Case Summary (G.R. No. 175844)
Rehabilitation Plan Proposed by Sarabia
• Interest restructuring: uniform escalating rates from 7% p.a. (2002–2005) up to 14% p.a. (2018)
• Principal amortization: annual payments beginning 2004 based on cash‐flow projections
• Current payables to suppliers and government to be paid on maturity
• Conversion of ₱18.75 million advances by stockholders into equity; deferment of other advances totaling ₱42.69 million
• Full protection of operations and employees; no dividends or stockholder compensation during rehabilitation
RTC Findings and Order
The Iloilo RTC found the petition sufficient in form and substance, issued a stay order, and appointed a receiver. In its August 7, 2003 order, it approved the plan as modified by the receiver’s recommendations:
• Recompute outstanding loan balances, capitalize 2001–2002 interest, waive penalties
• Extend repayment to 2003–2019 with a two-year principal grace period
• Fix interest at 6.75% p.a. plus VAT for the entire term
• Annual amortization payments; stockholders to cover any deficiency; excess funds accelerate servicing
• Payment of suppliers and government obligations on due dates
• Conversion of advances and deferred credits into equity improving debt‐to‐equity ratio to 0.85:1
• Approval required for material capital expenditures
• Termination of existing foreign management contract; appointment of new management subject to court approval
• Maintenance of real‐estate mortgages; release of surety obligations upon sufficient collateral
The RTC found the plan feasible, realistic, and viable based on Sarabia’s historical cash generation, projected revenues, and BPI’s published cost of funds.
Court of Appeals Modification
On April 24, 2006, the CA affirmed the RTC order but reinstated the stockholders’ surety obligations to BPI as an additional safeguard. It upheld the 6.75% p.a. interest rate as reasonable—higher than BPI’s 5.5% time-deposit rate and the 6.4% p.a. average for commercial papers—and noted that the plan could be later modified if market rates changed.
Issue on Review
Whether the CA correctly affirmed the rehabilitation plan, with modification reinstating stockholder sureties, over BPI’s opposition that the fixed interest rate and extended term unfairly prejudiced its rights as a secured creditor.
Supreme Court Ruling
- Procedural Bar – BPI’s Rule 45 petition raised primarily factual questions (e.g., Sarabia’s capacity to pay, BPI’s cost of funds) not reviewable on certiorari absent grave abuse of discretion.
- Feasibility of Rehabilitation – The plan met criteria under the Interim Rules: Sarabia remained an ongoing, profitable concern able to generate funds; projections were anchored on realistic assumptions; creditors would recover more over time as a going concern than via immediate liquidation.
- Protection of Creditor Interests – Adequate safe
Case Syllabus (G.R. No. 175844)
Facts
- Sarabia Manor Hotel Corporation (Sarabia) is a Philippine corporation, organized February 22, 1982, with paid-up capital of ₱10,000,000, engaged in hotel and related operations in Iloilo City.
- In 1997, Sarabia obtained a ₱150,000,000 special loan and a ₱20,000,000 stand-by credit line from Far East Bank and Trust Company (FEBTC), secured by real estate mortgages and a surety agreement of its stockholders.
- FEBTC merged into Bank of the Philippine Islands (BPI), which assumed all claims against Sarabia.
- Due to contractor default and delayed completion of a new five-storey hotel building, Sarabia suffered cost overruns, cash-flow problems, and faced higher loan amortizations after grace periods ended in 2000.
- External factors (September 11 attacks, Abu Sayyaf issue) further depressed hotel revenues.
- By mid-2002, Sarabia could not meet maturing obligations totaling over ₱225 million, owing to BPI, other banks, suppliers, government, and its stockholders.
Petition for Rehabilitation
- On July 26, 2002, Sarabia filed a petition for corporate rehabilitation with prayer for stay-order before the RTC of Iloilo City, Branch 39.
- It alleged illiquidity despite positive net worth, citing delayed building completion, cost overruns, and industry downturn as causes of cash-flow distress.
- Sarabia proposed restructuring all secured loans, pegging interest at escalating rates (7%–14% p.a. over various periods) and deferring principal payments until 2004, while paying government and suppliers on schedule.
Receiver’s Report and Recommendations
- The RTC appointed Liberty B. Valderrama as rehabilitation receiver.
- In a July 10, 2003 Report, the Receiver found rehabilitation feasible and recommended:
- Recompute outstanding balances as of December 31, 2002, capitalize 2001–2002 interest, waive penalties, extend repayment to 2003–2019 with two-year principal grace, fix interest at 6.75% p.a. plus VAT, annual payments, stockholder guarantee of deficiencies, early payment of any excess.
- Pay suppliers and government on due dates to maintain operations.
- Convert ₱18,748,306 advances to equity and ₱42,688,734 to deferred credits to improve debt-equity ratio.
- Require stockholders to pay certain receivables.
- Prohibit dividends or compensation to stockhol