it stated that disputed items of work such as
Labor Cost Adjustment and interest charges, retention,
processing of payment on Cost Retained by WGCC,
Determination of Cost of Deletion for miscellaneous Finishing
Works, are considered unresolved dispute[s] as to the proper
interpretation of our respective obligations under the Contract,
which should be referred to the Board of Arbitrators. Even if the
dispute subject matter of said letter had been satisfactorily
settled by herein parties, the contents of the letter evinces
respondent's frame of mind that the claims being made by
petitioner in the complaint subject of this petition, are indeed
matters involving disputes arising from differences in
interpretation.
Clearly, the subject matter of petitioner's claims arose
from differences in interpretation of the contract, and under the
terms thereof, such disputes are subject to voluntary
arbitration.Since, under Section 4 of Executive Order No.
1008 the CIAC shall have original and exclusive jurisdiction
over disputes arising from, or connected with, contracts entered
into by parties involved in construction in the Philippines and all
that is needed for the CIAC to acquire jurisdiction is for the
parties to agree to submit the same to voluntary arbitration, there
can be no other conclusion but that the CIAC had jurisdiction
over petitioner's complaint. Furthermore, Section 1, Article III of
the CIAC Rules of Procedure Governing Construction
Arbitration (CIAC Rules) further provide that [a]n arbitration
clause in a construction contract or a submission to arbitration of
a construction dispute shall be deemed an agreement to submit
an existing or future controversy to CIAC jurisdiction,
notwithstanding the reference to a different arbitration institution
or arbitral body in such contract or submission. Thus, even if
there is no showing that petitioner previously brought its claims
before a Board of Arbitrators constituted under the terms of the
contract, this circumstance would not divest the CIAC of
jurisdiction. In HUTAMA-RSEA Joint Operations, Inc. v. Citra
Metro Manila Tollways Corporation,[11] the Court held that:
Under Section 1, Article III of
the CIAC Rules, an arbitration clause in a
construction contract shall be deemed as an
agreement to submit an existing or future
controversy to CIAC
jurisdiction, notwithstanding the reference
to a different arbitration institution or
arbitral body in such contract x x x.
Elementary is the rule that when laws or
rules are clear, it is incumbent on the court
to apply them. When the law (or rule) is
166
unambiguous and unequivocal, application,
not interpretation thereof, is imperative.
Hence, the bare fact that the
parties herein incorporated an arbitration
clause in the EPCC is sufficient to vest the
CIAC with jurisdiction over any
construction controversy or claim between
the parties. The arbitration clause in the
construction contract ipso facto vested the
CIAC with jurisdiction. This rule applies,
regardless of whether the parties
specifically choose another forum or make
reference to another arbitral body. Since the
jurisdiction of CIAC is conferred by law, it
cannot be subjected to any condition; nor
can it be waived or diminished by the
stipulation, act or omission of the parties, as
long as the parties agreed to submit their
construction contract dispute to arbitration,
or if there is an arbitration clause in the
construction contract. The parties will not
be precluded from electing to submit their
dispute to CIAC, because this right has been
vested in each party by law.
xxxx
It bears to emphasize that the
mere existence of an arbitration clause in
the construction contract is considered by
law as an agreement by the parties to
submit existing or future controversies
between them to CIAC jurisdiction,
without any qualification or condition
precedent. To affirm a condition precedent
in the construction contract, which
would effectively suspend the jurisdiction
of the CIAC until compliance therewith,
would be in conflict with the recognized
intention of the law and rules
to automatically vest CIAC
with jurisdiction over a dispute should the
construction contract contain an arbitration
clause.
Moreover, the CIAC was created
in recognition of the contribution of the
construction industry to national
development goals. Realizing that delays in
the resolution of construction industry
disputes would also hold up the
development of the country, Executive
Order No. 1008 expressly mandates the
CIAC to expeditiously settle construction
industry disputes and, for this purpose, vests
in the CIAC original and exclusive
jurisdiction over disputes arising from, or
connected with, contracts entered into by
the parties involved in construction in the
Philippines.[12]
Thus, there is no question that in this case, the CIAC
properly took cognizance of petitioner's complaint as it had
jurisdiction over the same.
IN VIEW OF THE FOREGOING, the Petition
is GRANTED. The Decision of the Court of Appeals, dated
December 19, 2003, and its Resolution dated May 24, 2004 in
CA-G.R. SP No. 70959 are REVERSED and SET ASIDE. The
Order of the Construction Industry Arbitration Commission
is REINSTATED.
SO ORDERED.
167