G.R. No. 199420 - Philnico Industrial Corp. vs. Privatization and Management Office

Philnico Industrial Corporation (PIC), a Philippine corporation engaged in nickel mining and refining, part of the Philnico Group along with Philnico Processing Corporation (PPC) and Pacific Nickel Philippines, Inc. (PNPI). PIC and PNPI hold a Mineral Production Sharing Agreement for nickel mining areas, while PPC owns a nickel refinery in Nonoc Island.
Privatization and Management Office (PMO), an attached agency of the Department of Finance, successor to the Asset Privatization Trust (APT). PMO acts as the government’s marketing arm for privatized assets, responsible for managing, conserving, and disposing government properties for maximum cash recovery.

By foreclosure proceedings, Development Bank of the Philippines and Philippine National Bank acquired shares in PPC and eventually transferred these to PMO (formerly APT) in 1987.
On May 10, 1996, PMO, PIC, and PPC executed the “Amended and Restated Definitive Agreement” (ARDA) outlining the purchase by PIC of 22,500,000 PPC shares (90% ownership) and receivables, with purchase price equivalent to USD 333,762,000 payable in installments.
Key provisions in the ARDA:

Section 2.04 – PIC to pledge purchased shares as security and execute a Pledge Agreement in favor of PMO.
Section 2.07 – Closing conditions: transfer of title and stock certificates of PPC shares to PIC, issuance of new share certificates, and execution of a pledge agreement covering these shares. PIC assumes shareholder rights subject to pledge restrictions.
Section 8 – Default provisions stating:

Events of default include failure to pay two consecutive installments or breach of agreement terms.
Consequence includes PMO’s right to declare default and exercise remedies, including ipso facto reversion of shares to PMO if payment default exceeds 90 days from due date of the second installment.

On May 2, 1997, PIC, PNPI, and PMO signed a Pledge Agreement securing PIC’s obligations under the ARDA and the Pledge Agreement itself with PPC shares as pledge. This agreement explicitly details default events and remedies, allowing PMO to sell pledged shares publicly or privately, including the option to buy the shares.

PPC’s refinery plant became obsolete, and due to high costs of rebuilding (estimated USD 1 Billion) and regional economic difficulties, payment terms were renegotiated among PMO, PIC, and PPC via an Amendment Agreement in 1999 adjusting payment schedules and investment plans.
In November 2002, PMO notified PIC of default for unpaid amortizations totaling USD 275,000, demanding payment within 90 days or face enforcement of automatic reversion clause. PIC requested rescission of default notice to complete fund-raising efforts, especially with prospective Chinese investors. PMO responded insisting on enforcing reversion if payment not made by February 5, 2003.
On February 4, 2003, PIC filed a Complaint for Prohibition against PMO’s reversion of shares and sought a temporary restraining order and preliminary injunction. The RTC granted a 20-day TRO and subsequently a writ of preliminary injunction restraining PMO from reverting or selling the pledged shares, citing the automatic reversion clause as pactum commissorium and hence void.
PMO filed motions for reconsideration and to dismiss, arguing the ipso facto reversion clause is valid and not pactum commissorium, but the RTC denied these motions, affirming the illegality of the automatic reversion and upholding PIC’s ownership rights.
PMO complied with RTC directives and answered the complaint. The case proceeded to pre-trial in 2009, where the RTC listed several issues to be resolved including:

Validity of the ipso facto reversion clause and whether it is pactum commissorium.
Whether PIC was in default considering plant operations and unforeseen events.
Issues of reimbursement to PIC if rescission of contract allowed.
Applicability of arbitration clause.

PIC moved to delete issues already resolved (pactum commissorium and arbitration), which PMO opposed. PMO also filed omnibus motions seeking dissolution of the writ of preliminary injunction and other reliefs, alleging irreparable damage to government and sufficiency of bond posted by PIC.
On August 25, 2009, the RTC granted PIC’s motion deleting the two issues from pre-trial, denied PMO’s motion to dissolve the writ, declined to appoint a PMO representative to the board of PIC, but required PIC to submit accounting and financial reports to PMO.

PMO challenged the RTC Order denying dissolution of injunction through a petition for certiorari before the Court of Appeals.
The Court of Appeals ruled that the automatic reversion clause in Section 8.02 ARDA did not fulfill the requirements of pactum commissorium because elements were split between two separate contracts (ARDA and Pledge Agreement). However, the Court still declared the automatic reversion clause null and void as contrary to law, morals, and public policy, affirming the issuance of the writ of preliminary injunction.
Both PIC’s and PMO’s motions for reconsideration before the Court of Appeals were denied.

The Court of Appeals erred in holding that elements of pactum commissorium must concur in a single contract;
The petition for certiorari on the RTC Order of February 27, 2003 is time-barred since it became final.

The ipso facto reversion clause is valid;
The writ of preliminary injunction should be dissolved because the conditions that justified it have been met;
Dissolution of the injunction after almost 9 years is just and equitable.

Whether Section 8.02 of the ARDA, providing for ipso facto or automatic reversion of PPC shares to PMO upon PIC’s default, constitutes pactum commissorium and is therefore null and void.

Whether the Writ of Preliminary Injunction issued to prevent PMO from reverting the shares should be dissolved.