G.R. No. 191939 - Allied Banking Corp. vs. Equitable PCI Bank, Inc.

Case Summary (G.R. No. 191939)

Petitioner and Respondent

ABC: creditor and holder of a trust receipt (TR) and current account (No. 1801-004-87-6) for SCP; applied P6,750,000 of SCP’s current account to satisfy indebtedness under the TR. EPCIB: petitioning creditor who initiated corporate rehabilitation proceedings for SCP.

Key Dates

11 September 2006: EPCIB filed petition for corporate rehabilitation of SCP (commencement date).
12 September 2006: RTC issued order commencing rehabilitation, appointing receiver, and staying claims.
15 September 2006: ABC applied P6,750,000 from SCP’s current account to its obligations under the TR.
16 September 2006: RTC order published.
22 November 2006: RTC issued resolution ordering ABC to restore SCP’s current account and credit back P6,750,000.
27 July 2008 and subsequent dates: CA affirmed RTC; Supreme Court decision reviewed and affirmed CA (final disposition denied petition).

Applicable Law and Rules

Primary procedural framework: 2000 Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules) under A.M. No. 00-8-10-SC and, for cases pending, the Financial Rehabilitation Rules of Procedure (Rehabilitation Rules) promulgated under A.M. No. 12-12-11-SC to implement R.A. No. 10142 (Financial Rehabilitation and Insolvency Act of 2010). Constitutional consideration: prohibition against impairment of contracts. Key provisions relied upon include: (Interim Rules) Section 11, Rule 4 (period/effectivity of stay order), Section 5, Rule 3 (executory nature of orders), Section 8 (voidability of transfers made in violation of stay); (Rehabilitation Rules) Section 9 (effects of commencement order including retroactive nullification of post-commencement set-offs), Section 2, Rule 1 (scope applying rules to pending proceedings unless infeasible or unjust).

Procedural History

EPCIB filed the rehabilitation petition; RTC issued an order on 12 September 2006 commencing rehabilitation and staying claims; ABC set off SCP’s deposit on 15 September 2006; SCP moved to compel restoration and credit back; RTC ordered ABC to restore and credit back the P6,750,000; ABC appealed to CA which affirmed; ABC sought review before the Supreme Court, raising due process and impairment-of-contract arguments.

Factual Background and Trust Receipt Instrument

SCP experienced financial distress following the Asian Financial Crisis and entered into restructuring agreements. ABC had extended a revolving credit/letter of credit trust receipt line of P100 million to SCP; SCP executed a trust receipt which expressly authorized ABC to charge SCP’s accounts under specified events, including insolvency, non-payment, or assignment for benefit of creditors. ABC applied the subject account funds to its obligations under the TR on 15 September 2006, asserting the indebtedness had become due and demandable.

RTC’s Orders and Receiver’s Authority

The RTC’s 12 September 2006 order (commencement-style order) appointed a rehabilitation receiver, directed him to take possession, control, and custody of SCP’s assets, stayed all claims against SCP pursuant to the Interim Rules, restrained disposition of assets except in ordinary course or as approved by the receiver, and required publication and comments by creditors. The RTC later, by resolution of 22 November 2006, ordered ABC to restore SCP’s current account and to credit back the P6,750,000 applied by ABC.

CA Ruling

The Court of Appeals affirmed the RTC’s resolution. The CA held that the RTC’s stay order was effective from its issuance on 12 September 2006 (citing Section 11, Rule 4 and Section 5, Rule 3 of the Interim Rules) and thus ABC was bound by it when it made the setoff on 15 September 2006. The CA concluded the subject account was under custodia legis upon issuance of the stay order and that ABC’s unilateral application of proceeds was improper. The CA also held that there was no impairment of contractual rights because SCP’s indebtedness and terms remained unchanged—only enforcement was suspended.

Issues Presented to the Supreme Court

Whether ABC was deprived of due process when the RTC ordered restoration and credit back of SCP’s account even though the setoff occurred prior to publication of the commencement/stay order and before ABC was deemed notified.
Whether ABC was prohibited from applying the proceeds of SCP’s deposit to its outstanding obligations because the proceeds were under custodia legis from the date of issuance of the stay/commencement order.

Legal Analysis — Effectivity and Retroactivity of Commencement/Stay Order

The Supreme Court analyzed whether the Rehabilitation Rules (enacted 2013 but applicable to pending cases unless infeasible or unjust) could be applied to clarify the effect of commencement/stay orders issued under earlier Interim Rules. The Court found that Section 2, Rule 1 of the Rehabilitation Rules and Section 146 of R.A. No. 10142 permit application of the Rehabilitation Rules to pending rehabilitation proceedings except where application would be infeasible or unjust. The Rehabilitation Rules expressly provide that the effects of a commencement order retroact to the petition filing date and that any set-off after the commencement date may be rendered null and void (Section 9, Rehabilitation Rules).

Legal Analysis — Consistency with Interim Rules and Public Policy of Rehabilitation

Even under the Interim Rules, the Court emphasized that a stay order is effective upon issuance and immediately executory (Section 11, Rule 4 and Section 5, Rule 3). Rehabilitation proceedings are summary, non-adversarial, and in rem; their purpose is to preserve and conserve the debtor’s assets and to provide an orderly and equitable distribution among creditors while enabling debtor rehabilitation. Consequently, an order commencing rehabilitation and staying claims may nullify acts made after its issuance that violate the stay, in order to prevent irreparable harm to the debtor’s estate and to serve the rehabilitative objective.

Voidability of Post-Commencement Transactions and Custodia Legis

The Court relied on the Interim Rules’ express authority for the court to declare void transfers or payments made in violation of its stay order (Section 8, Interim Rules). The publication requirement serves to notify affected parties to satisfy due process; it does not negate the immediate effectiveness of the stay order. Thus, transactions undertaken after issuance but prior to publication may be invalidated if inconsistent with the stay, because the stay’s effect is to protect the debtor’s assets from depletion once the court has recognized the need for rehabilitation.

Impairment of Contracts and Legal Compensation Argument

ABC argued that enforcing the RTC’s restoration order impaired its contractual rights under the TR and that its setoff was a valid exercise of legal compensation upon default. The Court rejected the impairment argument, emphasizing the principle that applicable positive law is deemed written into contracts; the regulatory framework permitting suspension of enforcement once a rehabilitation stay is

Case Syllabus (G.R. No. 191939)

Court and Citation

Supreme Court of the Philippines, Third Division; G.R. No. 191939; Decision dated March 14, 2018; reported at 828 Phil. 64.
Decision authored by Justice Martires; Velasco, Jr. (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concurred.
Petition for review on certiorari under Rule 45 of the Rules of Court assailed the Court of Appeals’ 22 July 2008 Decision and 12 April 2010 Resolution in CA-G.R. SP No. 97206.

Case Caption and Parties

Petitioner: Allied Banking Corporation (ABC).
Respondent: Equitable PCI Bank, Inc. (EPCIB).
Underlying subject: Petition to have Steel Corporation of the Philippines (SCP) placed under corporate rehabilitation with prayer for approval of proposed rehabilitation plan.

Chronology of Key Dates and Events

11 September 2006: EPCIB filed petition for corporate rehabilitation of SCP with the Regional Trial Court (RTC).
12 September 2006: RTC issued an Order appointing a rehabilitation receiver and staying claims (the subject order).
15 September 2006: ABC applied P6,750,000.00 from SCP’s Current Account No. 1801-004-87-6 to satisfy obligations under a Trust Receipt (TR).
16 September 2006: Publication of the RTC Order in a newspaper of general circulation (acknowledged date of publication).
29 October 2006: SCP filed an urgent omnibus motion alleging ABC violated the stay order by applying the proceeds.
2 November 2006: ABC filed opposition to SCP’s motion, asserting legal compensation and lack of notice.
22 November 2006: RTC issued a Resolution ordering ABC to restore SCP’s current account and to credit back P6,750,000.00.
Post-RTC: ABC filed a petition for review under Rule 43 with the Court of Appeals (CA).
22 July 2008: CA rendered Decision affirming the RTC resolution.
ABC’s motion for reconsideration at the CA was denied by Resolution dated 12 April 2010.
14 March 2018: Supreme Court denied ABC’s petition; CA decisions affirmed.

Factual Background

SCP experienced a decline in financial condition following the 1997 Asian Financial Crisis, prompting lending institutions to extend various credit accommodations.
SCP defaulted on term loan facilities and on obligations under a December 2002 Omnibus Agreement among lending banks to reschedule and restructure SCP’s debts, reinstate working capital lines and establish a new trade financing line.
ABC extended to SCP a revolving credit facility in the form of a letter of credit/trust receipt line in the amount of P100,000,000.00 to finance importation of raw materials.
Under the Trust Receipt (TR) executed by SCP, ABC had express authority to charge SCP’s account and to take actions specified in paragraph 9 (including maturing all obligations and exercising attorney-in-fact powers to charge accounts, examine books, sell property in possession, and liquidate obligations) upon events such as bankruptcy, insolvency, suspension of payment, failure, assignment for benefit of creditors, non-fulfillment of any obligation, or non-payment at maturity.

RTC Order of 12 September 2006 (Subject Order) — Principal Directions

Petition found sufficient in form and substance.
Appointment of Santiago T. Gabionza Jr. as Rehabilitation Receiver, with specified address; required posting of bond in amount of P300,000.00 and taking oath.
Rehabilitation Receiver directed to take possession, control and custody of SCP’s assets; oversee operations; maintain property values; investigate causes of problems; evaluate assets and liabilities; recommend measures to salvage and protect creditors, stockholders and the public; exercise necessary powers under law and Interim Rules; and apply for further orders as necessary.
Stay of all claims against SCP insofar as they may be affected by proceedings, pursuant to Section 6, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation.
Prohibition on SCP from selling, encumbering, transferring or disposing assets except in ordinary course of business or as approved by the Rehabilitation Receiver.
Suppliers barred from withholding supply in the ordinary course of business if SCP is able to pay for goods and services supplied after issuance of the Order.
Direction that SCP pay administrative expenses incurred after the issuance of the Order.
Direction to publish the Order once a week for two consecutive weeks in a newspaper of general circulation.
Requirement for creditors and interested parties to file verified comments not later than ten days before initial hearing, with failure to do so constituting a bar from participation.

Transaction at Issue

ABC applied P6,750,000.00 remaining in SCP’s Current Account No. 1801-004-87-6 at its Aguirre Branch towards obligations under the TR on 15 September 2006.
SCP alleged this application violated the RTC stay order and sought immediate restoration and credit back of P6,750,000.00 and that ABC honor SCP’s account transactions.
ABC maintained that its setoff was proper as SCP’s obligations were due and demandable and that it lacked notice of the stay order at the time of the setoff; ABC also argued that it cannot be compelled to extend credit against its will.

RTC Resolution of 22 November 2006 — Disposition Regarding ABC

RTC found merit in SCP’s position.
Ordered ABC to restore SCP’s Current Account No. 1801-004-87-6 and to credit back the entire deposit balance of P6,750,000.00.
Ordered ABC to honor any and all transactions of SCP in said account as may be approved by the Rehabilitation Receiver.

CA Decision and Rationale

The Court of Appeals affirmed the RTC’s 22 November 2006 Resolution.
Held that the stay order issued by the RTC on 12 September 2006 was effective from the date of issuance under Section 11, Rule 4 and Section 5, Rule 3 of the Interim Rules of Corporate Rehabilitation; ABC was bound to comply as of that issuance date.
Found that the subject account was under custodia legis by virtue of the stay order and that ABC’s unilateral application of proceeds was improper.
Addressed impairment of contract argument, holding that there was no impairment because no change in amount or rate of debt occurred — only enforcement was suspended.
CA’s affirmance sustained by the CA decision dated 22 July 2008; ABC’s motion for reconsideration was denied by the CA on 12 April 2010.

Issues Presented to the Supreme Court

Whether the Court of Appeals erred in affirm