G.R. No. 187316 - Wonder Book Corp. vs. Philippine Bank of Communications

In February 2004, Wonder Book Corporation, together with eight other corporations (collectively known as the Limtong Group of Companies or LGC), filed a joint petition for rehabilitation before the Regional Trial Court (RTC) of Imus, Cavite (SEC Case No. 031-04).
Soon after filing, the petition was affected by a Stay Order issued on March 2, 2004, and later faced opposition from one of the creditors, Equitable PCI Bank (EPCI Bank), which challenged the propriety of having several distinct corporate personalities seek joint rehabilitation.

On February 9, 2005, the RTC approved the rehabilitation petition for LGC, granting a two-year moratorium on payment obligations, reducing interest to 5% per annum, and outlining a fifteen-year payment schedule post moratorium.
The rehabilitation plan was later reviewed by the Court of Appeals (CA) where EPCI Bank’s petition for review (docketed as CA-G.R. SP No. 89461) led to a reversal of the RTC’s Order for LGC, whereas Philippine Bank of Communications (PBCOM)’s petition (CA-G.R. SP No. 89507) was denied, making its ruling final since no further appeal or reconsideration was pursued by PBCOM.

On September 5, 2006, Wonder Book filed its own petition for rehabilitation with the RTC (SEC Case No. 058-06) claiming that its inability to pay debts arose from factors such as high interest rates, penalties, economic recession, increased competition, and the loss of inventories due to a fire in July 2002.
Wonder Book’s rehabilitation plan proposed:

A fifteen-year program to fully settle its debt to PBCOM at a reduced 5% per annum interest rate.
A two-year moratorium on interest and a three-year suspension on principal payments.
Payment arrangements for trade creditors within ten (later extended to twelve) years.

The conversion of deposits for future subscriptions into common stock.
The treatment of liabilities to officers and stockholders as trade payables.
A commitment to infuse an additional P10 million capital along with utilizing portions of an unpaid insurance claim from destroyed inventories.

Amendments were made in a subsequent detailed rehabilitation plan (filed on September 17, 2007) which adjusted various timelines—extending moratorium periods for both interest and principal and prolonging the conversion schedules.

Wonder Book’s proposals were vague, based on baseless assumptions, and did not address its dire financial condition.
The financial statements clearly exhibited not just illiquidity but actual insolvency; as of August 2006, assets were significantly lower than liabilities with a debt ratio of 2.11:1.
The material financial commitments purported in the plan were insufficient and speculative.
Projected profitability figures were unrealistic, insufficient to reverse the persistent deficits even after the rehabilitation period.

The RTC eventually approved Wonder Book’s rehabilitation plan on February 15, 2008, but this approval was subject to strict compliance by the debtor and monitoring by the Rehabilitation Receiver.

PBCOM filed a petition for review of the RTC’s approval of Wonder Book’s rehabilitation plan, leading to a CA decision dated March 25, 2009, upholding PBCOM’s objections based on:

The evident insolvency of Wonder Book.
The failure of the rehabilitation plan to provide the requisite material financial commitments and realistic business projections necessary to restore solvency.
The sustainability concerns given that even after the rehabilitation period, Wonder Book would still remain insolvent.

Whether Wonder Book Corporation’s petition for rehabilitation is impressed with merit despite clear evidences of insolvency.

Does the rehabilitation plan satisfy the requirements under Section 5 of the Interim Rules on Corporate Rehabilitation, particularly the necessity for material financial commitments?
Can a corporation be rehabilitated when its financial projections are based on unrealistic assumptions and it continues to exhibit a negative net worth even after the proposed rehabilitation period?
Whether the observed insolvency (as opposed to mere illiquidity) negates the possibility of a successful rehabilitation.